ASTHA School of Management

Business Law
Sub Code-18 MBA 108
LAW OF CONTRACT
Module- 1

MEANING AND DEFINITION OF LAW

Law refers to the principles and regulations established by a Government and
applicable to people, whether in the form of legislation or of custom and policies
recognised and enforced by judicial decision.
A few definitions of law authors According to BLACKSTONE “Law in its most
general and comprehensive sense signifies a rule of action and is applied
indiscriminately to all kinds of actions whether animate or in animate, rational or
irrational.”
Salmond defines law as the “body or principles recognised and applied by the State
in the administration of Justice.”
Woodrow Wilson defines law as “that portion of the established habit and thought of
mankind which has gained distinct and formal recognitions in the shape of uniform of
rules backed by the authority and power of the Government.”

INTRODUCTION OF CONTRACT
The law which is related to contracts in India is called as Indian Contract Act, 1872.
This Act was passed by British India and it is based on the principles of English
Common Law. Indian Contract Act determines the circumstances in which promises
made by the parties to a contract shall be legally binding on them. All of us in the
world enter into a number of contracts everyday knowingly or unknowingly. Each
contract creates some rights and duties on the contracting parties. Hence, this
legislation, Indian Contract Act of 1872, being of lean nature, deals with the
enforcement of these right stand duties on the parties in India.

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MEANING OF CONTRACT
The law of contract is that branch of law which determines the circumstances in
which promises made by the parties to a contract. The law which is related to
contracts in India is called as Indian Contract Act, 1872.
Short Title: Indian contract act 1872
Commencement: 1st September 1872.
Applicability: Applicable to whole of India , Except Jammu &Kashmir, however after
5 th August 2019 it is applicable to Jammu & Kashmir.

CLASSIFICATION OF CONTRACTS

Contracts on the Basis of Creation

1. Express Contract: Express contract is one which is made by words spoken or
written. When such a contract is formed, there is no difficulty in understanding the
rights and obligations of the parties.
Example 1: A says to B, will you buy a car for ` 1,00,000? B says to A, I am ready to
buy your car for ` 1,00,000. It is an express contract made orally.
.
2. Implied Contract: An implied contract is one which is made either by words
spoken or written. It is accurate from the conduct of a person or the circumstance of
the particular case.The condition of an implied contract is to be understood from the
acts, the contract of the parties or the course of dealing between them.
Example: A, a coolie in an uniform picks up the bag of B to carry it from railway
platform to the taxi stand and B allowed it. In this case, there is an implied offer by
the coolie and an
implied acceptance by the passenger. Now, there is an implied contract between the
coolie and the passenger; the passenger is bound to pay for the services of the
coolie.

3. Quasi or Constructive Contract: It is a contract in which there is no intention on

either side to make a contract, but the law imposes contract. In such a contract,
obligations arise not by any agreement between the practices but by operation of
law. There are certain dealings which are not contracts strictly, though the parties act

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as if there is a contract. The Contract Act specifies the various situations which come
within what is called Quasi contract.
Example: Where certain books are delivered to a wrong address, the addressee is
under an obligation to either pay for them or return them.

Contracts on the Basis of Execution

1. Executed Contract: It is a contract where both the parties to the contract have
fulfilled their respective obligations under the contract. There are contracts where the
parties perform
their obligations immediately, as soon as the contract is formed.
Example: A offer to sell his car to B for ` 1 lakh, B accepts A‟s offer. A delivers the
car to B and B pays ` 1 lakh to A. It is an executed contract.

2. Executory Contract: It is a contract where both the parties to the contract have
still to perform their respective obligations. In this contract, the obligations of the
parties are to be
performed at a later time.

Example: A offers to sell his car to B for ` 1 lakh. B accepts A‟s offer. If the car has
not yet been delivered by A and the price has not yet been paid by B, it is an
executory contract.

3. Partly Executed and Partly Executory Contract: It is a contract where one of

the parties to the contract has fulfilled his obligation and the other party has still to
perform his obligation.

Example: A offers to sell his car to B for ` 1 lakh on a credit of 1 month. B accepts
A‟s offer. A sells the car to B. Here, the contract is executed as to A and executory
as to B.

Unilateral Contract
A unilateral contract is also known as a one-sided contract. It is a type of contract
where only one party has to perform his promise.
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Example: Anuj promises to pay Rs. 1000 to anyone who finds his lost cellphone. B
finds and returns it to Anuj. From the time B found the cellphone, the contract came
into existence. Now Anuj has to perform his promise, i.e. the payment of Rs. 1,000.

Bilateral contract
A Bilateral contract is one where the obligation or promise is outstanding on the part
of both the parties. It is also known as a two-sided contract.

Example: Aj promises to sell his car to Bj for Rs. 1 lakh and agrees to deliver the car
on the receipt of the payment by the end of the week. The contract is bilateral as
both the parties have exchanged a promise to be performed within a stipulated time.

Contracts on the Basis of Enforceability

1. Valid Contract: A contract which satisfies all the conditions prescribed by law is a
valid contract.

Example: A offers to marry B. B accepts A‟s offer. This is a valid contract.

2. Void Contract: The term void contract is described as under section 2(j) of ICA,
1872. A contract which cases to be enforceable by law becomes void when it ceases
to be enforceable, OR a void contract is a contract which is valid when entered into
but which subsequently became void due to impossibility of performance, change of
law or some other reason.

Example: A offers to marry B. B accepts A‟s offer. Later on, B dies. This contract
was valid at the time of its formation but became void at the death of B.

3. Void Agreement: According to Section 2(g), an agreement not enforceable by

law is said to be void. Such agreements mean that they are unenforceable right from
the time they are
made.

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Example: An agreement with a minor or a person of unsound mind is void because
a minor or a person of unsound mind is incompetent to contract.

4. Voidable Contract: According to section 2(I) of the Indian Contract Act, 1872, an
agreement which is enforceable by law at the option of one or more of the parties
thereon but not at the option of the other or other, is a voidable contract. In other
words, a voidable contract is one which can be set aside or avoided at the option of
the aggrieved party. Until the contract is set aside by the aggrieved party, it remains
a valid contract.

Example: A contract is treated as voidable at the option of theparty whose consent

has been obtained under influence orfraud or misinterpretation.

5. Illegal Agreement: An illegal agreement is one in which theobject is unlawful.

Such an agreement cannot be enforced bylaw. Thus, illegal agreements are always
void.

Example: X agrees to Y ` 1 lakh. Y kills Z and claims ` 1lakh. Y cannot recover from
X because the agreement betweenX and Y is illegal and also its object is unlawful.

6. Unenforceable contract: It is contract which is actually validbut cannot be

enforced because of some technical defect (suchas not in writing, under stamped).
Such contracts can beenforced if the technical defect involved is removed.

Agreement Contract

According to Section 2(e) of the Indian Contract Act, 1872, "Every promise and every
set of promises forming the consideration for each other is an agreement".

Example: A promises to B to sell his Laptop for Rs. 25,000/- and B accepts to
purchase it for the said amount. Here 'A' and 'B' entered into an agreement.
For the formation of an agreement there must be two or more persons / parties
there must be a proposal from one person / party and acceptance from the other

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person / party. The person making the proposal is called the “Promisor”, and the
person accepting the proposal is called “Promisee”

In the above example 'A' Promisor and 'B' is Promisee.

Types of agreement

The following are the types of agreement:

 Wagering Agreement.
 Void Agreement.
 Voidable Agreement.
 Implied Agreement.
 Express Agreement.
 Conditional Agreement.
 Illegal Agreement.
 Social Agreement.
 Legal Agreement

1. Wagering Agreement :Agreements entered into between parties under the

condition that money is payable by the first party to the second party on the
happening of a future uncertain event, and the second party to the first party when
the event does not happen, are called Wagering Agreements or Wager. There
should be mutual chance of profit and loss in a wagering agreement.
Example : A and B agree with each other that if it rains on Tuesday, A will pay Rs.
100 to B and if it does not rain on Tuesday, B will pay A Rs. 100. Such
an agreement is a wagering agreement and hence is void.

2.Void Agreement:A void agreement is an agreement or contract with no legal value.

Legally, a void agreement means the contract or agreement is no longer
enforceable.
Example: A performer agrees to a set of shows, but then becomes injured and
cannot perform after all. In these circumstances, the contract was valid initially, but is
now impossible to fulfil.

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3 . Voidable Agreement:A voidable contract is a formal agreement between two
parties that may be rendered unenforceable for a number of legal reasons. Reasons
that can make a contract voidable include: Failure by one or both parties to disclose
a material fact. A mistake, misrepresentation or fraud. Undue influence or duress
Example:Smartphone apps, categorized as free premium apps, begin as free
downloads but later allow for in-app purchases costing real money. Premium apps
geared toward children may result in a minor accepting the terms and conditions
associated with game play, though these terms may allow for the later solicitation of
in-app purchases.

4. Implied Agreement: An implied agreement is an obligation between two or more

parties in the absence of a written contract, based on the interest of fairness implied
by circumstance or conduct.
Example: An individual enters a restaurant and orders food. A contract to receive
the food, service, and the payment for the same is established. An implied contract is
legally binding in the same manner as a written contract.

5.Express Agreement: An express agreement is a legally binding, the terms of which

are all clearly stated either orally or in writing. For an express agreement to come
together there must be an offer made by one of the parties, and acceptance of that
offer by the other party.
Example: The sale of real estate, employment contracts and even a contract to
perform a service.

6. Conditional Agreement:When a contract is 'conditional', this usually means that

one or both parties do not have to perform their side of the bargain until something
else has occurred. In other words, the contract is conditional upon something else
happening.

Example: A common example is a contract conditional upon the buyer getting

planning permission.

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7. Illegal Agreement:Agreements that involve contracting for an illegal act generally
are void and unenforceable.

Example: Agreements to commit a felony will be an illegal agreement.

8. Social Agreement: Social agreementis not enforceable because they do not create
legal obligations between the parties.

Example: invitation for dinner

9. Legal Agreement: Legal agreement is enforceable because they create legal

obligations between the parties.
Example: “A” promises to sell his car to “B”

NOTE:
Contract Act Contract = Agreement + Enforceability
Agreement = Offer + Acceptance
Enforceability = Legal obligations between parties

DEFINITIONS (Sec 2)
1. Offer(i.e. Proposal) [section 2(a)]:-When one person signifies to another his
willingness to do or toabstain from doing anything, with a view to obtaining the
assent of that other person either to such actor abstinence, he is said to make a
proposal.

2. Acceptance 2(b):-When the person to whom the proposal is made, signifies his
assent there to , theproposal is said to be accepted.
3. Promise 2(b) :-A Proposal when accepted becomes a promise. In simple words,
when an offer isaccepted it becomes promise.
4. Promisor and promisee 2(c) :-When the proposal is accepted, the person
making the proposal iscalled as promisor and the person accepting the proposal is
called as promisee.

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ESSENTIALS OF VALID CONTRACT
 Offer and Acceptance
 Legal Obligation
 Lawful Consideration
 Capacity of Parties
 Free Consent
 Lawful Object
 In Writing and Registration
 Certainty of Terms
 Possibility of Performance
 Not expressly declared void

1. Offer and Acceptance an agreement, there must be a lawful offer by one party and
lawful acceptance of that offer by other party. The term lawful means that the r and
acceptance must satisfy the requirements of contract act.
Example: offers to sell his cycle to “B” for Rs.45000, This is an offer, if “B” accepts
this offer there is an acceptance.

2.Legal obligation: The parties to an agreement must create legal obligations. It

means that if one party does not fulfil his promise, he shall be liable for breach of
contract.
Example: “A” offers to “B” to sell his home for Rs.2 Million, It is a contract as it
creates legal obligation.

3.Lawful Consideration: For a valid contract, consideration must be lawful,

Consideration is the price paid by one party for the promise of the other party. A
contract is enforceable only when both the parties give and take something. That
something given or taken is called consideration.
Example: “A” promises to sell his car to “B” for 1 million, For “A” the 1 million is
consideration and for “B” car is the consideration.

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4.Capacity of Parties: An agreement is enforceable if it is made by parties who are
the competent to contract. To be competent to contract, it is essential that the parties
are of the age of majority, have sound mind etc.
Example: “M” a person of unsound mind agree to sells his house to “S” for Rs 2
lacs. It is not a valid contract because “M” is unsound.

5. Free Consent: For a valid contract, it is essential that the consent of parties must
be free, Consent is free when it is not obtained by force, undue influence, fraud,
mispresentation or any kind of mistakes, If the consent of either party is not free, the
agreement cannot become a contract.
Example: “A” forced “B” at gun point to enter into a contract.

6.Lawful Objects: It is necessary that agreement is made for a lawful object. The
object of contract must not be illegal, immoral, opposed to public policy. Every
agreement with unlawful object is illegal and therefore contract is void.
Example: “A” hires a house to use for gambling. The object of agreement is illegal
and void.

7.Writing and Registration : A contract may be oral or in writing, It is preferable that

the contract be in writing because it is easy to prove in court.

8.Certainty of Terms: The terms and conditions of a contract must be clear, complete
and certain. If the terms are uncertain the agreement is void.
Example: “A” promises to sell 200 books to “B” without specifying their titles. The
agreement is void because the terms are not clear.

9.Possibility of Performance: A valid contract must be capable of being performed,

An agreement to do an impossible act is void. If the act is legally or physically
impossible to perform, the agreement cannot be enforced by law.
Example; “A” agrees with “B” to discover a treasure by magic, the agreement is not
enforceable.

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10. Not expressly declared void: The agreement should be such that it should be
capable or being enforced by law. Certain agreements have been expressly declared
illegal or void by the law.

Conclusion:
An agreement may be or may not be enforceable by law; therefore all agreements
are not contract. Only those agreements are contracts, which are enforceable by law
.Hence allContracts are Agreements, but all Agreements are not Contracts.

Difference between CONTRACT and AGREEMENT

BASIS AGREEMENT CONTRACT

COMPARISION
Meaning When an offer made by one An agreement enforced by
party is acceptable to another law is called contract.
party with requisite
consideration.
Elements Elements of an agreement are Elements of a contract are
Offer and acceptance. agreement and enforceability.
Elements of a contract are
agreement and enforceability.
Defined An agreement is defined in A contract is defined in
section 2(e). section 2(h).
In writing It is not necessary to have an A contract is normally in
agreement in written form. written form and registered.
Legal There are no legal obligations There are legal obligations in
Obligations in an agreement. a contract.
Wide It has a wide scope. It has a narrow scope.
One in other All agreements are not All contracts are agreements
necessarily contracted. in nature.

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OFFER
"When one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence,
he is said to make a proposal.”

An offer involves the following elements.

(i)It must be an expression of readiness or willingness to do or to abstain from doing
something. Thus, it may involve a 'positive' or a 'negative' act.

For example, A offers to sell his book to B for Rs. 30. A is making a proposal to do
something i.e., to sell his book. It is a positive act on the part of the proposer A. On
the other hand, when A offers not to file a suit against B if the latter pays A the
outstanding amount of Rs. 1,000, the act of A is a negative one i.e., he is offering to
abstain from filing a suit.

ii) It must be made to another person. There can be no 'proposal' by a person to

himself,

iii) It must be made with a view to obtain the assent of that other person to such act
or abstinence. Thus a mere statement of intention- "I may sell my furniture if I get a
good price" is not a proposal.
The person making the offer is called the 'offerer' or the 'promisor' and the person to
whom it is made is called the 'offeree'. When the offeree accepts the offer, he is
called the 'acceptor' or the 'promisee'.

Legal Rules as to valid offer:-

An offer to be valid must comply with the following rules:

1. Offer may be express or implied:

An offer may be express or may be implied from the conduct of the parties or
circumstances of the case.

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Express Offer: An express offer is made by words spoken or written.

Examples:

(1) A says to B, “Will you purchase may car for Rs. 15,000? It is an oral offer.

(2) A, through a letter asks B to buy his car for Rs. 15,000. It is a written offer.

Implied Offer – An implied offer is not made by words spoken or written. It is implied
from the conduct of the parties or from the circumstances.
Example:

(1) Public Transport, like, Railways. DTC in Delhi or MEST in Mumbai offer to carry
passengers for a certain fare on a particular route.

(2) Public Telephones or Weighing Machines in public places like, Railway Stations
or Cinema Houses offer their services for a certain amount, say one rupee.

2. Offer may be specific or general:

A specific offer is one which is made to a particular person. It can be accepted by the
person to whom it has been made, no one else can accept such an offer.

Example:

A offers to sell his watch to B for Rs. 200. This is a specific offer made to B. It is B
alone who can accept this offer and no one else can accept this offer, i.e., C or D
cannot accept this offer.
A general offer is made to the world at large. Therefore, it can be accepted by any
person.

Example:

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1. A advertised in a Newspaper that he would give Rs. 100 to anyone who finds and
returns his lost dog.
2. A company advertised that a reward of Rs. 100 would be given to any person who
contracted influenza after using the medicine (Smoke balls) made by the company
according to the printed directions. One lady, called Mrs. Carlill, purchased and used
the medicine according to the printed directions of the company but suffered from
influenza. She filed a suit to recover the reward of Rs. 100. The Court held that there
was a contract as she had accepted a general offer by using the medicine in the
prescribed manner and as such, she was entitled to recover the reward from the
company.

3. Offer must give rise to legal obligation:

An offer to be valid must create legal relationship between the parties. The very
purpose of entering into an agreement is to make it enforceable at a Court of law. If
the offer has not been made with this intention it will not become a contract even if it
is accepted by the party to whom it was made.

Example:

A promised to pay Rs. 30 to his wife every month. Later, A failed to pay the amount.
The wife filed a suit against the husband to recover the amount. The Court held that
she could not recover as the promise was not made with an intention to create any
legal relationship.

4. Terms of an offer must be definite and certain:

The terms of an offer should not be vague or indefinite.
Example:
A has two cars – Ambassador and Fiat. He agrees to sell one of his cars to B for Rs.
20,000.
It is not clear as to which of the cars A has agreed to sell. A might be thinking to sell
the Ambassador car while B might be thinking to purchase the Fiat car. The offer is
not definite.

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5. Offer must be distinguished from an invitation to offer:

An offer must be distinguished from an invitation to offer. The shopkeepers generally

display their goods in showcases with price tags. The shopkeeper in such cases is
not making an offer so that you can accept it. He is, on the other hand, inviting you to
make an offer which he may or may not accept. Thus you cannot compel a
shopkeeper to sell the goods displayed in the showcase at the marked price.
However, if there is specific law to sell goods at marked price then the seller will
have to sell at marked price. For example, during National Emergency essential
commodities like sugar etc. have to be sold at marked price.

6. Offer must be distinguished from a mere declaration of intention:

A declaration of intention to make an offer is not an offer. It is regarded as an
invitation to offer. An advertisement for sale in a Newspaper or Magazine etc. is not
an offer for sale.

Example:
A advertised to sell certain furniture by auction, B reached A‟s house to purchase the
furniture. However, A changed his mind not to sell the furniture. B cannot compel A
to sell the furniture or even to recover his damages, i.e., conveyance charges and
damages for inconvenience caused to him due to cancellation of the sale.

It should be noted that a general offer can be made through advertisement if the
terms are certain and capable of being accepted.

Example:
A lost his camera in a DTC bus. He announced a reward of Rs. 100 to the finder who
may return it to him. B found the camera after reading the advertisement and
returned it to him. B is entitled to the reward.

7. Offer must be communicated:

An offer must be communicated to the person to whom it is made. A person can
accept the offer only when he knows about it. If he does not know it, he cannot
accept it.
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Example:
G sent his servant L to trace his lost nephew. Later on G, announced a reward for
tracing the boy. L without knowing about the advertisement of the reward traced the
boy and restored him to G. When L came to know of the reward, he claimed it. G
refused to give the reward. The Court held that L was not entitled to recover the
reward as the offer was not communicated to L. He could not accept an offer which
he did not know.

8. Communication of Special Terms:

Special terms of a contract must be communicated. Generally, such cases arise in
respect of general offers, like tickets or receipts for depositing luggage at the Railway
Station or receipts for clothes given for dry cleaning etc. The rule in these cases is
that parties are not bound unless conditions printed are properly communicated.
Example:
A passenger was traveling from Dublin to White haven with his luggage. On the back
of the ticket, a special condition was printed according to which the Shipping Co.
would not be liable for the loss of luggage. However, this condition was not
communicated to the passenger in as much as no such words as RT.O. or See Back
were printed on the face of the ticket to draw the attention of the passenger. The
court held that the passenger was not bound by those conditions as those were not
communicated to him. Hence the company was liable to pay for the loss of the
luggage.

It should be noted that an acceptor is bound by the condition even if the conditions
are printed in a foreign language. He should ask for its translation.

Again, an acceptor cannot even plead that he was illiterate or blind, provided the
notice is reasonably sufficient for the class of persons to which he belongs.

Again, it should be noted that the special terms of the contract should be brought to
the notice of the offeree at the time of offer was made. If the special terms are
brought to the notice of the offeree after the contract was made, the offeree will not
be bound by them.

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Example:
A and his wife took a room on hire in a hotel. After booking the room, they entered
the room and saw a notice on the wall of the room. The proprietors not responsible
for articles lost or stolen unless handed over to the manager for safe custody.”

Due to the negligence of the hotel staff, their property was stolen. Held, the
proprietor of the hotel was liable as the notice was not binding, because it came to
the knowledge of the client only after the contract to take the hotel on hire had
already been made.

9. Offer must be made with a view to obtaining the consent of the other party
to do or to abstain from doing the act:

The offer must be made with an intention to get the consent of the other party to do
or to abstain from doing the act and not simply with a view to making known the
intention of making an offer.

Example:
A tells B, “I may sell my Television if I can get Rs. 2,000 for it. It is not an offer as it
has not been made with a view to get the consent of B. It is a mere declaration of
intention. Therefore, B cannot accept it by saying. “I can pay you Rs. 2,000 for it.” B
is not accepting A‟s offer but is making his offer which A may or may not accept.

10. Offer should not impose an unnecessary obligation to communicate non-

acceptance:
Thus an offeror cannot say that if acceptance is not communicated by Sunday next,
the offer would be considered as accepted.
Example:
A offers his car to B for Rs. 20,000 saying, “If you do not reply by Sunday next, I
shall presume, you have accepted the offer.”

In this case, no contract will be created even if the acceptor does not reply as the law
does not permit a party to impose an unnecessary obligation of the acceptor if he
does not want to accept the offer. Thus in the above example, if the acceptor does

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not accept the offer he will be put to an unnecessary burden of informing the offeror
that he does not want to accept the offer.
Types of Offer
(i) Express offer: – It is an offer that is done through words that can be either oral or
written. The oral offer can be made face to face or via telephone. The written offer
can be made via text messages, advertisements, letters or e-mail.

(ii) Implied Offer: – It is an offer conveyed through acting or signs. But if a party
observes a silence over the offer then that offer cannot be valid.

(iii) Specific Offer: -It is the offer made to a specific person or group of persons and
can be accepted by the same, not anyone else.

E.g William offers to buy a car from Miley for Rs 10 Lakh. Thus, a specific offer is
made to a specific person, and only Miley can accept the offer.

(iv). General Offer: -It is the offer made to public at large and not to any particular
person. it can be accepted by anyone by abiding by the terms of it.

E.g. Mr. A advertises in the newspaper that whosoever find his missing son would be
rewarded with $500.Mr. B reads it and after finding the boy, he calls Mr. A to inform
about his missing son. Now Mr. A is entitled to pay $500 to Mr. B for his reward.

(v). Cross Offer: -When both the parties involved makes a similar offer to one
another without knowing the each other‟s offer then it is called Cross offer.

E.g X sends an e-mail to Y to purchase his car for $200 while at the same time, Y
unknowingly is also sending an e- mail to X stating his desire to buy the car at
$200.This is the cross offer made where one party needs to accept the offer of the
another.

(vi) Standing or Open Offer: When an offer is allowed to remain open for
acceptance over a period of time, it is called standing, open or continuing offer.

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Tenders are the example of standing offer.The offer that is continuous in nature is
the standing offer.

LAPSE OFAN OFFER -An offer should be accepted before it lapses (i.e. comes to
an end). An offer may come to an end in any of the following ways stated in Section
6 of the Indian Contract Act:

1. By communication of notice of revocation: An offer may come to an end by

communication of notice of revocation by the offeror. It may be noted that an offer
can be revoked only before its acceptance is complete for the offeror. In other words,
an offeror can revoke his offer at any time before he becomes before bound by it.
Thus, the communication of revocation of offer should reach the offeree before the
acceptance is communicated.
2. By lapse of time; Where time is fixed for the acceptance of the offer, and it is not
acceptance within the fixed time, the offer comes to an end automatically on the
expiry of fixed time. Where no time for acceptance is prescribed, the offer has to be
accepted within reasonable time. The offer lapses if it is not accepted within that
time. The term „reasonable time‟ will depend upon the facts and circumstances of
each case.
3. By failure to accept condition precedent: Where, the offer requires that some
condition must, be fulfilled before the acceptance of the offer, the offer lapses, if it is
accepted without fulfilling the condition.
4. By the death or insanity of the offeror: Where, the offeror dies or becomes,
insane, the offer comes to an end if the fact of his death or insanity comes to the
knowledge of the acceptor before he makes his acceptance. But if the offer is
accepted in ignorance of the fact of death or insanity of the offeror, the acceptance is
valid.
This will result in a valid contract, and legal representatives of the deceased offeror
shall be bound by the contract. On the death of offeree before acceptance, the offer
also comes to an end by operation of law.
5. By counter offer by the offeree: Where, a counter – offer is made by the
offeree, and then the original offer automatically comes to an end, as the counter
offer amounts to rejections of the original offer.

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6. By not accepting the offer, according to the prescribed or usual mode: Where
some manner of acceptance is prescribed in the offer, the offeror can revoke the
offer if it is not accepted according to the prescribed manner.
7. By rejection of offer by the offeree: Where, the offeree rejects the offer, the
offer comes to an end. Once the offeree rejects the offer, he cannot revive the offer
by subsequently attempting to accept it. The rejection of offer may be express or
implied.
8. By change in law: Sometimes, there is a change in law which makes the offer
illegal or incapable of performance. In such cases also, the offer comes to an end.

ACCEPTANCE
Acceptance 2(b):- When the person to whom the proposal is made, signifies his
assent there to , the proposal is said to be accepted.
"acceptance is to an offer what a lighted match is to a train of gunpowder”…..Anson.

Legal Rules for the Acceptance

1. Acceptance must be absolute and unqualified

Example: A offers to sell his house to B for Rs. two lakhs. B accepts the offer and
promises to pay the price in four instalments. This is not pay the acceptance as the
acceptance is with variation in the terms of the offer.

2. Acceptance must be communicated: Mere mental acceptance is no

acceptance, But there is no requirement of communication of
acceptance of general offer.

Example: The manager of Railway Company received a draft agreement relating to

the supply of coal. The manager marked the draft with the words “Approved” and put
the same in the drawer of his table and forgot all about it. Held, there was no
contract between the parties as the acceptance was not communicated. It may
however, be pointed out that the Court construed a conduct to parties as railway
company was accepting the supplies of coal from time to time.

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 3. Manner of acceptance: General rule say that it must be as per the manner
prescribed by offeror. If no mode is prescribed in which it can be accepted, then it
must be in some usual and reasonable manner.

4. If there is deviation in communication of an acceptance of offer: offeror

may reject such acceptance by sending notice within reasonable time. If the offeror
doesn‟t send notice or rejection, he accepted acceptance of offer.

Example: A offers B and indicates that the acceptance be given by telegram. B

sends his acceptance by ordinary post. It is a valid acceptance unless A insists for
acceptance in the prescribed manner. (i.e. Registered/Speed post/telegram only)

5. Acceptance of offer must be made by offeree.

Example : A applied for the headmastership of a school. He was selected by the

appointing authority but the decision was not communicated to him. However, one of
members in his individual capacity informed him about the selection. Subsequently,
the appointing authority cancelled its decision. A sued the school for breach of
contract. The Court rejected the A‟s action and held that there was no notice of
acceptance. “Information by unauthorized person is as insufficient as overhearing
from behind the door”

6. Acceptance must be communicated to offeror

7. Time limit for acceptance : If the offer prescribes the time limit, it must be
accepted within specified time. If the offer does not prescribe the time limit, it must
be accepted within reasonable time.

Example : A applied (offered) for shares in a company in early June. The allotment
(Acceptance) was made in late November. A refused to take the shares. Held, A was
entitled to do so as the reasonable time for acceptance had elapsed.

8. Acceptance of offer may be expressly (by words spoken or written); or impliedly

(by acceptance of consideration); or by performance of conditions (e.g.in case of a
general offer)

9. Mere silence is not acceptance of the offer

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 Example: A offers to B to buy his house for Rs.5 lakhs and writes “If I hear no more
about it within a week, I shall presume the house is mine for Rs.5 lakhs. “B does not
respond. Here, no contract is concluded between A and B.

10. However, following are the two exceptions to the above rule. It means
silence amounts as acceptance of offer. Where offeree agrees that non – refusal
by him within specified time shall amount to acceptance of offer. When there is
custom or usage of trade which specified that silence shall amount to acceptance.

11. Acceptance subject to the contract is no acceptance If the acceptance has

been given „subject to the contract‟ or subject to approval by certain persons, it has
not effect at all. Such an acceptance will not create binding contract until a formal
contract is prepared and signed by all the parties

General Rules as to Communication of Acceptance

1. In case of acceptance by post

Where the acceptance is given by post, the communication of acceptance is
complete as against the proposer when the letter of acceptance is posted. Thus,
mere posting of letter of acceptance is sufficient to conclude a contract. However,
the letter must be properly addressed and stamped.

2. Delayed or no delivery of letter

Where the letter of acceptance is posted by the acceptor but it never reaches the
offeror, or it is delayed in transit, it will not affect the validity of acceptance. The
offeror is bound by the acceptance.

3. Acceptance by telephones telex or fax

If the communication of an acceptance is made by telephone, tele-printer, telex,
fax machines, etc, it completes when the acceptance is received by the offeror.
The contract is concluded as soon as the offeror receives not hears the
acceptance.

4. The place of Contract

In case of acceptance by the post, the place where the letter is posted is the place
of contract. Where the acceptance is given by instantaneous means of

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 communication (telephone, fax, tele-printer, telex etc.), the contract is made at the
place where the acceptance is received.

5. The time of Contract

In case of acceptance by post, the time of posting the letter of acceptance to the time
of contract. But in case of acceptance by instantaneous means of communication, the
time of contract is the time when the offeror gets the communication, the time of
contract is the time when offeror gets the communication of acceptance.

6. Communication of acceptance in case of an agent.

Where the offer has been made through an agent, the communication of acceptance
is completed when the acceptance is given either to the agent or to the principal. In
such a case, if the agent fails to convey the acceptance received from offeree, still the
principal is bound by the acceptance.

7. Acceptance on loudspeakers
Acceptance given on loudspeaker is not a valid a acceptance

BASIS FOR OFFER INVITATION TO OFFER

COMPARISON
Meaning When one person When a person expresses
expresses his will to something to another
another person to do or person, to invite him to
not to do something, to make an offer, it is known
take his approval, is as invitation to offer.
known as an offer.
Defined in Section 2 (a) of the Indian Not Defined
Contract Act, 1872.
Objective To enter into contract. To receive offers from
people and negotiate the
terms on which the
contract will be created.
Essential to Yes No

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 make an
agreement
Consequence The Offer becomes an An Invitation to offer,
agreement when accepted becomes an offer when
responded by the party to
whom it is made.

CONSIDERATION
Section 2(d) of the Indian Contract Act defines the term consideration as follows-
When at the desire of the promisor, the promisee or any other person
Has done, or abstained from doing something;
Or
Does or abstains from doing something;
Or
Promises to do, or to abstain from doing something;Then such act, abstinence or
promise is called a consideration for the promise.

For Example: A agrees to sell his car to B for Rs. 50,000. Here, B‟s promise to pay
the sum of Rs. 50,000 is the consideration for A‟s promise to sell the car, and A‟s
promise to sell the car is the consideration for B‟s promise to pay the Rs. 50,000.

Essential elements of consideration

1. Consideration should be passed at the request of offeror:- offeree should send only
such consideration which is wanted by the offeror. In the case where offeree sends
unwanted consideration, he has no right to claim counter consideration.

2.Consideration may move from a promisee or any other person:- In Indian law,
according to section 2(d) of the Indian Contract Act, consideration may move from
the promisee or if the promisor has no objection, from any other person.

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3.Consideration need not be adequate:- Consideration of the contract need not have
equal magnitude. The inadequacy of consideration will not infect the validity of the
contract.

4.Consideration must be lawful:- Presence of unlawful consideration makes the

contract illegal and hence void.
Illustration- A promises to maintain B‟s child and B promises to pay A Rs. 1,000
yearly for the purpose. Here, the promise of each party is the consideration for the
promise of the other party. They are lawful considerations.

5.Consideration must be real:- Consideration should not be of an illegal contract. It

must be a believable concept.

Types of consideration

1.Past Consideration- Past consideration is something wholly done, forborne, or

suffered before the making of the agreement.

Example: A saves B‟s life. B promises to pay A Rs. 21,000 out of gratitude. Here, the
consideration is past, because A did nothing or refrained doing anything on account
of B ‟s promise. Whatever he did, he did before B‟s promise was made.

2. Present Consideration- The consideration which moves simultaneously with the

promise is called present consideration or executed consideration.

Example:X buys an article from a shop and pays the price immediately. The
Consideration moving from X is present or executed consideration.

3. Future Consideration- This type of consideration is a promise to do or abstain from

doing something in the future. Sometimes executory consideration is also known as
a future consideration.
Example:- A promises to pay a sum of money to B in consideration of B‟s promise to
delivers a book for A. As B‟s promise has not yet been performed, it is executory.

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4. Unreal Consideration- When a consideration exists only in words, and not in fact.
Then such consideration is known as unreal consideration for a promise.

Example:- A promises to pay B, Rs. 2,000 on a particular day, in consideration of a

promise by B to pay A Rs. 500 at the same time, the consideration is „unreal‟ or
„illusory‟, and the promise will be regarded as merely a gratuitous promise by A to
pay B, Rs. 1500.

5.Unlawful Consideration- S.23 of the Act describe the term unlawful consideration.
A consideration is said to be unlawful if-
It is forbidden by law;
Or
It would defeat the provision of any law
Or
It Is fraudulent;
Or
Involves or implies injury to the person or property of another;
Or
It is regarded as immoral or opposed to public policy, by the Court.

Example- A, B and C enter into an agreement for the division among them of gains
acquired or to be acquired, by them by fraud. The agreement is void, as its object is
unlawful.

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

Section 11 of the Contract Act deals with the competency of parties and provides
that "every person is competent to contract who is of the age of majority according to

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the law to which he is subject, and who is of sound mind and is not disqualified from
disqualified from contracting by any law to which he is subject."

It follow that the following person are incompetent to contract:

(a) minor
(b) person of unsound mind, and
(c) Person disqualified by any law to which they are subject.
Contract entered into by the persons mentioned above are void.

Every person is competent to contract:

(a) Who is of the age of majority.
(b) Who is of sound mind.
(c) Who is not disqualified from making a contract.

Therefore the following persons are not competent to contract

(a) A person who is a minor.
(b) A person of unsound mind.
(c) A person who is diqualified from making a contract.

Minor: Who is Minor?

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

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

Guardians and Wards Act, 1890; or
2. Where the superintendence of a minor's property is assumed by a court of wards.

Free Consent

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Section 13 of the Indian Contract Act defines theterm 'Consent' as two or more
persons are said to consent when they agree uponthe same thing in the same
sense.
The consent should also be free i.e., it has been given by the free will of the parties
involving no pressure or use of force. Section 10 of the Contract Act specifically
provides that All agreements are contracts if they are made by the free consent of
the parties.

Example:
„A‟ agrees to sell his house to „B‟. „A‟ owns three houses and wants to sell his house
in Haridwar. „B‟ thinks he is buying his Delhi house. Here „A‟ and „B‟ have not agreed
upon the same thing in the same sense. Therefore, there is no consent and no
contract afterwards.

Factors and their effect:

1. Coercion
Coercion means forcing an individual to enter into a contract. When intimidation or
threats are used under pressure to gain the party‟s consent, i.e. it is not free consent.
Coercion may involve the actual infliction of physical and psychological harm in order
to enhance the credibility of a threat. Then the threat of further harm can lead to the
threatened person‟s cooperation or obedience.
Example
„A‟ went out for a walk, „B‟ approaches „A‟ with a stranger, pulls out his gun and asks
„A‟ to give all his possessions. The consent of „A‟ is obtained by coercion here.
Effect
Coercion has the effect of making the contract voidable. It implies that at the
discretion of the party whose consent was not free, the contract is voidable. The
aggravated party will, therefore, determine whether to enforce the contract or to
cancel the contract.
Techniques for causing coercion
 Threatening to commit any act which is prohibited by the Indian Penal Code.

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  Detaining not as per law or even threatening to detain any property, with the
sole intention of compelling a person to enter into a contract.

2.UNDUE INFLUENCE
According to Section 16 of the Indian Contract Act, 1872 an influence will be
considered as Undue Influence when:

One party to the contract is in a position of trust and controls the other party
wrongfully.
Such a person uses his dominant position to gain an unfair advantage over the
other.
There are two key elements of undue influence-

 The relationship- trust, confidence, authority.

 Unfair persuasion- careful examination of the terms of the contract.
Where one party is in a fiduciary relation to the other party
Fiduciary relationship means a relationship of trust and confidence. When a person
imposes faith and confidence on the other, he expects not to be betrayed. If the
other party betrays the confidence and trust reposed in him and gains an undue
influence.

Examples of fiduciary relationship includes:

 Solicitor and client;

 Trustee and trust ;
 Spiritual adviser and devotee;
 Medical attendant and patient;
 Parent and child;
 Husband and wife;
 Master and servant;
 Guardian and ward.
In other words, we can say that Undue influence occurs when the decision of
another party to the transaction can be influenced by one party.

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Example
„A‟ sold his gold ring to his teacher „B‟ for Rs 200 after he had been offered good
grades by his teacher. Here, A‟s permission is not given freely, he was influenced by
his teacher.

Effect
The effect of undue influence makes an agreement voidable at the option of the
party whose consent was caused. Any such contract can be set aside. Only a party
to the contract can avoid or rescind the contract. This right does not lie in the hands
of the third party.

Difference between Coercion and Undue Influence

Basic Coercion Undue Influence

Nature of Action Through coercion, by committing Under the undue influence,
an offence or threatening to consent is gained by
commit an offence, consent is suppressing other party‟s will.
gained.
Carried by Coercion is typically physical in Undue influence is immoral in
nature, in order to obtain nature, using mental pressure
consent, it requires a physical to gain consent.
force of violent nature.
Criminal Action Coercion includes a criminal act Undue Influence requires
and is punishable under the IPC unlawful act and is not
by a person who commits punishable under the IPC by
coercion. a person who has done
undue influence
Relationship Coercion does not involve a Undue influence can only be
party‟s relationship. exerted if there is a
relationship between two-
party.
Agreement When coercion induces consent When consent to an

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 to an agreement, the agreement agreement is caused by
is null and void at the option of undue influence, it becomes
the party whose consent is null and void at the discretion
induced. of the individual whose
consent has been so affected.

3.Fraud
According to Section 17 of Indian Contract Act, Fraud includes any of the following
acts committed by a contracting party or its connivance or its agent in order to
deceive or induce a party or its agent to enter into the contract:

The effective concealment of a fact by one who is aware of the fact;

 a promise made without any intention to carry it out;
 any other act fitted to deceive;
 any such act or omission as the law considers to be fraudulent.
Mere silence as to facts likely to affect a person‟s willingness to enter into a contract
is not fraud unless the circumstances of the case are such that, having regard to
them, it is the obligation of the silent person to speak or unless his or her silence is,
in itself, equivalent to speech.
Example
„A‟ sells his horse to „B‟ by auction, which „A‟ knows to be unsound, „A‟ tells „B‟
nothing about the unsoundness of the horse. This is a fraud on the part of „A‟.

Effect
The contract arising from fraud is a null contract.
The misled party has the right to withdraw from the contract.
Due to the fraudulent agreement, the party is responsible for recovering the
damages.

4. Misrepresentation

As per Section 18 of the Indian Contract:

Misrepresentation means the truth is misrepresented.

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Misrepresentation is the release of deceiving details resulting in the presumptiothat
the other party will enter into a deal and then lose. Nevertheless, the information
provided by the guilty party is the result of a genuine belief in the matter.
Misrepresentation is said to be committed.
Firstly, when the deceiving person declares that no justified data is misleading a
person is some way.
Secondly, there is a breach of an obligation that has caused the bias of one or the
other. Lastly, a mistake was committed by a person because of the
misrepresentation of the act or information.

Example
„A‟ told „B‟ that his radio is in good condition, because of the confidence he had in „A‟,
„B‟ bought the radio from him. The radio did not work properly after some time, „B‟
thought he was misled by „A‟, but „A‟ believed his radio was in good condition and
had no intention of deceiving him. So, here misrepresentation is in the part of „A‟,
because he did not know that the radio is not working properly.
Effect
If the party that has suffered as a result of the misrepresentation when entering into
a contract may choose to terminate the contract, rescind the contract within a
reasonable time under the Specific Relief Act 1963.

THE DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION

Basis Fraud Misrepresentation

Meaning Fraud is defined as the intentional Misrepresentation is
and wilful act of false representation defined as an
of information to deceive the other Unintentional or innocent
party. act of false representation
of information to the other
party.
Enacted by Section 17 of the Indian Contract Act, Section 18 of the Indian
1872 defined the term fraud and its Contract Act, 1872 defined
characteristics. the term Misrepresentation

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 and its characteristics.
Consent The consent of the party is obtained The consent of the party is
by committing a fraud by the other gained because of the
party. misrepresentation of
information by the other
party.
Action Fraud is an action of dishonest i.e Misrepresentation
one party deceives another by not happens when one party
communicating the original communicates the
information. information which is false
but believed it as true.
Consequences In case of fraud, the party who got In case of
deceived can cancel the contract and Misrepresentation, the
claim for the damage. party who is mistreated
can cancel the contract.
Legal Action The people who committed Fraud is The people who are
punishable under Indian Penal Code. involved in
Misrepresentation are not
bound to be punishable
according to the law.

EVERY AGREEMENT OF WHICH THE OBJECT OR CONSIDERATION IS

UNLAWFUL IS VOID [SEC 23]

(a) It is forbidden by law– Law would also include the rules regulations,
notifications etc.
Under or issued under the authority given by a statute.

Example: A promises B to drop a prosecution which he has instituted against B for

robbery, & B promise to restore the value of the things taken. The agreement is void,
as its object is unlawful.
Example.: A sold liquor without license to B. The sale is unlawful as the sale of liquor
without license is forbidden by the law. Hence, A cannot recover the price.

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Example .: A Hindu already married and his wife alive entered into a marriage
agreement with Y an unmarried girl. The agreement is void because the second
marriage is forbidden by Hindu Law.

(b)If it defeats the Provisions of any Law. - Not directly prohibited by any Law
Example. A‟s estate is sold for arrears of revenue under the provision defaulter is
prohibited from purchasing the state upon an understanding with A becomes the
purchaser and agrees to convey the estate to A . Upon receiving from him the price
which B has paid? The agreement is void.
(c) If it is Fraudulent Ex.: Object or consideration of an agreement is fraudulent. An
agreement with such an object or consideration is unlawful and void.

Examples: (a) A, promises to pay Rs 200 to B, if B would commit fraud on C. B

agrees. B‟s agreeing to defraud is unlawful consideration for A‟s promise to pay.
Hence the agreement is illegal and void.
(b) A, B and C enter into an agreement for the division among them of gains
acquired, or to be acquired, by them by fraud. The agreement is void, as its object is
unlawful.

(d) If it involves or Implies injury to a person or property of another.

If the object of an agreement is to cause injury to the persons or property of another,

it is unlawful. Injury means criminal or wrongful harm. An agreement to commit an
assault is void
Example:(a) An agreement by which a debtor, who borrowed Rs 100, promised to
do manual labour without pay for the creditor, so long as the debt was not repaid in
full has been held to be void, as it involved injury to the person of the debtor.
(b) An agreement between some persons to purchase shares in a company, and
thus by fraud & deceit to induce other persons to believe that there is a bonafide
market for the shares, is void.

(e) If the court regards it as immoral.

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Agreements which are contrary to good morals are illegal and void. If the
consideration for the agreement is an act of sexual immorality the agreement is
illegal.

Example: A agrees to let her daughter to B for concubinage(state of living together

as man & wife without being married). This agreement is unlawful and immoral.
Example:X gave Rs.10, 000 to Y a married woman to obtain a divorce from her
husband. X agrees to marry when divorce taken. X would not recover the amount.

Performance of Contract
Contract is said to be performed, when the obligations of the parties are fulfilled
completely or partly and hence contract is discharged.

Performance may be of two types:

• Actual performance
• Attempted performance (Tender/ Offer of performance)

Actual performance
When a promisor to a contract has fulfilled his obligation in accordance with the
terms of the contract, the promise is said to have been actually performed. Actual
performance gives a discharge to the contract and the liability of the promisor ceases
to exist.
Example, A agrees to deliver10 bags of cement at B‟s factory and B promises to pay
the price on delivery. A delivers the cement on the due date and B makes the
payment. This is actual performance.

Tender /Offer of performance- starting point of performance of contract is called

tender or offer of performance.
Elements of Tender: (sec38)
• Tender must be unconditional
• Must be made to the promisee or his authorised agent
• Must be made at proper time and proper place.
• If there are more than one promisee, it may be made to one of them.

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• If the contract is for delivery of goods, the promiseemust be given an opportunity to
ascertain that the goods are according to the contract.
Attempted Performance
When the performance has become due, it is sometimes sufficient if the promisor
offers to perform his obligation under the contract. This offer is known as attempted
performance or more commonly as tender. Thus, tender is an offer of performance,
which of course, complies with the terms of the contract. If goods are tendered by
the seller but refused by the buyer, the seller is discharged from further liability, given
that the goods are in accordance with the contract as to quantity and quality, and he
may sue the buyer for.breach of contract if he so desires. The rationale being that
when a person offers to perform, he is ready, willing and capable to perform.
Accordingly, a tender of performance may operate as a substitute for actual
performance, and can effect a complete discharge.
Where a promisor has made an offer of performance to the promisee, and the offer
has not been accepted, the promisor is not responsible for non-performance, nor
does he thereby lose his rights under the contract.
Example, A contracts to deliver to B, 100 tons of basmati rice at his warehouse, on 6
December 2015. A takes the goods to B„s place on the due date during business
hours, but B, without assigning any good reason, refuses to take the delivery.
Here, A has performed what he was required to perform under the contract. It is a
case of attempted performance and A is not responsible for non-performance of B,
nor does he thereby lose his rights under the contract.‟

Who can perform a Contract?

i) Promisor himself: It is the nature of the contract which determines the person by
whom it should be performed. If it appears from the nature that the intention of the
parties was
that promise should be performed by the promisor himself, then it should be
performed by him. Such contracts are usually those where the personal skill of the
promisor is vital. Such contracts come to an end if the promisor dies.
Example: X promises to sketch a site map of Y‟s house. X willhave to perform this
promise himself. Because it requires theskill of X.

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ii) Agent: According to Para 2 of the Section 40, the promisormay employ a
competent person such as agent to performthe promise, if the contract is not formed
on personal condition.
Example: A promises to pay B a sum of money. A may fulfill this promise, either by
personally paying the money to B or by causing it to be paid to B by another.

iii) Representative: The contracts which do not involve anypersonal skill of the
promisor may be performed by legalrepresentatives of the promisor if he dies before
performance,unless a contrary intention appears from the contract. Thepromisee can
compel the legal representative to perform.
Example: M promises to sell his car for Rs. 1, 00,000/- to Nafter a week. But, M dies
after 5 days of the contract. M‟srepresentative will be liable to sell the car to N and N
will be
liable to pay Rs. 1, 00,000/- to M‟s representative.

iv) Third Parties: According to the section 41, if a promise accepts the performance
of the promise by a third person hecannot afterwards enforce it against the promisor.
In such a
case the contract comes to an end and the promisor isdischarged from further
liability.

v)Third Person: If a promisee accepts performance of the promise from a third

person, he cannot afterwards enforce it against the promisor
Example:- A wanted to sell his property to B. So, A & B both entered into the contract
for sale of property. A suddenly fall ill and therefore through power of attorney
authorized his elder brother „E‟ to perform the contract on A‟s behalf. „B‟ thus
afterward cannot enforce it against the promisor.

vi)Joint Promisors: When two or more persons makes a joint promise to promisee,
all joint promisors are bound to perform the contract.
Example: A, B & C jointly enters into the contract with E for the sale of their jointly
purchased property. Here, A,B& C are equally liable for the performance of contract.

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Who can Demand Performance?

It is only the promisee who can demand for performance of the contract. This makes
no difference that whether the performance demanded is for the benefit of the
promisee or for the third person.In case of death of the promisee before the
performance, his legal representative can move ahead with the demand.

Example:- A promises B to pay C a sum of Rs.10,000/-. A does not pay the amount
to C. C cannot take action against A as it is only B who can enforce the promise
against A.

Contracts which need not be Performed

Following are the circumstances under which contracts need not be performed:
a. According to Section 62, if parties to a contract agree to Novation, Rescission,
or Alteration, the original contract need not be performed.
b. In such a case the original contract is substituted by a new contract. b.
According to Section 63, if parties to a contract agree to dispense with or
remit performance of promise either wholly or in part, the original contract
stands discharged.
c. According to Section 64, when a person at whose option a contract is
voidable rescinds it, the other party thereto need not perform his promise.
d. According to Section 67, if any promisee neglects or refuse to afford the
promisor reasonable facilities for the performance of his promise, the promisor
is excused for the non-performance of the contract.

MEANING OF DISCHARGE OF CONTRACT

Discharge of contract implies termination of the contractual relationship between the

parties. A contract is discharged if it ceases to operate and when the rights and
obligations created by it come to an end. Sometimes, other rights and obligations
may arise as a result of discharge of the contract. These are independent of the
original contract.

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MODE OF DISCHARGE OF CONTRACT

Different modes of discharge of contract have been provided under this sections of
the Act. These are:
1. Discharge by performance -

A contract is said to be discharged if the parties to a contract fulfill their obligations

arising under the contract within the time and in the manner prescribed. In such a
case, the parties are discharged and the contract comes to an end Performance of a
contract is the most usual mode of its discharge. It may be Actual Performance or
attempted Performance (tender)

(a) Actual performance: When both the parties perform their promises, the
contract is discharged. Performance should be complete, precise and according to
the terms of the agreement. Most of the contracts are discharged by the
performance in this manner.

(b) Tender or Offer of Performance: Tender or offer of performance means "offer

made by the promisor to promisee expressing his willingness to perform his part of
the obligation under the contract. It is also known as attempted performance.
Example-

'A' offers to sell his house to 'B' for $100000 and 'B' accepts the same letter 'B'
paid the amount in full and 'A' handed over the house to 'B'. Here the parties have
fulfilled their obligations.The contract is said to be discharged by performance.

If only one party performs the promise, he alone is discharged. Such a party gets
a right of action against the other party who is guilty of breach of contract.

2. Discharge by agreement or consent :

A contract rests on the agreement of the parties. As it is an agreement which binds
them, so by their agreement or consent they may be discharged.

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A contract may be terminated by subsequent agreement. The new agreement may
be by way of
:

a) Novation- Section 62 of the Indian Contract Act deals with the doctrine of
novation. when a new contract is substituted for an existing one, either between the
same parties or between the new parties. If the parties to a contract agreed to
substitute a new contract for it or to rescind or alter it, the original contract need not
be performed.

b) Alteration-.When one or more of the terms of the contract is/are altered by the
mutual consent of the parties to the contract.

c) Rescission- When all or some of the terms of the contract are cancelled.

d) Remission- Section 63 of the Indian Contract Act 1872 speaks about the
discharge of a contract by remission. i.e., acceptance of a lesser fulfilment of the
promise made.

e) Waiver - Which means intentional relinquishment or giving up of a right by a party

entitled thereto under a contract.

f) Merger- When an inferior right accruing to a party under a contract merges into a
superior right accruing to the same party under a new contract.

3.Discharge by Impossibility of Performance:

If the performance of a contract is impossible, it is void. In other words, the

impossibility of performance renders the contract void. Section 56 of the Indian
Contract Act 1872 lays down the provisions relating to the impossibility of
performance, which runs as follows -

" An agreement to do an act impossible in itself is void." Impossibility which arises

subsequent to the formation of a contract ( which could be performed at the time
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when the contract was entered into ) is called subsequent or supervening
impossibility include-

a) destruction of the subject-matter of contract;

b) non-existence or non-occurrence of a particular state of things;

e) death or incapacity for personal service;

d) change of law or stepping in of a person with statutory authority;

e) outbreak of war. The contract is discharged in these case.

The following cases are not covered by supervening impossibility ;

a) difficulty of performance;

b) commercial impossibility;

c) failure of a third person on whose work the promisor relied;

d) strikes, lockouts and civil disturbances;

e) failure of one of the objects. The contract is not discharged in these cases.

4. Discharge by lapse of time:

The limitation act 1963, imposed an obligation on the parties in respect of certain
contacts to perform within a specified. If a contract is not performed within the period
of limitation and if no action is taken by the promise in a law court, the contract is
discharged.

5) Discharge by operation of law:

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A contract may be discharged by operation of law.

A contract can be discharged by the operation of law. The operationof law by which
contract can be discharged are as following –
i) By death:- If the contracts depend on the personal skill or abilitythen such contract
may be discharged on the death of thepromisor.
ii) By insolvency:- A person, after being adjudged insolvent, isreleased from all his
liability incurred prior to his adjudication. Acontract is discharged by the insolvency of
one of the partiesto it when an Insolvency Court passes an „order of discharge‟.
iii) Merger:- When an inferior right contract merges with into asuperior right contract,
the inferior right contract standsdischarged automatically. E.g. when a part-time
lecturer is
made full-time lecturer, the contract of part-time lectureship isdischarged by merger.
iv) Unauthorized alteration of the terms of a contract:- If one party makes any
material alteration in the contract without theconsent of the other party, then the
other party can avoid thecontract..

6) Discharge by breach of Contract:

A contract can be said to be breached or broken when either of the parties fails or
refuses to perform his obligations, or his promise under the contract. Therefore, it
can be said that when a binding agreement is not honoured by one or more parties
by non-performance of his promise, the agreement can be said to be breached.

TYPES OF BREACHES

1. Material breach : The first, and most sever type of breach, is called “material
breach.” A material breach of contract involves one of the key elements of the
contract not being provided or undertaken as agreed.

EXAMPLE: If, for instance, you were to purchase a computer package online and
only receive a monitor upon delivery, your contract with the provider would be
materially breached.

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2. Minor breach :It‟s important to be clear that not all breaches of a contract will be
material and hence immediately end the wronged party‟s obligations. In this case
there would have been a remedy to the breach of contract.

EXAMPLE: For instance, be if the computer company delivered the equipment but a
couple of pages were missing from the user manual. This would not lead to an
immediate cancellation of the contract.

3. Anticipatory breach :An anticipatory breach occurs when a party demonstrates

his intention to breach of contract.

EXAMPLE: Jane agrees to sell her antique sewing machine to Amanda, and the two
agree on the purchase price of $1,000, the sale to occur on May 1st. On April 25th,
Amanda tells Jane that she cannot come up with the money on time. Following this
communication, Jane can reasonably assume that Amanda is in anticipatory breach.
This enables Jane to sell the sewing machine to someone else, or potentially file a
lawsuit against Amanda for breach of contract.

4. Actual breach: This is of course the most common way that a party will breach a
contract. It occurs when the time arrives for a party to perform their side of an
agreement and they don‟t perform.

Example: “Ali” agrees to deliver 10 kg of rice to “Hassan” on 30th November. Ali fails
to deliver the rice to Hassan on agreed time. This is actual breach of contract by Ali.

Remedies of Breach Contract

All parties to a contract are expected to perform their promises.Breach of contract

takes place when one party to the contract, without lawful excuse, does not fulfill his
contractual obligation or by his own act makes it impossible that he should perform
his obligation under it. The other party or parties are called aggrieved or injured party
or parties.

There are various types of remedies for the injured parties. Such as –
i) Rescission of the contract.
ii) Suit for specific performance.

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iii) Suit for injunction
iv) Suit for quantum merit and
v) Suit for damages.
1) Rescission of the contract: - If there is breach of contract by one party, then the
other party may rescind the contract and thereby he is absolved from his all
obligations under the contract.
Example:- M promises N to deliver him a motor car on 1st January 2017, and N
promises to pay for the motor car on 1st January 2017. M does not deliver the car on
that date. N is discharged from the liability to pay the price. The court may grant
rescission:
a) Where the contract is voidable by the plaintiff; or
b) Where the contract is unlawful for causes not apparent on its face and the
defendant is more to blame than the plaintiff.
2) Suit for specific performance: - In some specific cases if the damages are not
an adequate remedy, then the court can direct the party in breach for the specific
performance of the contract. In suchcase, the promise is carried out as per terms
and conditions of thecontract. This is a direction by the court for specific performance
ofthe contract at the suit of the party not in breach.Generally in the following cases,
the court grants specific performance:
i) When the act agreed to be done is such that compensation in moneyfor its non
performance of the act agreed to be done is not measurable.
ii) When it is probable that compensation in money is an inqdequaterelief got for the
non performance of the act agreed to be done.
iii) When there is no standard for ascertaining the actual damage caused by the non-
performance of the act agreed to be done.
On the other hand, the court does not grant specific performance in
the following cases:
i) Damages are an adequate remedy.
ii) The contract is not certain.
iii) The contract is inequitable to either party.
iv) The contract is of revocable nature.
v) The contract is made by the trustee in breach of trust.
vi) The contract is of personal nature i.e. contract to marry.

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vii) The contract made by a company beyond its power (ultra-vires of its
memorandum of association).
viii) The court cannot supervise its carrying out.
3) Suit for injunction: - Injunction is an order passed by a competent court
restraining a person from doing some act. Injunction can be defined as a mode of
securing the specific performance of the negative terms of a contract. Negative
terms of contract imply doing something, which a party has promised not to do.
Injunction is an order which is granted by the court restraining the person to do what
he had promised not to do. The court may order injunction in the following cases –
i) if the contract is voidable.
ii) if the contract becomes void or
iii) on discovering the contract as void.
4) Suit for quantum meruit:- The claim for quantum meruit may bearise if a contract
performed by one party has become discharged bybreach of the other party. The
meaning of the phrase “quantum meruit”is „as much as earned‟. The claim is not for
the original contract thathas been discharged or void, but on an implied promise by
the otherparty to pay for what he has done.
Quantum meruit arises in the following circumstances.
a) If a contract is found to be void.
b) If something is done without any intention to do so gratuitously.
c) If one party abandons or refuses to perform the contract.
d) If a contract is divisible
e) If a contract is performed badly.

5) Suit for damages: Damages are a monetary compensationawarded by the court

to the injured party for the loss or injury sufferedby him. As per contract, one party
can claim damages if other partybreach the contract. The main purpose of awarding
the damages isto make good the loss suffered by him. It is known as doctrine
ofrestitution. The Section 73 of the Indian Contract Act, 1872 dealswith the
compensation for loss or damages caused by a party forbreach of contract. There
are mainly four types of damages, suchas

i) Ordinary damages

ii) Special damages

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iii) Vindictive or exemplary damages and

iv) Nominal damages.

i) Ordinary damages: When a contract has been broken, the injuredparty can, as a
rule, always recover from the guilty party ordinary orgeneral damages. Ordinary
damages are such damages as may fairlyand reasonably be considered as arising
naturally and directly in theusual course of things from the breach of the contract
itself.

ii) Special Damages: Special damages are such damages which occurdue to some
special or unusual reasons affecting the plaintiff. Suchdamages cannot be claimed
as a matter of right. These can be claimedonly in the special circumstances which
would results in a specialloss in case of a breach of a contract are brought to the
notice of theother party.

iii) Vindictive or exemplary damages: Damages which are awardedwith a view to

punishing the guilty party for the breach and not byway of compensation for the loss
suffered by the aggrieved party.But the cardinal principle of the law of damages for
the breach of acontract are given by way of compensation for loss suffered, and
notby way of punishment for wrong inflicted. Hence, vindictive orexemplary damages
have no place in the law of contract as they arepunitive in nature. However, there are
two exceptions to this rule i.e. the court may award exemplary damages: a) Breach
of a contract to marry.(b) Dishonour of a cheque by a banker when there are
sufficient fundsto the credit of the customer.

iv) Nominal damages: Nominal damages are awarded only for thename sake,
where the injured party has not actually suffered any loss byreason of the breach of
a contract. The damage recoverable by the injuredparty is nominal, i.e. very small.
This merely signifies that the plaintiff haswon the case.

QUANTUM MERUIT:Quantum meruit is a Latin term, which means “ as much as

earned” & “as much as deserved”. A right to sue on a quantum meruit arises where a
contract, partly performed by one party, has become discharged by the breach of the

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other party. The right to payment is based on an implied promise by the other party
to pay for what has been done. It does not arise out of the original contract.

Quasi Contract:

Quasi Contract is based on the principle of equity. "A person shall not be allowed to
enrich himself unjustly at the expense of another. It means one should not accept or
recieve any benefit unjustly.The term Quasi Contract is derived from the Roman Law
"Obligatio quasi ex contractu". Quasi Contract is not real Contract entered into by
parties intentionally. It resembles a contract in which law imposes on obligation on a
person to perform an obligation on the ground of equity.

According to Salmond, " There are certain obligations which are not in truth
contractual in the sense of resting on agreement, but which the law treats as if they
were.

Example - XYZ leaves his wristwatch at ABC's house by mistake. here ABC has
Quasi-contractual obligation to return it to XYZ. Note - Generally, In a contract,
obligations are created on the parties out of an agreement but In these type of
contracts (quasi-contracts) obligations are created on the parties without any
agreement.

Kinds of Quasi Contracts

1) Claim for necessaries supplied to person incapable of contracting, or on his

account":If a person, incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
Examples: (a) A supplies B, a lunatic, with necessaries suitable to his condition in
life. A is entitled to be reimbursed from B‟s property.
(b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B‟s property.
2) Reimbursement of person paying money due by another, in payment of
which he is interested: A person who is interested in the payment of money which

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another is bound by law to pay, and who therefore pays it, is entitled to be
reimbursed by the other.
Example: B holds land in Bengal, on a lease granted by A, the zamindar. The
revenue payable by A to the Government being in arrear, his land is advertised for
sale by the Government. Under the law, the consequence of such sale will be the
annulment of B‟s lease. B to prevent the sale and the consequent annulment of his
own lease pays the Government the sum due from A. A is bound to make good to B
the amount so paid.
3) Obligation of person enjoying benefit of non-gratuitous act:Where a person
lawfully does anything for another person, or delivers anything to him, not intending
to do so gratuitously, and such another person enjoys the benefit thereof, the letter is
bound to make compensation to the former in respect of, or to restore, the thing so
done or delivered.
4) Responsibility of finder of goods:A person who finds goods belonging to
another, and takes them into his custody, is subject to the same responsibility as a
bailee.
5) Liability of person to whom money is paid, or thing delivered, by mistake or
under coercion:A person to whom money has been paid, or anything delivered, by
mistake or under coercion, must repay or return it.

EXAMPLE:
(a) A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, not
knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount
to B.
(b) A railway company refuses to deliver up certain goods to the consignee except
upon the payment of an illegal charge for carriage. The consignee pays the sum
charged in order to obtain the goods. He is entitled to recover so much of the charge
as was illegal and excessive.
Contingent Contract: A contingent contract is a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen.
[Section 31]
Example: A contracts to pay B Rs.10,000/- if B’s house is burnt. This is a
ContingentContract.

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A contingent contract contains a conditional promise. A promise is absolute or
unconditional when the promisor undertakes to perform it in any event. A promise is
conditional when performance is due only if an event, collateral to the contract ,does
or does not happen. Collateral means subordinate but from same source, connected
but aside from main line.

Essentials of Contingent Contracts

1)Depends on happening or non-happening of a certain event

The contract is contingent on the happening or the non-happening of a certain event.

These said events can be precedent or subsequent, this will not matter.

Example Peter promises to pay John Rs 5,000 if the Rajdhani Express reaches Delhi
on time. This is a contingent event.

2)The event is collateral to the contract

It is important that the event is not a part of the contract. It cannot be the performance
promised or a consideration for a promise.

Example: Peter enters into a contract with John and promises to deliver 5 television
sets to him. John promises to pay him Rs 75,000 upon delivery. This is NOT a
contingent contract since John‟s obligation depends on the event which is a part of the
contract (delivery of TV sets) and not a collateral event.

3) The event should not be a mere will of the promisor

The event cannot be a wish of the promisor.

Example Peter promises to pay John Rs 5,000 if Argentina wins the FIFA World Cup
provided he wants to. This is NOT a contingent contract. Actually, this is not a contract
at all.

Peter promises to pay John Rs 50,000 if he leaves Mumbai for Dubai on August 30,
2018. This is a contingent contract. Going to Dubai can be within John‟s will but is not
merely his will.

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4) The event should be uncertain

If the event is sure to happen, then the contract is due to be performed. This is not a
contingent contract. The event should be uncertain.

Example: Peter promises to pay John Rs 500 if it rains in Mumbai in the month of July
2018. This is not a contingent contract because in July rains are almost a certainty in
Mumbai.

Differences between contract and quasi-contract

1. A contract is a real agreement between two or more parties, but a Quasi-

contract is not an agreement but resembles an agreement or a contract.
2. Under a contract, both parties give their consents freely, while under quasi-
contract, there is no consent of either of the parties, as it is not voluntarily
made.
3. Under a contract, liability exists according to the terms mentioned and agreed
upon by both the parties, whereas under quasi-contract, the liability comes
into existence through the conduct of the parties and is based on morality,
natural justice, equity, and a good conscience.
4. General Contracts are entered into by interested parties voluntarily without
any compulsion, whereas quasi-contracts are imposed by law.
5. General Contracts can be both rights in Rem (against the whole world) and
rights in Personam (against any one person or entity). But quasi-contracts are
only rights in Personam, these are only available against a specific person.

6. The Indian contracts act 1872 as a whole encompasses everything about all
kinds of contracts. A contract is defined in section 2(h) and sections 68-72
constitute all the information about Quasi-contracts.

Conclusion of a Contract
To avoid legal issues in the future, parties must come to an agreement by setting a
value to specific goods, services, or job performance. Consideration legally binds a
contract, protecting both parties from potential lawsuits or misunderstandings.

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 ASTHA School of Management
Business Law
Sub Code-18 MBA 108
LAW OF CONTRACT
Module- II
SPECIAL CONTRACT
Asst Prof SMITA RAY
Contract Of Agency

An agent does not act on his own behalf but acts on behalf of his principal. He either
represents his principal in transactions with third parties or performs an act for the principal.
The question as to whether a particular person is an agent can be verified by finding out if his
acts bind the principal or not.
Definition
Sec 182 of the Indian contract act,1872 defines Agent and Principal as:
 Agent: means a person employed to do any act for another or to represent another in
dealing with the third persons and
 The principal: means a person for whom such act is done or who is so represented.
Essentials of Agency
Principal is liable for the acts of agent
 The principal is liable for all the acts of an agent which are lawful and within the scope
of agent‘s authority.
 The contracts entered into by the agent on behalf of the principal have the same
legal consequences as if these contracts were made by the principal himself.
Who may employ an agent?
 Any person may employ an agent if –
 He is of the age of majority; and
 He is of sound mind.
Who can be an agent?
 Any person may become an agent.
 Even a minor or a person of unsound mind can become an agent
Liability of agent
 Generally an agent is liable to the principal
 An agent is not liable to the principal if he is a minor or is of unsound mind.
Requirement of consideration
 No consideration is necessary for creating an agency.

The agency can be created in the following ways:
1. Express Agency: One can enter into the contract of agency through an
express agreement, i.e. oral or written. In a written contract of agency, the power of
attorney is transferred in the name of the agent, conferring him the authority and
 power to act on behalf of the principal, subject to the terms and conditions specified in
the contract.
When the purpose of creation of agency is to transfer the immovable property, it is
required to be registered,
2. Implied Agency: When something is not directly or clearly stated, it is said to be
implied. Therefore, the implied agency is created by way of conduct, the situation of
the parties, i.e. principal and agent, or necessity of the case.

Implied Agency can be sub-Divided into

Agency by Estoppel: Suppose a person by his conduct informs another person that a
particular person is his agent and the person who is signified as an agent is present and
hearing at the time when it is intimated. Now, if the third person enters into a contract with
that person thinking that he is the agent. This is the case of agency by estoppel, where the
agent will be precluded from refusing his authority.
Agency by Holding out: When a legally married couple lives together, the wife is supposed
to have the authority of his husband to pledge his credit, in order to afford the basic
necessities of life, according to their standard of living. However, it has certain exceptions, if
the husband proves that:
1. He has explicitly warned the dealer not to give the goods on credit to his wife, or
2.
3. He has explicitly forbidden his spouse to pledge his credit, or
4. He has already supplied the mentioned stuff in sufficient quantity to his wife or
5. He is providing sufficient allowance to his wife.
Agency of Necessity: There may be certain circumstances that compel the parties to enter
into a contract of agency. Suppose a person is entrusted with property or goods of another
person, he is obligated to take reasonable care of it as well as to incur necessary expenses
so as to preserve and protect such property.
Agency by Ratification: Agency can also be created by ensuing ratification. When a person
who does not have any authority claims to act as an agent or a legally employed agent
performs an act which is beyond his authority, then the principal is not legally bound by the
contract entered into on his behalf. However, he may ratify the act performed by the agent
and accept the liability. This results in an agency by ratification.
In such a case, the parties i.e. the principal and agent will be in the same position if the acts
were performed with authority.

Kinds of Agents
Agents are classified in various ways. They are classified as mercantile or commercial
agents and non-mercantile or non-commercial agents. There are different various types of
kind agents are as follows.
Specific Agent: - A specific agent is one who is appointed to perform a particular act or to
represent in some particular transactions. For example, an agent appointed for sale of
particular house. General Agent: - A person hired to carry on a series of transaction relating
to particular business, he is the one who has authority to do all acts connected with a
particular trade, business or employment. For example, A manager of a firm. Universal
Agent:- This agent is appointed to do all acts and whose authority is unlimited and can do
everything which the principal lawfully do.
Mercantile Agent: - He is the agent appointed for mercantile or business activities. The
business activities consist of both trade activities and commerce activities. There are
different types of mercantile agent.
They are as follows :-
a. Factor: - The agent to whom goods are entrusted for the purpose of selling them. He
can sell the goods in his own name and can do such things as are usual and
necessary in the course of such businesses.
b. Broker: - A broker is an agent who is employed to buy or sell goods on behalf of
another. He is a middleman for purchase or sale of goods but he is not entrusted with
the possession of goods and he doesn‘t sell or purchase the goods himself. He is
appointed to bring about a contractual relation between principal and third parties.
c. Commission Agent: - Agents who act on behalf of another for commission of his act
or service. Generally this type of agent buys or sells goods in the foreign market on
behalf of his principal.
d. Auctioneer: - An auctioneer is an agent appointed by a seller to sell his goods by
public auction for commission. He sales good by auction to the highest bidder in
public competition.
e. Del-Credence:- An agent who in extra commission guarantees his principal the
person with whom he enters into contract on behalf of the principal shall perform their
obligations otherwise he (agent) will be liable. He is surety (state of being sure) also.
f. Bankers: - Bank and Bankers is the agent of the customers because the relationship
between banker and customer is generally creditor and debtors. The bankers collect
cheque, draft or bills or buys and sales securities on behalf and get commissions from
the customer as considerations for services.
Non-Mercantile Agent:- The agent who is unrelated with business activities. It includes
estate agent, house agent, election agent, promoter, insurance agents, solicitors, clearing
and forwarding agent etc. These include attorneys.

Duties of Agents:
 It is the duty of an agent to execute the mandate of his principal.
 It is the duty of an agent to take reasonable care of the property of the principal and
not to destroy the sale.
 An agent is bound to render proper accounts to his principal on demand.
 In case of difficulty, the agent must inform the principal and get instruction from him
before taking any steps in facing the difficulty or emergency.
 It is the duty of agent not to deal on his own account.
 An agent should not make any secret profit out of his agency or agency agreement.
 An agent must not delegate his authority to a different person, but perform the work of
agents.
Rights of Agents:
 Every agent is entitled to receive agreed remuneration, or if there is no agreement, a
reasonable remuneration.
 An agent has the right to retain all money in respect of his remuneration, advances or
reasonable expenses incurred by him in conducting the business.
 An agent has to be indemnified against the consequences of all lawful acts done by
him in the exercise of the authority conferred upon him.
 It is the right of an agent to stop the goods in transit to the principal like an unpaid
seller if he has bought goods with his own money and the principal has become
insolvent.

Duties of Principal:
 To indemnify against consequences of all lawful acts of agent
 To indemnify the agent against consequences of acts done in good faith
 To pay compensation against agent‘s injury
 To pay the agent the commission or other remuneration agreed.

Termination/Revocation of Agency or Agency Agreement

1) Agreement:
An agency or agency agreement can be terminated at any time by a mutual
agreement between the principal and the agent. Therefore, the authority of an agent
terminates when the principal and therefore the agent complies with to terminate it.
2) Revocation by the Principal:
The principal can revoke the authority of the agent at any time before the agent has
exercised his authority.
3) Revocation by Agent:
An agency or agency agreement can be terminated or revoked by the agent himself
because a person cannot be compelled to work as an agent.
4) Completion of business of Agency:
An agency or agency agreement comes to an end automatically when the business of
the agency is completed.
5) Expiry of time:
If the agent is appointed for a fixed period, the agency comes to an end on the expiry
of the fixed period, even though the business may not have been completed.
6) Death of the Principal or Agent:
An agency or agency agreement terminates automatically on the death of the principal
or agent.
7) The insanity of the Principal or Agent:
An agency or agency agreement terminates automatically, where the principal or the
agent becomes of an unsound mind. When the principal becomes insane, the agent
cannot act for an individual of unsound mind.
8) Insolvency of the Principal:
An agency or agency agreement is also terminated by the insolvency of the principal.
9) Destruction of Subject matter:
An agency or agency agreement terminates on the destruction of the subject matter of
the Contract of Agency.
10) Principal or Agent becomes Alien enemy:
If the principal and agent are citizens of two different countries and a war breaks
out between the two countries, the contract of agency(agency agreement) is terminated.

Contract of Bailment

Section 148 of the Indian Contract Act: A bailment is the delivery of goods by one person to
another for some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the person
delivering them. The person delivering the goods is called the Bailor. The person to whom
the delivery is called the bailee.

Essential Elements of a contract of Bailment:

1) Contract:
There must be a valid contract between the bailor and the bailee. The delivery of goods
should be made under a contract. If the goods are delivered without any contract e.g. by
mistake, there is no bailment. The contract may be expressed or implied.
2) Delivery of Goods(possession):
Delivery of possession is of two kinds:
Actual Delivery:
When the bailor hands over to bailee the physical possession of goods, it is called actual
delivery.
Constructive Delivery:
When there is no change of physical possession, goods remain where they are, but
something is done which has the effect of putting them in bailee‘s possession, it is called
constructive delivery.
3) Delivery must be for specific purpose:
The bailment of goods is always made for some purpose and is subject to the condition
according to the directions of the bailor.
4) Return disposal of deposited:
It is essential for bailment that when the purpose is accomplished, the goods must be
returned in original form or in changed form or disposed of according to the directions of the
bailor.

RIGHTS AND DUTIES OF BAILOR

 Right to enforce bailee‘s performance: The bailor delivers goods to the bailee for
some specific purpose, and in case of non-gratuitous bailment, the bailor has an
elemental right to achieve that purpose or obtain the benefit through the latter.
  Right to claim damages: In the case of bailment, the bailor has the right to claim for
damages against the loss, if any, caused to the goods bailed due to the bailee‘s
negligence or misconduct.
 Right to claim compensation against unauthorized use of goods: If any third person
does some injury to the goods bailed or deprives the rights of bailee of the use of the
goods, the bailor may file a suit against the wrong-doer, and recover compensation
from him.
 Right to demand return of goods along with accretion to, if any: The bailor enjoys the
right to have the goods bailed delivered back to him in a safe condition and after the
time of bailment has expired or the purpose behind the bailment has been achieved.
And, in the absence of any contrary term in the contract, the bailor is also entitled to
any accretion to the goods bailed if it occurred while the goods were in the study of
bailee.

DUTIES OF BAILOR
 Duty to disclose faults: In the case of gratuitous bailment, the bailor is expected to
disclose all the defects to the bailee known to him and which would get in the way with
the use of goods bailed. A non-gratuitous bailment carries a greater responsibility on
the part of the bailor. He will be liable even if he was not in the know of the defects.
 Duty to repay bailee‘s expenses: A bailor is bound to repay to the bailee expenses
incurred by him for work done on the goods received under conditions of bailment,
and in which he is not receiving any remuneration or deriving any benefit.
 Duty to indemnify the bailee: The bailor is bound to make good the loss suffered by
the bailee that is in excess of the benefit derived, where he had delivered the goods
without a reason and compelled the bailee to return them before the expiry of the
period of bailment.
 Duty to compensate bailee for breach of warranty: In every contract of bailment
warrants the bailee about the bailor‘s title being defect-free. And, if bailee
subsequently suffers any loss by the reason of the bailor‘s title being defective, it is
the duty of the bailor to compensate the bailee for breach of warranty.
 Duty to claim back the goods: The bailor is bound to accept the goods returned by the
bailee in accordance with the terms of bailment. If he refuses or fails to accept back
the goods, if offered at a proper time and at a proper place, without any reasonable
ground, he will be responsible for any damage to the goods and not the bailee.

RIGHTS AND DUTIES OF BAILEE

 Right to compensation: The bailor is responsible to the bailee for any loss which the
bailee may sustain and the bailor was not entitled to make the bailment, or to give
directions respecting them. If the bailor has no right to bail the goods or to give
directions respecting them and consequently the bailee is exposed to some loss, the
bailor is responsible for the same.
 Right to expenses or remuneration: The conditions of the bailment, the goods are to
be kept, or to have work done upon them by the bailee for the bailor, thus the bailee is
to receive no remuneration, the bailor will have to repay to the bailee the necessary
expenses incurred by him for the purpose of the bailment.
  Right of Lien: If the bailee lawful charges are not paid he may retain the goods. So the
right to retain any property until the charges due in respect of the property are paid is
called the right of lien. The Supreme Court cited the following passage from
HALSBURY‘S LAWS OF ENGLAND as to the nature of this right.

DUTIES OF BAILEE
 Duty of Reasonable Care: In the cases of bailment the bailee is bound to take as
much care of the goods bailed to him as an ordinary and prudent man of sound mind.
 Duty of unauthorized use of goods: The bailee should use the goods bailed to him
strictly in accordance with the conditions of the contract of bailment. If he illegally uses
the goods bailed to him, the contract of bailment becomes voidable at the option of the
bailor.
 Duty of not to Mix the goods bailed with his own goods: The bailee must keep the
goods bailed separate from his own goods. He should not mix his goods with another
without any prior permission of the bailor.
 Duty of not to set up an adverse title: The bailee holds the goods on behalf of the
bailor. So he has to return them to him. He cannot have the right of the bailor as to the
ownership of the goods.
 Duty of Return the goods: The bailee should return the goods bailed to the bailor on
the expiry of the period on the fulfilment of the object for which the goods were bailed.
The goods must be returned according to the directions of the bailor. If he fails to do
so, he is responsible to the bailor for the loss, even if it arises without his negligence.

The Sale of Goods Act, 1930

According to section 4 of the sale of goods act, 1930 . ‗Contract of sale of goods is a contract
whereby the seller transfer or agrees to transfer the property in goods to the buyer for a
price‘.

TYPES OF GOODS
 Existing Goods: It means such goods which are in existence at the time of the contract of
sale i.e. owned or possessed by the seller.
 Specific or Ascertained Goods: It means goods identified and agreed upon at the time the
contract of sale has been made.
 Generic / Unascertained Goods: It means the goods which are not specifically identified
but are indicated by description.
 Future Goods: It means goods to be manufactured or produced or acquired by the seller
after making the contract of sale.

Formation of the Contract

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

2. Contract of Sale how made -.

A. A contract of sale is made by an offer to buy or sell goodsfor a price and the
acceptance of such offer. The contract may provide for the immediate delivery of the
goods or immediate payment of the price or both, or for the delivery or payment by
instalments, or that the delivery or payment or both shall be postponed.
B. Subject to the provisions of any law for the time being in force, a contract of sale may
be made in writing or by word of mouth, or partly in writing and partly by word of
mouth or may be implied from the conduct of the parties.

3. Existing or future goods.-

A. The goods which form the subject of a contract of sale may be either existing goods,
owned or possessed by the seller, or future goods.
B. There may be a contract for the sale of goods the acquisition of which by the seller
depends upon a contingency which may or may not happen.
C. Whereby a contract of sale the seller purports to effect a present sale of future goods,
the contract operates as an agreement to sell the goods.
4. Goods perishing before making of contract.- Where there is a contract for the sale
of specific goods, the contract is void if the goods without the knowledge of the seller
have, at the time when the contract was made, perished or become so damaged as
no longer to answer to their description in the contract.
5. Goods perishing before sale but after agreement to sell.- Where there is an
agreement to sell specific goods, and subsequently the goods without any fault on the
part of the seller or buyer perish or become so damaged as no longer to answer to
their description in the agreement before the risk passes to the buyer, the agreement
is thereby avoided.
6. Ascertainment of price.-
(1) The price in a contract of sale may be fixed by the contract or may be left to be
fixed in manner thereby agreed or may be determined by the course of dealing
between the parties.
(2) Where the price is not determined in accordance with the foregoing provisions,
the buyer shall pay the seller a reasonable price. What is a reasonable price is a
question of fact dependent on the circumstances of each particular case.
7. Agreement to sell at valuation.-
(1) Where there is an agreement to sell goods on the terms that the price is to be
fixed by the valuation of a third party and such third party cannot or does not make
such valuation, the agreement is there by avoided.
 Provided that, if the goods or any part thereof have been delivered to, and
appropriated by, the buyer, he shall pay a reasonable price there for.
(2) Where such third party is prevented from making the valuation by the fault of
the seller or buyer, the party not in fault may maintain a suit for damages against the
party in fault.
8. Stipulations as to time.- Unless a different intention appears from the terms of the
contract, stipulations as to time of payment are not deemed to be of the essence of a
contract of sale. Whether any other stipulations as to time is of the essence of the
contract or not depends on the terms of the contract.

1. DISTINGUISH BETWEEN SALE AND AGREEMENT TO SELL

SALE AGREEMENT TO SELL

1.Transfer of property: the property in 1.Transfer of property: In agreement to sell,
goods passes from the seller to the buyer the ownership of the property will pass from
immediately the seller to the buyer at some future time or
on fulfilment of some conditions.
2.Nature of contract: A sale is an 2.Nature of contract: An agreement to sell is
executed contract an executory contract
3. Consequences of Breach by buyer : In 3. Consequences of Breach by buyer : In an
a sale, if the buyer fails to pay for the agreement to sell, the seller can only sue for
goods, the seller can: a) Sue him for damages for breach of contract
recovery of price b) Claim damages
4. Consequences of Breach by seller: In 4. Consequences of Breach by seller: In the
a sale, if the seller defaults, i.e. commits case of an agreement to sell, if the seller
a breach, the buyer can: 1. Claim commits a breach, the buyer can only claim
delivery of the goods from third party 2. damages.
Sue for damages
5. Transfer of risk: In a sale, if the goods 5. Transfer of risk: In an agreement to sell, if
are destroyed, the loss falls on the buyer the goods are destroyed, the loss falls on the
even though they are in the possession seller, even though they are in the possession
of the seller. of the buyer.
6. Subsequent destruction: A subsequent 6. Subsequent destruction: Such loss or
loss or destruction of the goods is the destruction is the liability of the seller.
liability of the buyer.

2.SALE AND HIRE- PURCHASE

SALE HIRE-PURCHASE
1. Property in the goods is transferred to 1. The property in goods passes to the hirer
the buyer immediately at the time of upon payment of the last instalment.
Contract.
2. The position of the buyer is that of an 2. The position of the hirer is that of a bailee till
Owner of the goods.. 4. The seller takes he pays the last instalment.
the risk of any loss resulting from the
insolvency of the buyer.
3. The buyer cannot terminate the 3. The hirer may, if he so likes, terminate the
contract and is bound to pay the price of contract by returning the goods to its owner
the goods. without any liability to pay the remaining
instalments
4. The seller takes the risk of any loss 4. The owner takes no such risk, for if the hirer
resulting from the insolvency of the fails to pay an instalment the owner has right
buyer. to take back the goods.
5. The buyer can resell the goods. 5. The hirer cannot resell the goods till the last
instalment.
6. Tax is levied at the time of the 6. Tax is not leviable until it eventually ripens
contract. into a sale.

3. SALE AND BAILMENT

SALE BAILMENT
1.The property in goods is transferred . There is only transfer of possession of goods
from the seller to the buyer. from the bailor to the bailee for any of the
reasons like safe custody, carriage,etc.
2. The return of goods in contract of sale 2. The bailee must return the goods to the
is not possible. bailor on the accomplishment of the purpose
for which the bailment was made.
3. The consideration is the price in terms 3. The consideration may be gratuitous or
of money. non-gratuitous.

DIFFERENCES BETWEEN SALE AND CONTRACT FOR WORK AND LABOUR

Sale Contract for Work and Labour
1.Property in goods is transferred from 1.It is a contract for performing some work and
the seller to the buyer. not for transferring the property in goods
2.It involves the delivery of goods. 2. It involves exercise of skill and labour in
rendering some work. It involves ―the uses by
means of money consideration‖.

EFFECT OF PERISHING OF GOODS:

1. Goods perishing before making a contract

a) Where in a contract of sale of specific goods, the goods without the knowledge of the
seller have perished at the time of making the contract, the contract is void.
b) If the seller was aware of the destruction and still entered into the contract, he is
stopped from disputing the contract. Moreover, perishing of goods not only includes loss by
theft but also where the goods have lost their commercial value.

2) Goods perishing after agreement to sell

Where there is an agreement to sell specific goods, and subsequently the goods without any
fault of any party perish before the risk passes to the buyer, the agreement is thereby
avoided. The provision applies only to sale of specific goods. - If the sale is of unascertained
goods, the perishing of the whole quantity of such goods in the possession of the seller will
not relieve him of his obligation to deliver.

PRICE & ITS FIXING Price is money consideration for the sale of goods and it constitutes
the essence for a contract of sale.
The price may be fixed: (i) at the time of contract by the parties themselves, or (ii) may be left
to be determined by the course of dealings between the parties, or (iii) may be left to be fixed
in some way stipulated in the contract, or (iv) may be left to be fixed by some third-party.

CONDITIONS & WARRANTIES

Condition - If the stipulation forms the very basis of the contract or is essential to the main
purpose of the contract, it is a condition. - The breach of the condition gives the suffering
party a right to treat the contract as repudiated (cancelled). Thus, if the seller fails to fulfil a
condition, the buyer may treat the contract as repudiated, refuse the goods and, if he has
already paid for them, recover the price. He can also claim damages for the breach of
contract.

Warranties - If the stipulation is collateral to the main purpose of the contract, i.e., is a
subsidiary promise, it is a warranty. - The effect of a breach of a warranty is that the suffering
party cannot repudiate (cancel) the contract but can only claim damages. - Thus, if the seller
does not fulfil a warranty, the buyer must accept the goods and claim damages.
- Stipulation (condition) as to time of payment are not to be deemed conditions (and hence
not to be of the essence of a contract of sale) unless such an intention appears from the
contract. - Whether any other stipulation as to time (e.g., time of delivery) is of the essence of
the contract or not depends on the terms of the contract.

WHEN A CONDITION MAY BE TREATED AS WARRANTY

In the following cases, a breach of a condition is treated as a breach of a warranty:
 Waiver by the buyer :The buyer may waive a condition. Once the buyer waives a
condition, he cannot insist on its fulfilment.
 Compulsory treatment by buyer : Where the contract is indivisible and the buyer has
accepted the goods or part thereof, the breach of condition can only be treated as
breach of warranty. Thus, the buyer cannot terminate the contract but can only claim
damages from the seller.
WARRANTIES : EXPRESS WARRANTIES// IMPLIED WARRANTIES
Implied Warranties: It is a warranty, which the law implies into the contract of sale. The law
presumes that the parties have incorporated it into their contract. The implied warranties are
read into every contract of sale unless they are expressly excluded by the parties. In case of
conflict between the express and implied warranties, the express term shall prevail and the
implied terms shall not be considered.
Following are the implied warranties which are contained in the Sale of Goods Act :
1. Warranty as to quiet possession: Where the buyer has obtained the possession of
the goods, he has a right to enjoy them in a way he likes, i.e., no one should
interfere with the quiet enjoyment of the buyer. If buyer‘s right of possession and
enjoyment is disturbed by anyone, then the buyer can recover damages from the
seller. Then they should be reasonably fit for the purpose for which they are generally
used. Then they should be immediately resalable in the market under their
description.
2. Warranty as to free from encumbrance: In every contract of sale there is an
implied warranty that the goods sold shall be free from any charge. If the
possession of the buyer is disturbed due to such charge in favour of third party, he
can claim damages from the seller.
3. Disclosure of dangerous nature of goods: There is another implied warranty on
the part of the seller that in case the goods are inherently dangerous or they are likely
to be dangerous to the buyer and the buyer is ignorant of the danger, the seller must
warn the buyer of the probable danger. If there is breach of this warranty, the seller
will be liable in damages
4. Warranties implied by customs: Like implied conditions, implied warranties are also
attached by custom or usage of trade. This is so because the parties enter into an
agreement subject to the known customs or usages of trade.

CONDITIONS : EXPRESS CONDITIONS IMPLIED CONDITIONS

Express conditions: Express conditions are those, which are agreed upon between the
parties at the time of contract and are expressly provided in the contract.

Implied Conditions: It is a condition, which the law implies into the contract of sale. The law
presumes that the parties have incorporated it into their contract. The implied conditions are
read into every contract of sale unless they are expressly excluded by the parties. In case of
conflict between the express and implied conditions, the express term shall prevail and the
implied terms shall not be considered.

Following are the implied conditions which are contained in the Sale of Goods Act :

1. Conditions as to title: According to this condition, it is presumed that the seller

has a valid title to the goods, i.e., he has the right to sell the goods. If later on, the buyer
comes to know that the seller had no valid right to sell the goods, then he may reject the
goods and claim the refund of the price, if already paid.
This implied condition may be analysed as under:
(i) In case of sale, the implied condition is that the seller has the right to sell the goods,
and
 (ii) (ii) In case of an agreement to sell, the implied condition is that the seller will have the
right to sell the goods at the time when the ownership is to pass from the seller to the
buyer.
2. Condition as to description: Sometimes, the goods are sold by description. In
such cases, the implied condition is that the goods shall correspond with the
description. The term ‗correspondence with description‘ means that the goods
purchased by the buyer must be the same which were described by the seller. If
subsequently, it is discovered that the goods do not correspond with the
description, the buyer may reject the goods and claim the refund of the price, if
already paid.
3. Condition as to sample: In case of sale of goods by showing the sample to the
buyer, there are following three implied conditions, (i) That the goods delivered
shall correspond with the quality of the sample (ii) That the buyer shall have a
reasonable opportunity of comparing the bulk with the sample. (iii) That the goods
shall be free from latent defects (i.e., the defects which are not discoverable on
reasonable examination of sample)
4. Condition as to sample as well as description: Sometimes, the seller shows
sample of the goods to the buyer and also gives him their description. In such
cases, the implied condition is that the goods shall correspond with both, the
sample as well as description.
5. Condition as to quality or fitness for buyer’s purpose: Ordinarily, there is no
implied condition that the goods shall be fit for the particular purpose of the
buyer. Buyer is not responsible (i) To know the particular purpose of buyer. (ii) If
buyer chooses the goods negligently. However in following exceptions, there is an
implied condition that the goods shall be fit for the buyer‘s specific purpose.
In following cases seller is responsible to the buyer: (i) If the buyer makes his
purpose clear to the seller. (ii) If the buyer buys the goods ‗relying upon his skill
and judgment‘.
6. Condition as to merchantability: The term ‗merchantability‘ has not been defined
in the Sale of Goods Act. However, it has been interpreted by the courts, and
basically it means the two things, namely: If goods are purchased for

Self use Resale

Then they should be reasonably fit for Then they should be immediately
the purpose for which they resalable in the market under
are generally used. their description

7. Condition as to wholesomeness: This condition is a part of the condition as to

merchantability. It is applicable in cases of eatables, i.e., foodstuffs and other
goods which are used for human consumption. As per this condition, goods sold
must be fit for human consumption.
CAVEAT EMPTOR
o The term caveat emptor is a Latin word which means ―let the buyer beware‖.
o It implies that while purchasing the goods, the buyer must be cautious. This
principle states that, at the time of buying goods, the buyer must make
reasonable examination of the goods to satisfy him that the goods are suitable
for his purpose.
o Section 6 provides that there is no implied warranty or condition as to the
quality or fitness for any particular purpose for which the goods are supplied
under a contract of sale.
o In simple words, it is not the seller‘s duty to give to the buyer the goods which
are fit for a suitable purpose of the buyer. It is up to the buyer to make proper
selection of goods according to his needs. If he makes a wrong selection, he
cannot blame the seller if the goods turn out to be defective or do not serve his
purpose.

Exceptions to the Doctrine of Caveat Emptor

(1) Where the seller makes a false representation and the buyer relies on it.
(2) When the seller actively conceals a defect in the goods which is not visible on a
reasonable examination of the same.
(3) When the buyer, relying upon the skill and judgement of the seller, has expressly or
impliedly communicated to him the purpose for which the goods are required.
(4) Where goods are bought by description from a seller who deals in goods of that
description.

PASSING OF PROPERTY OR TRANSFER OF OWNERSHIP

(a) Risk follows the ownership, whether the delivery has been made or not. If the goods
are lost or damaged by accident, then the loss falls on the owner of the goods at the
time they are lost or damaged.
(b) When there is a danger of the goods being damaged by the action of third parties, it is
generally the owner who can take action.
(c) In case of insolvency of either the seller or the buyer, it is necessary to know whether
the goods can be taken over by the official assignee or the official receiver. It will
depend upon whether the property in the goods was with the party adjudged insolvent.

Passing of Property in Specific / Ascertained Goods (Sale by a finder of goods)

1. Where there is an unconditional contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made.
2. Where there is a contract for the sale of specific goods not in a deliverable state, i.e.
the seller has to do something to the goods to put them in a deliverable state, the
property does not pass until that thing is done by seller and buyer has notice of it.
3. When there is a sale of specific goods in a deliverable state, but seller is bound to
weigh, measure, test or do something with reference to the goods for the purpose of
ascertaining the price, the property to the goods for the purpose of ascertaining the
price does not pass until such act or thing is done and the buyer has notice of it.
4. If goods are delivered to the buyer ―on approval‖ or ―on sale of return‖ basis then the
property passes to the buyer when he signifies his approval or acceptance to the
seller or he does not signify his approval or acceptance to the seller but retains goods
beyond a reasonable time.

Passing of property in Unascertained Goods

1. The property in unascertained or future goods does not pass until the goods are
ascertained.
2. The property in unascertained or future goods sold by description passes to the buyer
when goods of that description and in a deliverable state are unconditionally
appropriated.
3. If there is a sale of a quantity of goods out of a large quantity, for example, 50 quintals
of rice out of a heap in B‘s go down, the property will pass on the appropriation of the
specified quantity by one party with the assent of the other.
4. Delivery by the seller of the goods to a carrier or other buyer is sufficient to pass the
property in the goods.

Transfer of Title by Person not the Owner :The general rule is that only the owner of
goods can sell the goods. Conversely, the sale of an article by a person who is not or who
has not the authority of the owner, gives no title to the buyer. The rule is expressed by the
maxim; ―Nemo Dat Quod Non Habet‖ i.e. no one can pass a better title than he himself has.

Exception to the General Rule

(a) Sale by a mercantile agent: A buyer will get a good title if he buys in good faith from a
mercantile agent who is in possession either of the goods or documents of title to the
goods with the consent of the owner.
(b) Sale by a co-owner: A buyer who buys in good faith from one of the several joint
owners who is in sole possession of the goods with the permission of his coowners
will get good title to the goods. (c) Sale by a person in possession under a voidable
contract: A buyer buys in good faith from a person in possession of goods under a
contract which is voidable, but has not been rescinded at the time of the sale.
(d) Sale by seller in possession after sale: Where a seller, after having sold the goods, is
in possession of the goods and again sells them to a person who buys in good faith
and without notice of the previous sale, such a buyer gets a good title to the goods.
(e) Sale by buyer in possession: If a person has brought or agreed to buy goods, any sale
by him to a buyer who takes in good faith, will give a good title to the buyer. In any of
the above cases, if the transfer is by way of pledge or pawn only, it will be valid as a
pledge or pawn.
(f) Estoppel: If the true owner stands by and allows an innocent buyer to pay over money
to a third-party, who professes to have the right to sell an article, the true owner will be
estopped from denying the third-party‘s right to sell.
(g) Sale by an unpaid seller: Where an unpaid seller has exercised his right of lien or
stoppage in transit and is in possession of the goods, he may resell them and the
second buyer will get absolute right to the goods.
(h) Sale by person under other laws: A pawnee, on default in repayment, has a right to
sell the goods, pawned and the buyer gets a good title to the goods. The finder of lost
 goods can also sell under certain circumstances. The Official Assignee or Official
Receiver, Liquidator, Officers of Court selling under a decree, Executors, and
Administrators, all these persons are not owners, but they can convey better title than
they have.

ACCEPTANCE OF GOODS BY THE BUYER

Acceptance of the goods by the buyer takes place when the buyer:
(a) Intimates to the seller that he has accepted the goods;
(b) Retains the goods, after the lapse of a reasonable time without intimating to the seller
that he has rejected them; or
(c) Does any act on the goods which is inconsistent with the ownership of the seller, e.g.,
pledges or resells. If the seller sends the buyer a larger or smaller quantity of goods
than ordered, the buyer may: (a) reject the whole; or (b) accept the whole; or (c)
accept the quantity be ordered and reject the rest.

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

SUITS FOR BREACH OF CONTRACT

 Where the property in the goods has passed to the buyer, the seller may sue him for the
price.
 Where the price is payable on a certain day, the seller may sue for the price, if it is not
paid on that day.
 Where the buyer wrongfully neglects or refuses to accept the goods and pay for them,
the seller may sue the buyer for damages for non-acceptance.
 Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the
buyer may sue him for damages for non-delivery.
 If the buyer has paid the price and the goods are not delivered, the buyer can sue the
seller for the recovery of the amount paid. In appropriate cases the buyer can also get
an order from the court that the specific goods ought to be delivered.

UNPAID SELLER
Sale of Goods Act, 1930, a person has sold some goods and has not got the whole price and
if the transaction is done through negotiable instruments like cheque, bill of exchange and a
promissory note, then the person can be said as an unpaid seller.
Illustration- If A is a seller and he delivers the goods to B and transfers the possession, and if
B hasn‘t paid the sum then A becomes an unpaid seller.
Seller is deemed to be an unpaid seller, when:
Whole of the price has not been paid or tendered and seller had an immediate right of action
for the price.
- bill of exchange or other negotiable instrument was given as payment, but the same has
been dishonoured, unless this payment was an absolute and not a conditional payment.

Rights of Unpaid Seller against Goods

• Right of lien or retention.
• Right of stoppage in transit.
• Right of resale.
• Right to withhold delivery.

Right of Lien or Retention :It can be exercised on the goods for the price while he is in
possession until the payment of price of such goods. It can be exercised in following cases:
(i)Where goods have been sold without any stipulation as to credit.
(ii) Where goods have been sold on credit but the term of credit has expired.
(iii) Where buyer becomes insolvent.

This right depends upon physical possession. It can only be exercised for the non payment
of price.
This right is terminated under following circumstances:
a. Where he delivers goods to carrier or bailee for the purpose of transmission to buyer
without reserving the disposal right.
b. Where buyer or his agent lawfully obtains possession of goods.
c. Where seller has waived the right of lien.
d. By estoppels

Right of Stoppage in Transit :

It means right to stop the further transit of goods, to resume possession and to hold the same
till the price is paid.
It can be exercised in following cases:
(i) Seller must be unpaid.
(ii) He must have parted with the possession of goods.
(iii) Goods are in transit.
(iv) Buyer has become insolvent.
(v) Right is subject to provisions of the Act. Goods are deemed to be in transit from the
time they are delivered to carrier or other bailee- for transmission, until buyer or his
agent takes delivery of them.

This right is lost under following cases:

(i) Buyer taking delivery
(ii) Acknowledgment by carrier
(iii) Delivery to ship
(iv) Wrong denial to deliver by carrier
(v) Sub sale
(vi) Goods in possession of ship‘s master acting as buyer‘s agent.
Right of Resale:

It can be exercised in following cases:

a. Where the goods are of perishable nature, buyer need not be informed of the intention
of resale.
b. Where he gives notice to the buyer of his intention to resell the goods, the buyer does
not within a reasonable time pay or tender the price.
c. Where the right is expressly reserved in the contract.

If no notice has been given to the buyer of intention to re-sell, unpaid seller cannot claim any
damages and buyer will be entitled for all profits.
Unpaid seller can recover from buyer the balance amount (if any) on resale.
If notice has been given to buyer, then profits origin out of sale of goods won‘t be shared with
buyer. Only seller will hold the samples.

Rights to Withhold Delivery

 It is exercised if the property in good

 It is exercised if the property in goods has not passed to the buyer. - It is in additions to
above 3 rights. - However if the property has not been passed the unpaid seller has a
right of withholding delivery similar to and co-extensive with his rights of lien and
stoppage in transit.

Rights of Unpaid Seller against Buyer

1. Suit for recovery of price:

Where the buyer takes the ownership as well as possession of goods and the buyer fails to
pay the price of the goods, the seller can file a suit against the buyer for recovery of
the price.
2. Suit for damages for repudiation of the contract before the due date of delivery
of goods:
Where the buyer repudiates (i.e., puts an end to) the contract before the due date of
delivery of the goods, the seller has the following options:
(i) He may not immediately take any action against the buyer, and treat the contract as
subsisting and wait till the date of delivery of goods.
(ii) He may immediately treat the contract as repudiated and bring a legal action against
the buyer for the recovery of damages. Thus, the option of bringing the action lies with
the seller. He may either wait till the date of delivery of goods arrives, or bring an
immediate action for damages.
3. Suit for damages:
Where the seller is ready and willing to deliver the goods to the buyer, but the buyer
wrongfully neglects or refuses to accept the goods and pay for them, then the seller
 may bring a legal action against the buyer for the recovery of damages suffered due to
non-acceptance of the goods.
4. Suit for interest:
The court may award the interest from the date of tender of the goods or from the date
when the price is payable. The rate of interest to be awarded is at the discretion of the
court.

Performance of Contract of Sale: Performance of a contract of sale implies a duty of the

seller to deliver the goods, and of the buyer to accept the delivery of the goods and make
payment in accordance with the terms of the contract (sec. 31).
Delivery of Goods:

‗Delivery‘ has been defined as voluntary transfer of possession of goods from one person to
another. Delivery of goods sold may be made by doing anything which the parties agree shall
be treated as delivery or which has the effect of putting the goods in the possession of the
buyer or of any person authorized by him.

Mode of Delivery:
1. Actual delivery: It means physical transfer of goods by the seller to the buyer. The
delivery may be made by the agent of the seller to the agent of the buyer.
2. Symbolic delivery: Where the goods are bulky, it is usual for the seller to give
symbolic delivery. For example, where the timber is lying in a warehouse, the delivery
of key is regarded as symbolic delivery which has the effect of putting the buyer in
possession or actual control of the goods.It should be noted that the key must give
complete access to the goods. If for example, the key of a room in which the goods
are kept is given but the key of the main gate or door is not given, it is not regarded as
a valid delivery.
3. Constructive delivery: In place of actual or symbolic delivery, the goods may be
delivered without any change in their actual or visible custody. For example, where the
goods at the time of sale are in possession of a third person and such third person
acknowledges to the buyer that he holds the goods on his (buyer‘s) behalf; the
delivery is called constructive delivery.

Rules Regarding Delivery:

1. Delivery by whom and to whom:
It is the duty of the seller to deliver the goods and of the buyer to accept and pay for
the goods delivered.
2. Delivery and payment are concurrent conditions:
Delivery of goods and payment of price are concurrent conditions, i.e., at the same
time or reciprocally.
The seller shall be ready and willing to deliver the goods and the buyer shall be ready
and willing to pay the price in exchange for delivery of the goods.
3. Effect of part delivery:
 A delivery of part of the goods, in the process of the delivery of the whole, has the
same effect, for the purpose of passing the property in such goods, as a delivery of
the whole. However, delivery of part of the goods, with an intention of severing it from
the whole, does not operate as a delivery of the remainder.
4. Place of delivery: In the absence of an agreement, express or implied, the goods
sold are to be delivered at the place at which they are at the time of sale. The goods
agreed to be sold are to be delivered at the place at which they are at the time of the
agreement to sell, or if not then in existence, at the place at which they are
manufactured or produced.
5. Time of delivery:
If any time is specified by the parties, the goods must be delivered by that time.
If the seller is bound to send the goods to the buyer and no time has been fixed by the
parties, the goods must be delivered within a reasonable time
6. Delivery of goods in possession of third persons Where the goods at the time of
sale are in possession of a third person, there is no delivery by the seller to the buyer
unless such third person acknowledges to the buyer that he holds the goods on his
behalf.
It should be noted that this rule does not affect the transfer of goods by means of a
document of title of goods, e.g., where goods have been sold by a bill of lading,
consent of the third party is not necessary.

Consumer Protection Act: The Consumer Protection Act, 1986 has been enacted to
provide for the establishment of consumer councils and other authorities for the settlement of
consumers‘ disputes and for matters connected there with. In fact, the basic motive of
enacting this important Act is to provide cheaper and speedy remedies to the consumers
who are in disadvantageous position in comparison with the traders who are well organised
and rule the market

Objects of the Act

The objects of the Act are as follows:
1. Better protection of interests of consumers. The Act seeks to provide for better
protection of the interests of consumers. For that purpose, the Act makes provision for
the establishment of Consumer Councils and other authorities for the settlement of
consumer disputes and formatters connected therewith.
2. Protection of rights of consumers. The Act seeks, inter alia, to promote and protect the
rights of consumers such as—
a) The right to be protected against marketing of goods or services which are hazardous
to life and property ;
b) The right to be informed about the quality, quantity, potency, purity, standard and price
of goods or services so as to protect the consumers against unfair trade practices;
c) The right to be assured, wherever possible, access to goods and services at
competitive prices ;
d) The right to be heard and to be assured that consumers' interest will receive due
consideration at appropriate forums ;
e) The right to seek redressal against unfair trade practices or restrictive trade practices
or unscrupulous exploitation of consumers ; and
f) right to consumer education.
3. Consumer Protection Councils. The above objects are sought to be) promoted and
protected by the Consumer Protection Councils established at the Central and State
levels.
4. Quasi-Judicial machinery for speedy redressal of consumer disputes. The Act seeks
to provide speedy and simple redressal to consumer disputes. For this purpose, there
has been setup a quasi-judicial machinery at the district, State and Central levels.

IMPORTANT DEFINITION
COMPLAINANT :―Complainant‖ means- (i) a consumer; or (ii) any voluntary consumer
association registered under the Companies Act, 1956 .Or under any other law for the time
being in force; or (iii) the Central Government or any State Government, who or which makes
a complaint; (iv) one or more consumers, where there are numerous consumers having the
same interest (v) in case of death of a consumer, his legal heir or representative*‖
COMPLAINT ―Complaint‖ means any allegation in writing made by a complaint that- (i) an
unfair trade practice or a restrictive trade practice has been adopted by any trader; or service
provider* (ii) the goods bought by him or agreed to be bought by him; suffer from one or
more defect;
(iii) the services hired or availed of or agreed to be hired or availed by him suffer from
deficiency in any respect;
(iv) a trader or the service provider has charged for the goods or for the service mentioned in
the
complaint a price in excess of the price (a) fixed by or under any law for the time being in
force, (b)
displayed on the goods or any package containing such goods, (c) displayed on the price list
exhibited by him, (d) agreed between the parties.
(v) Goods which will be hazardous to life and safety when used, are being offered for sale to
the public in contravention of any law for the time being in force.
(vi) Service which are hazardous or likely to be hazardous to life and safety of the public
when used*

CONSUMER ‗consumer‘ means any person who:

(i) Consumer of goods buys any goods for a consideration which has been paid or promised
or partly paid and partly promised, or under any system of deferred payment and includes
any user of such goods other than the person who buys such goods for consideration paid or
promised or partly paid or partly promised, or under any system of deferred payment when
such use is made with the approval of such person, but does not include a person who
obtain such goods for resale or for any commercial purpose; or
(ii) Consumer of services hires or avails of any services for a consideration which has been
paid or promised or partly paid and partly promised, or under any system of deferred
payment and includes any beneficiary of such services other than the person who hires or
avails of the services for consideration paid or promised, or partly paid and partly promised,
or under any system of deferred payment, when such services are availed of with the
approval of the first mentioned person;‖

CONSUMER DISPUTE: “Consumer dispute‖ means a dispute where the person, against
whom a complaint has been made, denies or disputes the allegations contained in the
complaint;
DEFECT:―defect‘ means any fault, imperfection or shortcoming in the quality, quantity,
potency, purity, or standard which is required to be maintained by or under any law for the
time being for or under any contract, express or implied or as it claimed by the trader is any
manner whatsoever in relation to any goods;‖―manufacture‖ means a person who-
(i) makes or manufactures any goods or parts thereof : or
(ii) does not make or manufacture any goods but assembles parts thereof made or
manufactured by
other; or
(iii) puts or causes to be put his own mark on any goods made or manufactured by any other
manufacture.
PERSON:
―person‖ includes-(i) a firm whether registered or not;(ii) a Hindu undivided family; (iv) every
other association of persons whether registered under the Societies Registration Act.

Consumer Protection Act:

The object of the Consumer Protection, 1986, is to provide better protection to consumers.
To secure this object, the Act intends to provide simple, speedy and inexpensive redressal to
the consumers‘ grievances. For this purpose, the Act provides for the establishment of three-
tier quasi-judicial machinery at the District, State and National levels.
The three consumer disputes redressal agencies at the different levels are as under:
1. Consumer Disputes Redressal Forum to be known as District Forum at the District level.
2. Consumer Disputes Redressal Commission to be known as State Commission at the
State level.
3. National Consumer Disputes Redressal Commission to be known as National Commission
at the National level.

ESTABLISHMENT OF AGENCIES

1 DISTRICT FORUM The ‗District Forum‘ is the short name of the Consumer Disputes
Redressal Forum established in the District under Section 9(a) of the Consumer Protection
Act, It is the redressal agency to deal with the complaints of the consumers at the District
level.
1. Composition of the district forum

The District Forum is a body of three persons appointed by the State Government. The
qualifications of the President and other members are as follow:
(a) President: A person who is, or has been or is qualified to be, a District Judge shall be the
President of the District Forum.
(b) Other Member: A part from the President, the District Forum shall consist of two other
members one of whom shall be a woman. The qualification for appointment of other
members is:
(i) He/She must not be less than 36 years of age.
(ii) He/She must possess a bachelor‘s degree from a recognised university.
(iii) He/She must be a person of ability, integrity and standing and have adequate knowledge
and experience of at least 10 years in dealing with problems relating to economics, law,
commerce, accountancy, industry, public affairs or administrations.

2. Appointment of members of District Forum: The appointment of the President and of

the members shall be made by the State Government on the recommendation of the
selection committee consisting of (a) the President of the State Commission, (b) Secretary,
Law Department of the State, and (c) Secretary, in charge of the Department dealing with
consumer affairs in the State.

3. Disqualifications of members:
a) If he has been convicted and sentenced to imprisonment for an office, which, in the
opinion of the State Government, involves moral turpitude, or
b) If he is an undercharged insolvents, or
c) If he is of unsound mind and stands so declared by a competent court, or
d) If he has been removed or dismissed from the services of the Government or a body
corporate owned or controlled by the Government,

4. Tenure of office of the members of the District Forum

A person may act as a President or a member of the District Forum for 5 years or up to the
age of 65 years, whichever is earlier. Thus, in any case, a person cannot hold the office of
the President or that of the member beyond the age of 65 years. 5 Vacancy in the office of
the District Forum The officer of the President or of any member of the forum may become
vacation on his attaining the age of sixty-five years.

5. Jurisdiction of the District Forum

The District Forum has the jurisdiction to entertain complaints where the value of the goods
or services and the compensation, if any, claimed does not exceed rupees 20 lakhs.
The limit has been enhanced from Rs. 5 lakhs by the Consumer Protection (Amendment) Act
2002
PROCEDURE ON RECEIPT OF COMPLAIN SECTION-13 The district forum has to observe
the procedure mentioned in section. It may be summarised as follows-
I. Reference of complaint to opposite party – Whenever the district forum receives a
complaint, relating to a goods, it should refer a copy of the complaint to the opposite party. It
must be given within 30 days of receiving the complaint. However, it may be extended by a
further period not exceeding 15 days.
II. On refusal or dispute by opposite party – When the opposite party, on receipt of a
complaint, refusal/disputes the allegations contained in the complaint or fails to take any
action within the time given by the district forum, the forum shall proceed to settle the
consumer dispute in the following manner –
1. Reference of sample to laboratory
2. Deposit of fees
3. Forwarding of report to opposite partly
4. Objection by any of the parities.
5. Reasonable opportunity to parties of being heard and issue order.

Who can complaint in the district forum A complaint in relation to any goods sold or
delivered or any serviced provided may be filed with a district forum by –
1. Consumer of goods/service
2. Any recognized consumer association.
3. Central or state government

For the purpose of this section ―recognised consumer association‖ means any voluntary
consumer association registered under the companies Act 1956 or any other law for the time
being in force (Sec. 12)
Power of the District forum – The district forum shall have the same power as are vested in
a civil court under the code of civil procedure, 1908 while typing a suit in respect of the
following matter, namely-
1. The summoning and enforcing attendance of any defendant or witness and examining
the witness on oath.
2. The discovery and production of any document or other material object producible as
evidence.
3. The reception of evidence on affidavits
4. The requisitioning of the report of the concerned analysis or test from the appropriate
laboratory or form any other relevant source.
5. Issuing of any commission for the examination of any witness and
6. Any other matter which may be prescribed.

Every proceeding before the district forum shall be deemed to be a judicial proceeding within
the meaning of Sec. 193 and 228 of the Indian Penal code; 1860 and the District forum shall
be deemed to be a civil court for the purposes of Sec. 195 and chapter XXVI of the code of
criminal procedure 1973.

Findings of the District forum (Sec. 14) If the district forum is satisfied that the goods
suffer from any of the defects specified in the complaint or that any of the allegations
contained in the complaint about the services are proved, it shall issue an order to the
opposite party directing him to take one or more of the following things namely-
a) To remove the defect pointed out by the appropriate laboratory from the goods in
question.
b) To replace the goods with new goods of similar description which shall be free from
any defect.
c) To return to the complaint the price or as the case may be the charge paid by the
complaint.

STATE COMMISSION ‗State Commission‘ is the short name given to the Consumer
Disputes Redressal Commission established in the State under Section 9(b) of the
Consumer Protection Act, 1986 [Section] 2(1) (p). It is the redressal agency to deal with the
complaints of the consumers at the State level. Legal provision relating to District forum
Composition of the State Commission Section 16(1) makes the following provisions
regarding the qualifications of the President and other members:
(a) President: A person who is or has been a judge of a High Court shall be the President of
the State Commission.
(b) Other members: Apart from the President, the State Commission shall consist of two
other member one of whom shall be a woman. The qualifications for appointment of the other
member are:
(i) He/ She must not be less than 35 year of age.
(ii) He/ She must possess a bachelor‘s degree from a recognised university.
(iii) He/ She must be a person of ability, integrity and standing and have adequate
knowledge or experience of at least 10 years in dealing with problems relating to economics,
law, commerce, accountancy, industry, public affairs or administration.
1. Appointment of members of State Commission
The appointment of the President shall be made by the State Government after consultation
with the Chief Justice of the High Court of the State. And the appointment of the other
members shall be made by the State Government on the recommendation of the selection
committee consisting of (a) President of the State Commission, (b) Secretary of the Law
Department of the State and (c) Secretary, in charge of Department dealing with consumer
affairs in the State.
2. Disqualification of members
These disqualifications are the same as already discussed the District Forum.
3. Tenure of office of the members of the State Commission
The President or the member of the State Commission shall hold office for a term of 5 years
or up to the age of 67 year, whichever is earlier. Thus, in any case, a person cannot hold the
office of President or that of a member beyond the age of 67 years.
4. Jurisdiction of the State Commission
(a) Pecuniary jurisdiction: The State Commission has the jurisdiction to entertain
complaints where the value of the goods or services and compensation, if any, claimed
exceeds rupees 20 lakhs but does not exceed rupees one crore.
(b) Appellate jurisdiction: Any person aggrieved by an order made by the District Forum
may prefer an appeal to the State Commission with a period of 30 days from the date of the
order.

NATIONAL COMMISSION The ‗National Commission‘ is the short name given to the
National Consumer Disputes Redressal Commission established in the country under
Section 9(c) of the Consumer Protection Act, 1986. Legal provision relating to District
forum
1. Composition of the National Commission
The ‗National Commission‘ is a body of minimum five persons appointed by the Central
Government. Legally, the National Commission shall consist of a President and at least four
other members.
(a) President: A person who is or has been a judge of the Supreme Court shall be the
President of the National Commission. Thus, only the sitting or retired judges of the Supreme
Court are eligible for appointment as President.
(b) Other members: A part from the President, the National Commission shall consist of at
least four other members one of whom shall be a woman. The qualifications for appointment
of other members are:
(i) He/She must not be less than 35 year of age.
(ii) He/She must possess a bachlor‘s degree from a recognised university.
He/She must be a person of ability, integrity and standing and have adequate knowledge or
experience of at least 10 years in dealing with problems relating to economics, law,
commerce, accountancy, industry, public affairs or administration.
2. Appointment of the members of the National Commission [Section 20(1) (a) (b):
The appointment of the President shall be made by the Central Government after
consultation with the Chief Justice of India .The appointment of the other four members shall
be made by the Central Government on the recommendation of the selection committee
consisting of (a) sitting judge of the Supreme Court, (b) Secretary in the Department of Legal
Affairs, Government of India, (c) Secretary of the Department dealing with consumer affairs
in the Government of India
3. Disqualification of members
These disqualifications are the same as already discussed in case of members of District
Forum and of State Commission. Any other disqualification may also be prescribed the
Central Government.
4. Tenure of office of the members of the National Commission
The President or the members of the National Commission shall hold the office for a term of
5 year or up to the age of 70 years, whichever is earlier. Thus, in any case, a person cannot
hold the office of President or that of a member beyond the age of 70 years.
5. Jurisdiction of the National Commission
(a) Pecuniary jurisdiction: The National Commission has the jurisdiction to entertain
complaints where the value of the goods or services and compensation, if any claimed
exceeds rupees 1 crore .Prior to the Consumer Protection (Amendment) Act, 2002, the
National Commission had the jurisdiction where the value of this claim exceeded rupees
twenty lakhs.
(b) Appellate jurisdiction: The National Commission also has the appellate jurisdiction to
entertain appeals against the order of any State Commission.

CONSUMER PROTECTION COUNCILS Consumer protection councils have been set up at

national and state levels. Their object is to protect rights of consumers. Provisions with
regard to consumer protection councils are contained in the consumer protection act wide
section 4 to 8.
II. Central consumer protection Council –
1. Establishment of this council by a notification of the central government.
2. Central government nominates government and private members from different
departments and sectors.
3. At present there are 150 members in the council.
4. Chairman of the council is central government food & civil supplies minister.
5. 3 years term of office of council.
6. If any post of the council falls vacant, it shall be filled up by a same cadre member.
7. 3 meetings are compulsory in a year time and place is fixed by chairman.
8. Main object of council is to expand and protect the rights of consumers.
 Protection against fatal advertisement of goods/for human life services.
 Protection against improper trade transaction and service.
 As far as possible, a right of satisfaction about the various qualities.
 A right of belief and confidence on goods & services.
 A right of compensation against mis-behaviour in restricted trade policies.
 A right of consumer education.

III. State consumer protection council –

1. Establishment of this council by notification of state government.
2. Chairman of the council is state minister of food and civil supplies.
3. State government nominated government or private member from different sectors.
4. There must be at least two meetings in a year or arrange according to convened any
time.
5. Time and place of meetings shall be fixed by the chairman.
6. Object of council is to protect the interest and rights of consumer in state which is
same central council.
 ASTHA School of Management
Business Law
Sub Code-18 MBA 108
LAW OF CONTRACT
Module- III
COMPANY LAWS
Asst Prof SMITA RAY

Company Laws

The word ‗company‘ is derived from the Latin word (Com=with or together; panis =bread), and it
originally referred to an association of persons who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to discuss business matters. A company is not
merely a legal institution. It is rather a legal device for the attainment of the social and economic end.
It is, therefore, a combined political, social, economic and legal institution.
Salient features of the Companies Act 2013

1. Class action suits for Shareholders: The Companies Act 2013 has introduced new concept
of class action suits with a view of making shareholders and other stakeholders, more
informed and knowledgeable about their rights.
2. More power for Shareholders: The Companies Act 2013 provides for approvals from
shareholders on various significant transactions.
3. Women empowerment in the corporate sector: The Companies Act 2013 stipulates
appointment of at least one woman Director on the Board (for certain class of companies).
4. Corporate Social Responsibility: The Companies Act 2013 stipulates certain class of
Companies to spend a certain amount of money every year on activities/initiatives reflecting
Corporate Social Responsibility.
5. National Company Law Tribunal: The Companies Act 2013 introduced National Company
Law Tribunal and the National Company Law Appellate Tribunal to replace the Company Law

1|Page
 Board and Board for Industrial and Financial Reconstruction. They would relieve the Courts of
their burden while simultaneously providing specialized justice.
6. Fast Track Mergers: The Companies Act 2013 proposes a fast track and simplified
procedure for mergers and amalgamations of certain class of companies such as holding and
subsidiary, and small companies after obtaining approval of the Indian government.
7. Cross Border Mergers: The Companies Act 2013 permits cross border mergers, both ways;
a foreign company merging with an India Company and vice versa but with prior permission
of RBI.
8. Prohibition on forward dealings and insider trading: The Companies Act 2013 prohibits
directors and key managerial personnel from purchasing call and put options of shares of the
company, if such person is reasonably expected to have access to price-sensitive information.
9. Increase in number of Shareholders: The Companies Act 2013 increased the number of
maximum shareholders in a private company from 50 to 200.
10. Limit on Maximum Partners: The maximum number of persons/partners in any
association/partnership may be upto such number as may be prescribed but not
exceeding one hundred. This restriction will not apply to an association or partnership,
constituted by professionals like lawyer, chartered accountants, company secretaries, etc.
who are governed by their special laws. Under the Companies Act 1956, there was a limit of
maximum 20 persons/partners and there was no exemption granted to the professionals.
11. One Person Company: The Companies Act 2013 provides new form of private company,
i.e., one Person Company. It may have only one director and one shareholder. The
Companies Act 1956 requires minimum two shareholders and two directors in case of a
private company.
12. Entrenchment in Articles of Association: The Companies Act 2013 provides for
entrenchment (apply extra legal safeguards) of articles of association have been introduced.
13. Electronic Mode: The Companies Act 2013 proposed E-Governance for various company
processes like maintenance and inspection of documents in electronic form, option of keeping
of books of accounts in electronic form, financial statements to be placed on company‘s
website, etc.
14. Indian Resident as Director: Every company shall have at least one director who has stayed
in India for a total period of not less than 182 days in the previous calendar year.
15. Independent Directors: The Companies Act 2013 provides that all listed companies should
have at least one-third of the Board as independent directors. Such other class or classes of
public companies as may be prescribed by the Central Government shall also be required to
appoint independent directors. No independent director shall hold office for more than two
consecutive terms of five years.
16. Serving Notice of Board Meeting: The Companies Act 2013 requires at least seven days‘
notice to call a board meeting. The notice may be sent by electronic means to every director
at his address registered with the company.
17. Duties of Director defined: Under the Companies Act 1956, a director had fiduciary (legal or
ethical relationship of trust)duties towards a company. However, the Companies Act 2013 has
defined the duties of a director.
18. Liability on Directors and Officers: The Companies Act 2013 does not restrict an Indian
company from indemnifying (compensate for harm or loss) its directors and officers like the
Companies Act 1956.
19. Rotation of Auditors: The Companies Act 2013 provides for rotation of auditors and audit
firms in case of publicly traded companies.
20. Prohibits Auditors from performing Non-Audit Services: The Companies Act
2013 prohibits Auditors from performing non-audit services to the company where they are
auditor to ensure independence and accountability of auditor.

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21. Rehabilitation and Liquidation Process: The entire rehabilitation and liquidation process of
the companies in financial crisis has been made time bound under Companies Act 2013.

The Companies Act, 2013 provides for the types of companies that can be promoted and registered
under the Act. The three basic types of companies which may be registered under the Act are:
 Private Companies;
 Public Companies; and
 One Person Company (to be formed as Private Limited).

Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful
purpose by—
 seven or more persons, where the company to be formed is to be a public company;
 two or more persons, where the company to be formed is to be a private company; or
 one person, where the company to be formed is to
(2) A company formed under sub-section (1) may be either—
 a company limited by shares; or
 a company limited by guarantee; or
 an unlimited company.

Types of Company:
A. Types of Company on the basis of Incorporation
1. Statutory Companies:
These companies are constituted by a special Act of Parliament or State Legislature. These
companies are formed mainly with an intention to provide the public services.
Though primarily they are governed under that Special Act, still the CA, 2013 will be
applicable to them except where the said provisions are inconsistent with the provisions of the
Act creating them (as Special Act prevails over General Act).
Examples of these types of companies are Reserve Bank of India, Life Insurance Corporation
of India, etc.
2. Registered Companies:
Companies registered under the CA, 2013 or under any previous Company Law are called
registered companies.
Such company comes into existence when they are registered under the Companies Act and
a certificate of incorporation is granted to it by the Registrar.

B. Types of Company on the basis of Liability

1. Companies limited by shares:
A company that has the liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them is termed as a company limited by shares.
The liability can be enforced during existence of the company as well as during the winding up.
Where the shares are fully paid up, no further liability rests on them.
For example, a shareholder who has paid 75 on a share of face value 100 can be called upon to pay
the balance of 25 only. Companies limited by shares are by far the most common and may be either
public or private.
2. Companies limited by guarantee:
Company limited by guarantee is a company that has the liability of its members limited to such
amount as the members may respectively undertake, by the memorandum, to contribute to the
assets of the company in the event of its being wound-up. In case of such companies the liability of
its members is limited to the amount of guarantee undertaken by them.

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The members of such company are placed in the position of guarantors of the company‘s debts up to
the agreed amount.
Clubs, trade associations, research associations and societies for promoting various objects are
various examples of guarantee companies.
3. Unlimited Liability Companies:
A company not having a limit on the liability of its members is termed as unlimited company. Here the
members are liable for the company‘s debts in proportion to their respective interests in the company
and their liability is unlimited.
Such companies may or may not have share capital. They may be either a public company or a
private company.

C. Types of Company on the basis of number of members

1. Public Company:
 Defined u/s 2(71) of the CA, 2013 – A public company means a company which is not a
private company.
 Section 3(1) of the CA, 2013– Public company may be formed for any lawful purpose by 7 or
more persons.
 Section 149(1) of the CA, 2013 – Every public company shall have minimum 3 director in its
Board.
 Section 4(1)(a) of the CA, 2013 – A public company is required to add the words ―Limited‖ at
the end of its name.
 It is the essence of a public company that its shares and debentures can be transferable
freely to the public unlike private company. Only the shares of a public company are capable
of being dealt in on a stock exchange.
 A private company that is a subsidiary of a public company, will be considered a public
company.
2. Private company:
 Defined u/s 2(68) of the CA, 2013 –
A private company means a company which by its articles—
a. Restricts the right to transfer its shares;
b. Limits the number of its members to 200 hundred (except in case of OPC)
Note:
1. Persons who are in the employment of the company; and persons who, having been formerly
in the employment of the company, were members of the company while in that employment
and have continued to be members after the employment ceased, shall be excluded.
2. Where 2 or more persons hold 1 or more shares in a company jointly they shall be treated as
a single member.
 Prohibits any invitation to the public to subscribe for any securities of the company;
 Section 3(1) of the CA, 2013 – Private Company may be formed for any lawful purpose by 2
or more persons.
 Section 149(1) of the CA, 2013 – Every Private company shall have minimum 2 director in its
Board.
 Section 4(1)(a) of the CA, 2013 – A private company is required to add the words ―Private Ltd‖
at the end of its name.
 Special privileges – Private Companies enjoys several privileges and exemptions under the
Companies Act.
3. One Person Company (OPC):
 With the enactment of the Companies Act, 2013 several new concepts was introduced that
was not in existence in Companies Act, 1956 which completely revolutionized corporate laws
in India. One of such was the introduction of OPC concept.

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 This led to the avenue for starting businesses giving flexibility which a company form of entity
can offer, while also offering limited liability that sole proprietorship or partnerships does not
offers.
 Defined u/s 2(62) of the CA, 2013 – One Person Company means a company which has only
one person as a member.
 Section 3(1) of the CA, 2013 – OPC (as private company) may be formed for any lawful
purpose by 1 persons.
 Section 149(1) of the CA, 2013 – OPC shall have minimum 1 director in its Board, its sole
member can also be director of such OPC.
Some Feature explained! –

o Single-member: OPCs can have only 1 member or shareholder, unlike other private companies.
o Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the
sole member of the company has to mention a nominee while registering the company. Since
there is only one member in an OPC, his death will result in the nominee choosing or rejecting to
become its sole member. This does not happen in other companies as they follow the concept of
perpetual succession.
o Special privileges: OPCs enjoys several privileges and exemptions under the Companies Act.

D. Types of Company on the basis of Domicile

1. Foreign company:
 Defined u/s 2(42) of the CA, 2013 – ―foreign company‖ means any company or body
corporate incorporated outside India which,—
1. has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
2. conducts any business activity in India in any other manner.
 Section 379 to Section 393 of the CA, 2013 prescribes the provisions which are applicable on
such companies.
2. Indian Company:
 A company formed and registered in India is known as an Indian Company.

E. Other Types of Company:

1. Section 8 Company:
 A section 8 company is registered as a limited company under section 8 of the CA, 2013 and
holds the licence from Central Government (CG) and
1. has in its objects the promotion of commerce, art, science, sports, education, research,
social welfare, religion, charity, protection of environment or any such other object;
2. intends to apply its profits, if any, or other income in promoting its objects; and
3. intends to prohibit the payment of any dividend to its members.
 Proviso to Section 4(1)(a) of the CA, 2013 – Section 8 Company is exempted from clause (a)
of Section 4(1) which means Section 8 Company is neither required to add the word ―Ltd‖ nor
words ―Private Ltd‖ at the end of its name.
 Section 8 of the CA, 2013 also laid down the provision related to Incorporation, application for
licence as section 8 company, grant of licence by CG and revocation of licence by CG.
 Special privileges: Section 8 Company enjoys several privileges and exemptions under the
Companies Act.
2. Government Company:
 Defined u/s 2(45) of the CA, 2013 – ―Government company‖ means any company in which not
less than 51 % of the paid-up share capital is held by the Central Government, or by any State
Government or Governments, or partly by the Central Government and partly by one or more

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 State Governments, and includes a company which is a subsidiary company of such a
Government company. Explanation – ―paid-up share capital‖ shall be construed as ―total
voting power‖, where shares with differential voting rights have been issued.
 Special privileges: Government Company enjoys several privileges and exemptions under the
Companies Act.
3. Small Company:
 Defined u/s 2(85) of the CA, 2013 – ―small company‖ means a company, other than a public
company,—
1. paid-up share capital of which does not exceed 50 lakh rupees or such higher amount as
may be prescribed which shall not be more than 10 crore rupees; and
2. turnover of which as per profit and loss account for the immediately preceding financial year
does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not
be more than 100 crore rupees
Provided that nothing in this clause shall apply to—
o a holding company or a subsidiary company;
o a company registered under section 8; or
o a company or body corporate governed by any special Act;
 Special privileges: Small Company enjoys several privileges and exemptions under the
Companies Act.
4. Subsidiary Company:
 Defined u/s 2(87) of the CA, 2013 – ―subsidiary company‖ or ―subsidiary‖, in relation to any
other company (that is to say the holding company), means a company in which the holding
company—
1. controls the composition of the Board of Directors; or
2. exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have
layers of subsidiaries beyond such numbers as may be prescribed.
Explanation: For the purposes of this clause-
1. a company shall be deemed to be a subsidiary company of the holding company even if the
control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the
holding company;
2. the composition of a company‘s Board of Directors shall be deemed to be controlled by
another company if that other company by exercise of some power exercisable by it at its
discretion can appoint or remove all or a majority of the directors;
3. the expression ―company‖ includes any body corporate;
4. ―layer‖ in relation to a holding company means its subsidiary or subsidiaries.
5. Holding Company:
 Defined u/s 2(46) of the CA, 2013 –―holding company‖, in relation to one or more other
companies, means a company of which such companies are subsidiary companies;
Explanation: For the purposes of this clause, the expression ―company‖ includes any body
corporate.
6. Associate Company:
 Defined u/s 2(6) of the CA, 2013 – ―associate company‖, in relation to another company,
means a company in which that other company has a significant influence, but which is not a
subsidiary company of the company having such influence and includes a joint venture
company.
Explanation: For the purpose of this clause:
1. the expression ―significant influence‖ means control of at least 20% of total voting power, or
control of or participation in business decisions under an agreement;

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 2. the expression ―joint venture‖ means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement;
7. Producer Company:
 Common parlance- A producer company can be defined as a legally recognized body of
farmers/ agriculturists with the aim to improve the standard of their living, and ensure a good
status of their available support, incomes and profitability.
 Definition- ―Producer Company‖ means a body corporate having objects or activities specified
in section 581B and registered as Producer Company under the Companies Act, 1956.
 Proviso to section 465(1) of the CA, 2013 prescribes – that the provision of Part IX A of
the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a
manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for
Producer Companies.
 Some Conditions for Producer Company explained! :

o Only persons engaged in an activity connected with, or related to, primary produce can
participate in the ownership.
o The members have necessarily to be primary producers.
o Name of the company shall end with the words ―Producer Company Limited―.
o On registration, the Producer Company shall become as if it is a private limited company for
the purpose of application of law and administration of the company, However it shall comply
with the specific provisions of part IXA until a special Act is enacted for Producer Companies.
o To incorporate Producer Company any of the following combination of producers is required:
o 10 or more producers (individuals); or
o 2 or more producer institutions; or
o Combination of the above 2.
o Every Producer Company shall have at least 5 director but not more than 15. (Provided that in
the case of an inter-State co-operative society incorporated as a Producer Company, such
Company may have more than 15 directors for a period of one year from the date of its
incorporation as a Producer Company.)
o PART IXA of Companies Act 1956 comprises of XII Chapters which prescribes different
provisions to be complied by Producer Company.
8. Dormant Company:
 In case of company is formed and registered under this Act for a future project or to hold an
asset or intellectual property and has no significant accounting transaction, such a company
or an inactive company may make an application to the Registrar for obtaining the status of a
dormant company.
 Thereafter Registrar on consideration of the application shall allow the status of a dormant
company to the applicant and issue a certificate.
 ―Inactive company‖ means a company which has not been carrying on any business or
operation, or has not made any significant accounting transaction during the last two financial
years, or has not filed financial statements and annual returns during the last two financial
years.
 In case of a company which has not filed financial statements or annual returns for two
financial years consecutively, the Registrar shall issue a notice to that company and enter the
name of such company in the register maintained for dormant companies.
 Registrar has power to strike off the name of a dormant company from the register of dormant
companies, which has failed to comply with the requirements of this section.

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Lifting of Corporate Veil :
Meaning of Corporate Veil:
(a) ‗Every incorporated company limits the liabilities of its promoters as a company is a legal entity
of its own and enjoys its own powers as discussed earlier.
(b) The Company promoters are safeguarded as per the company law. The promoters enjoy the
commercial benefits earned by the artificial person that is a ‗Company‘.
(c) There are more possibilities for company promoters to take advantage of the legal entity of the
company and engage in illegal or fraud activities, on the name of Artificial Person that is a
company. The concept of lifting the corporate veil is a very dynamic concept. The veil of
corporate personality, even though not lifted sometimes, is becoming more and more a
transparent form of ensuring smooth business practices in modern jurisprudence.
(d) To see smooth operations of the firm, without indulged in illegal activities the law of land (Court)
can lift the corporate veil or interfere to know on the promoters of the firm. Which is called as
‗Lifting A Corporate Veil‘.

When the lifting of corporate veil is exists:

(a) The Law of The Land (Court) receives a petition that a company is indulged in any illegal
activities.,
(b) The Law of The Land (Court) finds some of the promoters are victimized in any criminal
offence.
(c) When a Company is not following the rules and regulations as per the law of the land.

The law of the land (Court) can lift the corporate veil during two instances, namely:
(a) Common Law Exceptions and
(b) Statutory Exceptions

The former Common Law Exceptions include the Judicial interpretations, while the Statutory
Exceptions include the statutory norms of the company law.

Judicial Provisions Or Grounds For Lifting The Veil

FRAUD OR IMPROPER CONDUCT- Where in the case of winding up of a company it appears that
any business of the company has been carried on with intent to defraud the creditors or any other
person, or for any fraudulent purpose, if the Tribunal thinks it proper so to do, be made personally
liable without limitation to liability for all or any debts or other liabilities of the company. Liability under
this section may be imposed only if it is proved that the business of the company has been carried on
with view to defraud the creditors

FOR BENEFIT OF REVENUE-The Court has the power to disregard corporate entity if it is used for
tax evasion or to circumvent tax obligations.

ENEMY CHARACTER-A company may assume an enemy character when persons in de facto
control of its affairs are residents in an enemy country. In such a case, the Court may examine the
character of persons in real control of the company, and declare the company to be an enemy
company.

WHERE THE COMPANY IS A SHAM- The Courts also lift the veil where a company is a mere cloak
or sham (hoax).

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COMPANY AVOIDING LEGAL OBLIGATIONS- Where the use of an incorporated company is being
made to avoid legal obligations, the Court may disregard the legal personality of the company and
proceed on the assumption as if no company existed.

SINGLE ECONOMIC ENTITY- Sometimes in the case of group of enterprises the Salomon principal
may not be adhered to and the Court may lift the veil in order to look at the economic realities of the
group itself.

AGENCY OR TRUST- Where a company is acting as agent for its shareholder, the shareholders will
be liable for the acts of the company. It is a question of fact in each case whether the company is
acting as an agent for its shareholders. There may be an Express agreement to this effect or an
agreement may be implied from the circumstances of each particular case

AVOIDANCE OF WELFARE LEGISLATION- Avoidance of welfare legislation is as common as

avoidance of taxation and the approach of the Courts in considering problems arising out of such
avoidance is generally the same as avoidance of taxation. It is the duty of the Courts in every case
where ingenuity is expended to avoid welfare legislation to get behind the smokescreen and discover
the true state of affairs.

PUBLIC INTEREST- The Courts may lift the veil to protect public policy and prevent transactions
contrary to public policy. The Courts will rely on this ground when lifting the veil is the most ‗just‘
result, but there are no specific grounds for lifting the veil. Thus, where there is a conflict with public
policy, the Courts ignore the form and take into account the substance.

Statutory Provisions for Lifting The Veil

REDUCTION OF NUMBER OF MEMBERS- Under Section 45 of The Indian Companies Act, 1956, if
a company carries on business for more than six months after the number of its members has been
reduced to seven in case of a public company and two in case of a private company, every person
who knows this fact and is a member during the time that the company so carries on business after
the six months, becomes liable jointly and severally with the company for the payment of debts
contracted after six months. It is only that member who remains after six months who can be sued.

FRAUDULENT TRADING- Under Section 542 of The Indian Companies Act, 1956, if any business of
a company is carried on with the intent to defraud creditors of the company or creditors of any other
person or for any fraudulent purpose, who was knowingly a party to the carrying on of the business in
that manner is liable to imprisonment or fine or both. This applies whether or not the company has
been or is in the course of being wound up. This was upheld in Delhi Development Authority v.
Skipper Constructions Co. Ltd. (1997).

MISDESCRIPTION OF THE COMPANY- Section 147 (4) of The Indian Companies Act, 1956,
provides that if any officer of the company or other person acting on its behalf
signs or authorizes to be signed on behalf of the company any bill of exchange, promissory note,
endorsement, cheque or order for money or goods in which the companies name is not mentioned in
legible letters, he is liable to fine and he is personally liable to the holder of the instrument unless the
company has already paid the amount.

FAILURE TO REFUND APPLICATION MONEY-According to Section 69(5) of The Indian

Companies Act, 1956, the directors of a company are jointly and severally liable to repay the

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application money with interest if the company fails to refund the money within 130 days of the date
of issue of prospectus.

HOLDING AND SUBSIDIARY COMPANIES- In the eyes of law, the holding company and its
subsidiaries are separate legal entities.
But in the following two cases the subsidiary may lose its separate entity-
Where at the end of its financial year, the company has subsidiaries, it must lay before its members in
general meeting not only its own accounts, but also attach therewith annual accounts of each of its
subsidiaries along with copy of the board‘s and auditor‘s report and a statement of the holding
company‘s interest in the subsidiary.
The Court may, on the facts of a case, treat a subsidiary as merely a branch or department of one
large undertaking owned by the holding company.

Difference between Private and Public Company:

BASIS FOR PUBLIC COMPANY PRIVATE COMPANY
COMPARIS
ON
Meaning A public company is a company A private company is a company which is
which is owned and traded owned and traded privately.
publicly
Minimum 7 2
members
Maximum Unlimited 200
members
Minimum 3 2
Directors
Suffix Limited Private Limited
Start of After receiving certificate of After receiving certificate of incorporation.
business incorporation and certificate of
commencement of business.
Statutory Compulsory Optional
Meeting
Issue of Obligator Not required
prospectu
s
Public Allowed Not allowed
subscriptio
n
Quorum at 5 members must present in 2 members must present in person.
AGM person.
Transfer Free Restricted
of shares

Procedure of Incorporation and Certificate of commencement of business.

Under Companies Act 2013, the date of incorporation of a company cannot be the date of
commencement of business. From the point of commencement of Business companies may be
divided into 2 categories:
1. Public and Private Companies not having Share Capital
2. Public and Private Companies having Share Capital
Public and Private Companies not having Share Capital

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A private company and a public limited company not having share capital are not required to comply
with any other formalities and may commence its business activities immediately after obtaining the
certificate of incorporation from the concerned Registrar of Companies.
Public and Private Companies having Share Capital
As per section 11 of Companies Act, 2013, now all newly incorporated Public and Private Companies
having Share Capital would be required to obtain certificate of commencement of business from
concerned Registrar of Companies before commencing the business or exercise of borrowing
powers.

“Commencement of Business”
It is a Declaration to be issued by the directors within 180 days of incorporation of company stating
that the subscribers to the Memorandum of the company has paid the value of shares so agreed by
them, along with a verification of registered office address of the company. This declaration need to
be filed along with proof of subscription money received by the company in form 20A with the
Registrar of Companies.

WHO NEED TO FILE DECLARATION FOR COMMENCEMENT OF BUSINESS?

Every company having share capital incorporated after 2nd November 2018
Even the Section 8 Companies having share capital need to file form 20A

WHO ARE NOT REQUIRED TO FILE?

Companies not having share capital and
Companies incorporated before 2nd November 2018, with or without share capital.
PENALTY FOR NOT FILING
 50,000/- for Company
 1000/- per day for defaulting directors (maximum Rs. 1,00,000/-)
 Registrar can remove the name of the company

TIME LIMIT TO FILE

A company have to file form 20A within 180 days after its incorporation.
WILL COMPANY GET THE “CERTIFICATE OF COMMENCEMENT OF
BUSINESS?”
No, the form 20A is in STP mode i.e. The eForm will be auto approved (STP) and no certificate will
be issued by the Ministry for corporate affairs.
WHAT IS THE PRESCRIBED FORM ?
Form 20A
ATTACHMENT TO FORM 20A
 Subscribers proof of payment for value of shares
 Certificate of Registration issued by the RBI (Only in case of Non-Banking Financial
Companies) /from other regulators. It is mandatory to attach this document if ‗Yes‘ is selected
in field 3(a).
WHO WILL CERTIFY THE FORM 20A?
This e-form 20A needs to be verified by a practicing professional i,e, CS /CA/CWA. For any
negligence or default in certification practicing professional shall be liable for face the consequences
as per the poisons of section 448 and 449 of the companies Act, 2013.

CONSEQUENCES FOR NOT FILING CERTIFICATE OF COMMENCEMENT OF BUSINESS

1. Non filling of form INC 20A allows Registrar of Companies one additional ground to strike off
the name of your Company from its Register.

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 2. The company shall be liable to a penalty of fifty thousand rupees and every officer who is in
default shall be liable to a penalty of one thousand rupees for each day during which such
default continues but not exceeding an amount of one lakh rupees.
3. On non filling of form INC 20A ROC may strike off your Company which shall adverse effect
all the Sectoral Approval taken after the incorporation by the Company.
Accordingly the concept of certificate of commencement of business is another welcome in ease of
doing business and run the business in a more legally and a transparent manner.

Memorandum of Association
Memorandum of Association (MoA) is commonly known as ―Memorandum‖ or ―Charter of the
Company‖ and defines its reason of existence (raison d‘être) is a document that governs the
relationship between the company with other entities. MoA is a fundamental document as it
comprises of the fundamental conditions upon which alone the company is allowed to be
incorporated. MoA shows the object of the formation of the company along with the utmost possible
scope of it. It creates a limitation for the actions of the company which cannot be exceeded.

The purpose of Memorandum of Association

• It allows the prospective shareholders to get a basic idea about the company and understand the
risks involved with their investments.
• The outsiders dealing with the company can obtain the objects of the company and understand
whether the contract between them fall within the object of the company.

Features of Memorandum of Association

1. It states the nature of business activities undertaken by the company
2. MoA is prepared by promoters
3. To be signed by 7 people in case of a public company and by 2 people in case of a private
company.
4. MoA is submitted to the Registrar of the company to get a certification of incorporation.
5. It is generally considered an unalterable charter as it is very difficult to amend.
6. It is a Public document.

What are different //Content parts of Memorandum of Association (MOA)?

As Memorandum of Association (MOA) is an important documents which outlines the company laws
under which a company will work and function. It has several caluses which defines some pertinent
aspects under provision of The Companies Act, 2013 which are as follows:-
1. Name Clause
2. Situation/ Registered State Clause
3. Object clause
4. Liability clause
5. Capital Clause
6. Subscriber Clause

1. Name Clause of Memorandum of Association

The name of the company should be stated in this clause. A company name should be which is not
identical in any manner to any existing company also, there are some words which are strictly
prohibited to be used in names of company in any manner. The Word ―Private/PVT Limited‖ should
be in end of any private company. And the word ―Limited‖ should be in the end of every public limited
Company.
An section 8 or not for profit company are not required to use the word ―Private Limited/ pvt. Limited
or Limited‖ at the end of their company name.

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2. Situation Clause of Memorandum of Association
In this clause the state name of company‘s registered office is mentioned. The Company should
intimate the location of registered office to the registrar within thirty days from the date of
incorporation in case the permanent address of company is not given.
It is one of important aspects as all the correspondence for cm=company will be sent on this. Note
that just a few months also many companies have been strike off/ name has been removed due to
non-maintenance of registered address of company able to receive and acknowledge the letters of
company.
Once a company has been registered, it should have a proper registered office until, the company is
closed.
3. Objects Clause of Memorandum of Association
Every company have specific business which they will run after a company is incorporated. This
clause states all the business which this proposed company will commence after incorporation that to
in detail.
Now as per The Companies Act, 2013 only Main objects and other objects which are ancillary to main
objects are covered.
Any business run apart from this can lead to closure of business. Again, there are some business
which are required approval from different authorities like for loan and capital funding, Reserve Bank
of India (RBI) is required. For commencing insurance business approval from Insurance Regulatory
and development authority of India (IRDAI).
4. Liability Clause of Memorandum of Association
This clause states the liability of the members of the company. The Liability can be limited or
unlimited which means at the time of winding up of company, a company with limited liability,
members are required to pay amount upto the value of nominal value of shares taken by them but in
case of unlimited members are required to pay without any limit for the debt or payment which a
company is required to pay.
5. Capital Clause of Memorandum of Association
This clause states the Authorised Capital of the company and total number of shares along with value
of per share. This is the limit a company can raise its capital maximum amount. For example, if
company authorised capital is 10 Lakhs and paid up at the time of incorporation is 1 Lakh, company
can raise its capital upto 9 lakhs. But nothing more than 9 lakhs.
There is no limit for amount of authorised capital a company can have in India as per The Companies
Act, 2013.
6. Subscription Clause of Memorandum of Association
It contains the names and addresses of the first subscribers. The subscribers to the Memorandum
must take at least one share. The minimum number of members is two (2) in case of a private
company, seven (7) in case of a public company and one (1) in case of One Person Company as per
The Companies Act, 2013.
The above clause are required to be inserted omission of any of above clause will lead to refusal of
company incorporation by Registrar of Companies.

The Doctrine of Ultra Vires

Now, the question arises about what happens when the company goes beyond that defines object in
the MoA. Any act done beyond the legal powers and authority of the company is Ultra Vires and
hence void and hence a legal relationship for that action has not been formed.

Effects of ultra vires transactions:

• For an ultra vires act, any member can get an injunction from the Court restraining the company
from acting further for such an act.

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• Any member of the company can propose and maintain an action that compels the directors of the
company to restore the funds of the company used for an ultra vires act. (Russel v. Wakerfield Water
Wprks Co. (1857) L.R. 20 Eq. 474)
• When an agent (Directors are agents of the company) exceeds his authority he is personally liable
for Breach of Warranty of authority in a suit brought by the third party.
• A contract ultra vires are void ab initiated hence has no legal effects.
• A property acquired by an ultra vires transaction. The company has the right to protect and hold that
property. (National Telephone Co.v. St. Peter Constables (1900) A.C. 317)
• A company is not liable for any civil wrongdoing committed by the company‘s agents or servants
during the course of an ultra vires transaction.
Memorandum of Association is one of the documents that is required to incorporate a company in
India. It contains specific information regarding the working of the company and defines the scope of
activities undergone by the company. It is a document that explains the entire structure of the
company.

1. What is the importance of the Memorandum?

MoA determines the area of operation of the company along with the relationship of the company with
outsiders. Further, it is the basis of the incorporation of a company.

2. What’s the use of MoA?

MoA helps establish the extent and scope of business activities that a particular company can carry
out. MoA with Article of Association serves to constitute the company.

3. What is the effect of omission of limited or private limited in a name?

When limited or private limited forms part of the company‘s name, the omission of this makes the
name incorrect and a contract done under an incorrect name would be deemed personally liable.

4.What is the doctrine of ultra vires?

This doctrine states that any act done beyond the power of the company is void and hence has no
legal obligation. The powers of the company are defined in the object clause of MoA. A company
cannot go beyond the scope of the defined objects.

Articles of Memorandum

The Articles of Association of a company are that which prescribe the rules, regulations and the bye-
laws for the internal management of the company, the conduct of its business, and is a document of
paramount significance in the life of a company. The Articles of a company have often been
compared to a rule book of the company‘s working, that regulates the management and powers of
the company and its officers. It prescribes several details of the company‘s inner workings such as
the manner of making calls, director‘s/employees qualifications, powers and duties of auditors,
forfeiture of shares etc.

Distinction between Memorandum and Articles of Association

The pivotal differences between memorandum and articles of association are as follows:
S.No. Memorandum of Association Articles of Association
It stated the objective of foundation of It states the rules of internal
1
the company. management of the company.
2 It is a functional document It is a Complementary document.

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 Relationship between the company Relationship between the company
3
and outsiders and the members.
Memorandum lays down the Articles prescribe details within those
4
parameters for the articles to function. parameters.
The preparation and filling of MOA is It is not necessary for public
5
compulsory companies to have their own AOA
6 It is not governed by AOA. It is not governed by MOA.
7 There is no specification There is a specification
8 It is formed under Companies Act It is formed under MOM & AOA
It is comparative easier to make
9 It is difficult to make changes in MOA
changes AOA

Nature and Content of Articles of Association

As per the Companies Act, 2013, the articles of association of different companies are supposed to
be framed in the prescribed form, since the model form of articles is different for companies limited by
shares, companies limited by guarantee having share capital, companies limited by guarantee not
having share capital, an unlimited company having share capital and an unlimited company not
having share capital.
The signing of the Articles of Association
The Companies (Incorporation) Rules, 2014 prescribes that both the Memorandum and the Articles of
a company are to be signed in a specific manner.
 Memorandum and Articles of a company, are both required to be signed by all subscribers,
who are further required to add their names, addresses and occupation, in the presence of at
least one witness, who must attest the signatures with his own signature and details.
 Where a subscriber is illiterate, he must affix a thumb impression in place of his signature, and
appoint a person to authenticate the impression with his signature and details. This appointed
person should also read out the content of the documents to the illiterate subscriber for his
understanding.
 Where a subscriber is a body corporate, the memorandum and articles must be signed by any
director of the body corporate who is duly authorised to sign on behalf of the body corporate,
by a passing a resolution of the board of directors of the body corporate.
 Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly
authorised to sign on the behalf of the LLP by a resolution of all the partners shall sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3) which
implies that certain provisions within the Articles of Association will not be alterable by merely passing
a special resolution, and will require a much lengthier and elaborate process. The literal definition of
the word ―entrench‖ means to establish an attitude, habit, or belief so firmly that bringing about a
change is unlikely. Thus, an entrenchment clause included in the Articles is one which makes certain
changes or amendments either impossible or difficult.
Provisions for entrenchment can only be introduced in the articles of a company during its
incorporation, or an amendment to the articles brought about by a special resolution in case of a
public company, and an agreement between all the members in case of a private company.

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the
conditions contained in the memorandum of association, by passing a special resolution. This power

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is extremely important for the functioning of the company. The company may alter its articles to the
effect that would turn:
A public company into a private company
For a company wanting to convert itself from public to a private company simply passing a special
resolution is not enough. The company will have to acquire the consent and approval of the Tribunal.
Further, a copy of the special resolution must be filed with the Registrar of Companies within 30 days
of passing it. Further, a company must then file a copy of the altered, new articles of association, as
well as the approval order of the Tribunal with the Registrar of Companies within 15 days of the order
being received.
A private company into a public company
For a company wanting to convert from its private status to public, it may do so by removing/omitting
the three clauses as per section 2(68) which defines the requisites of a private company. Similar to
the conversion of the public to a private company, a copy of the resolution and the altered articles are
to be filed with the Registrar within the stipulated period of time.
Limitations on power to alter articles
 The alteration must not contravene provisions of the memorandum, since the memorandum
supersedes the articles, and the memorandum will prevail in the event of a conflict.
 The alteration cannot contravene the provisions of the Companies Act, or any other company
law since it supersedes both the memorandum and the articles of the company.
 Cannot contravene the rules, alterations or suggestions of the Tribunal.
 The alteration cannot be illegal or in contravention with public policy. Further, it must be for
the bona fide benefit and interest of the company. The alterations cannot be an effort to
constitute a fraud on the minority and must be for the benefit of the company as a whole.
 Any alteration made to convert a public company into a private company, cannot be made
until the requisite approval is obtained from the Tribunal.
 A company may not use the alteration to cover up or rectify a breach of contract with third
parties or use it to escape contractual liability.
 A company cannot alter its articles for the purpose of expelling a member of the board of
directors is against company jurisprudence and hence cannot occur.

Binding effect of Memorandum and Articles of Association

After the Articles and the Memorandum of a company are registered, they bind the company and its
members to the same extent as if they had been signed by each of the members of the company.
However, while the company‘s articles have a binding effect, it does not have as much force as a
statute does. The effect of binding may work as follows:

Binding the company to its members

The company is naturally completely bound to its members to adhere to the articles. Where the
company commits or is in a place to commit a breach of the articles, such as making ultra vires or
otherwise illegal transaction, members can restrain the company from doing so, by way of an
injunction. Members are also empowered to sue the company for the purpose of enforcement of their
own personal rights provided under the Articles, for instance, the right to receive their share of
declared divided.

Members bound to the company

Each member of the company is bound to the company and must observe and adhere to the
provisions of the memorandum and the articles. All the money that may be payable by any member
to the company shall be considered as a debt due. Members are bound by the articles just as though
each and every one of them has signed and contracted to conform to their provisions.

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Binding between members
The articles create a contract between and amongst each member of the company. However, such
rights can only be enforced by or even against a member of the company. Courts have been known
to make exceptions, and extend the articles to constitute a contract even between individual
members. .

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles constitute a contract
between the company and any third party. The company and its members are not bound to the
outsiders with respect to the provisions of the memorandum and the articles.

The doctrine of Constructive Notice

When the Memorandum and Articles of Association of any company, are registered with the Registrar
of Companies they become ―public documents‖ as per section 399 of the Act. This implies that any
member of the general public may view and inspect these documents at a prescribed fee. A member
of the public may make a request to a specific company, and the company, in turn, must, within
seven days send that person a copy of the memorandum, the articles and all agreements and
resolutions that are mentioned in section 117(1) of the Act.
If the company or its officers or both, fail to provide the copies of the requisite documents, every
defaulting officer will be liable to a fine of Rs. 1000, for every day, until the default continues, or Rs.
1,00,000 whichever is less.
Therefore, it is the duty of every person that deals with the company to inspect these public
documents and ensure in his own capacity that the workings of the company are in conformity with
the documents. Irrespective of whether a person has actually read the documents or not, it is
assumed that he familiar with the contents of these documents, and that he has understood them in
their proper meaning. The memorandum and articles of association are thus deemed as notices to
the public, hence a ‗constructive notice‘.
Illustration: If the articles of Company A, provided that any bill of exchange must be signed by a
minimum of two directors, and the payee receives a bill of exchange signed only by one, he will not
have the right to claim the amount.

The Doctrine of Indoor Management

The concept of the Doctrine of Indoor Management can be most elaborately explained by examining
the facts of the case of Royal British Bank v. Turquand, which in fact, first laid down the doctrine. It
is due to this that the doctrine of indoor management is also known as the ―Turquand Rule‖.
The directors of a particular company were authorised in its articles to engage in the borrowing of
bonds from time to time, by way of a resolution passed by the company in a general meeting.
However, the directors gave a bond to someone without such a resolution being passed, and
therefore the question that arose was whether the company was still liable with respect to the bond.
The company was held liable, and the Chief Justice, Sir John Jervis explained that the understanding
behind this decision was that the person receiving the bond was entitled to assume that the resolution
had been passed, and had accepted the bond in good faith.
Therefore the primary role of the doctrine of indoor management is completely opposed to that of
constructive notice. Quite simply, while constructive notice seeks to protect the company from an
outsider, indoor management seeks to protect outsiders from the company. The doctrine of
constructive notice is restricted to the external and outside position of the company and, hence,
follows that there is no notice regarding how the internal mechanism of the company is operated by
its officers, directors and employees. If the contract has been consistent with the documents on public
record, the person so contracting shall not be prejudiced by any and all irregularities that may beset
the inside, or ―indoor‖ operation of the company.

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Exceptions to the Doctrine of Indoor Management
1. Where the outsider had knowledge of the irregularity— Although people are not expected to
know about internal irregularities within a company, a person who did, in fact, have
knowledge, or even implied notice of the lack of authority, and went ahead with the
transaction regardless, shall not have the protection of this doctrine.
2. Lack of knowledge of the articles— Naturally, this doctrine cannot and will not protect
someone who has not acquainted himself with the articles or the memorandum of the
company for example in the case of Rama Corporation v. Proved Tin & General Investment
Co. wherein the officers of Rama Corporation had not read the articles of the investment
company that they were undertaking a transaction with.
3. Negligence— This doctrine does not offer protection to those who have dealt with a
company negligently. For example, if an officer of a company very evidently takes an action
which is not within his powers, the person contracting should undertake due diligence to
ensure that the officer is duly authorized to take that action. If not, this doctrine cannot help
the person so contracting, such as in the case of Al Underwood v. Bank of Liverpool.
4. Forgery— Any transaction which involves forgery or is illegal or void ab initio, implies the
lack of free will while entering into the transaction, and hence does not invoke the doctrine
of indoor management. For example, in the case of Ruben v. Great Fingal Consolidated,
the secretary of a company illegally forged the signatres of two directors on a share
certificate so as to issue shares without the appropriate authority. Since the directors had
no knowledge of this forgery, they could not be held liable. The share certificate was held to
be in nullity and hence, the doctrine of indoor management could not be applied. The
wrongful an unauthorized use of the company‘s seal is also included within this exception.

Management of Company:
Management in businesses and organizations is the function that coordinates the efforts of people to
accomplish goals and objectives by using available resources efficiently and effectively.
Management includes planning, organizing, staffing, leading or directing, and controlling an
organization to accomplish the goal. Resourcing encompasses the deployment and manipulation of
human resources, financial resources, technological resources, and natural resources. Management
is also an academic discipline, a social science whose objective is to study social organization.
What is a director?
There is no comprehensive definition of a but, in essence, it means a person who (together with the
other directors who form the board of directors) is responsible for the management of a company.
The term ―director‖ includes any person occupying the position of director, by whatever name called.
Any person may be a director except the following:
 any person under 16 years of age;
 an undischarged bankrupt or person subject to a bankruptcy restrictions order;
 a person subject to a disqualification order or who has given a disqualification undertaking; or
 a person who is the company‘s auditor (if any).

A private company must have at least one director. At least one director must be a natural person (as
opposed to another company, known as a ―corporate director‖).
A director may resign from office by giving notice to the company and a company may remove a
director by resolution of the shareholders.
Distinctions are sometimes made between executive and non-executive directors, but company law
on directors applies similarly to all directors.

APPOINTMENT OF DIRECTORS

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There are several types of directors in companies and there are several types of companies and then
there are certain mandatory rules for companies to appoint certain kind of directors in certain
companies. A person who is appointed but not designated as a director will not be considered as a
director under the meaning of this Act. Only an individual shall be eligible to be appointed as director
because in case of corporate and firms it will be difficult to fix duties and responsibilities. Minor cannot
be a director because of the ineligibility to obtain DIN (Section 152(3)). As per Section 149(3), at least
one director has to be an Indian resident.
Minimum number of directors: In case of public company it is 3, private company 2 and one person
company 1. Though articles of the company might specify for a higher number of minimality.
Maximum number of directors– It is 15 but more can be appointed by passing a special resolution.
Requirement of special resolution is not needed in Government Company and company licensed
under section 8 subjects to condition.
No person shall hold directorship in more than 20 companies and 10 in case of public company as
per section 165 of the Companies Act. For counting the limit, dormant company and company
licensed under section 8 subject to condition are excluded.
Suppose a person is director in 15 companies out of which 9 are public and 6 are private. Now he is
eligible to be appointed as director in only 1 more public and/or 4 private companies if no public
company then 5 in private company. For the purpose of this section any holding/subsidiary of any
public company will be considered as public company.
Disqualification of director (Section 164)- Following are not eligible to be a director-
1. A person of unsound mind
2. Undischarged insolvent
3. Person applied for to be adjudicated as an insolvent and his application is pending.
4. A person who has been imprisoned for more than 6 months and 5 years have not elapsed.
5. Court or Tribunal disqualifying such person
6. A person who has not paid any call on share and 6 months have elapsed.
7. Convicted in offence of related party transaction in preceding 5 years.
8. A person who has not been allotted with DIN.
Any company in which such candidate is director and such company has not filed annual return for
consecutive period of 3 years or defaulted in payment/redemption of deposits/ debentures or its
interest or defaulted in payment of declared dividend is also not eligible for reappointment in the
same company and appointment in any other company for a period of 5 years.
Executive Director– A director who is employed in the company and closely witness daily affairs of
the company are known as executive directors. They possess deep knowledge of the company. This
class includes managing directors and whole time directors also.
Non- Executive directors– Directors who are neither employed nor are they closely involved in the
day to day management of the company are known as non-executive directors. This class majorly
includes professional directors, nominee directors etc who have unbiased attitude towards the
company.
Rotational Directors– In case of companies other than private company and certain government
company, not less than two third of the directors shall retire by rotation. Articles may specify
retirement of all the directors by rotation. Not less than one third of rotational directors are liable to
retire either by lots or agreement. Retiring director may be reappointed but not in cases specified in
section 152(7)(b). Retiring director cannot hold office beyond the last date of AGM.
While counting the total number, independent directors are not included and nominee director
appointed by financial institution are also not included.
Non-rotational directors– Directors other than rotational are non rotational directors.
First director– Directors specified in the articles at the time of incorporation. If not specified then shall
be selected by majority of memorandum subscribers as per Table F and if Table F is not applicable

19 | P a g e
then all the subscribers are first directors. They are appointed till the company appoints subsequent
directors.

Manager/ Managing Director/ Whole time directors–

As per section 203, every listed company or any public company having paid up share capital of more
than 10 crores or a company not falling under above two but having paid up share capital of more
than 5 crores is required to appoint managing director/manager/whole time director, company
secretary and chief executive officer.
A person who fits in the definition provided in the section 2(54) of the Act is known as managing
director of the company. Similarly Manager is defined under section 2(53) and whole time director in
section 2(94). No such person can be appointed for a period of more than 5 years although such
restriction is not applicable on private company. Section 196 provides with the appointment of such
key managerial persons. Such person must be resident of India, aged between 21 to 70 years
(subject to condition for above 70 years) and all other eligibility criteria as per schedule V.
Independent directors– As the name suggests such directors are not related in certain ways with the
company. They are not managing directors, whole time directors or nominee directors, such directors
have to comply with the criteria‘s given in section 149(6). An independent director can be appointed
for a consecutive period of not more than 2 years then a gap of 3 years is required before their
reappointment in the same company for the same position.
Every listed public company shall have not less than one third of its directors as independent.

Following prescribed public companies shall have minimum of 2 independent directors:-

1. whose paid up share capital is of 10 crores or more
2 whose turnover is of 100 crores or more
3. whose outstanding loans, debentures, and deposits in aggregate exceeds 50 crores.
A joint venture, wholly owned subsidiaries and dormant companies need not to have such directors. If
a company has audit committee then more than half shall be independent directors and this will be
the minimum number of independent directors in such companies.
For example, if a public company has paid up share capital of Rs. 12 crores and has 7 members in
audit committee then minimum number shall not be 2 but 4 i.e. more than half of 7.
Nominee director– Such directors are appointed by third party subject to the articles of the company
in pursuance with the law or any provisions for the time being in force. For example a director
appointed by bank.
Woman director– Following companies must have atleast one director as woman-
1. Every listed company and
2. Every public company having paid up share of 100 crores or more
3. Every public company having turnover of 300 crores or more.
Vacancy shall be filled by 3 months from such vacancy or immediate next board meeting after such
vacancy whichever is later.

Additional director– All public or private companies can appoint additional director but the articles
should allow for the same and such person shall not fail to be appointed as director in general
meeting. Such director can be appointed in board meeting or passing resolution by circulation. Such
director cannot hold office beyond the next AGM or the due date on which such AGM is ought to be
conducted.
For example, a company did not organise AGM till 30th September but the additional director in any
case cannot hold office beyond 30th September. In case company acquires permission from
prescribed authority to hold AGM at a later date then that date shall be the last date for additional
director which should not be any date later than 31st December.

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Alternate director– When a director is leaving India for a period of 3 months then Board may appoint
an alternate director (who is not director in the same company nor holding alternate directorship for
anyone else in the same company) by articles or passing special resolution. He/she shall have same
position as of original director. He shall hold the post till the director in place of whom he is appointed
returns back or the period of holding office of the original director comes to an end.
Directors by small shareholders– Only listed companies whose shareholders having nominal value
of less than 20000 proposes to appoint a small shareholder‘s director have to give notice atleast 14
days before the meeting. 1000 small shareholders or 10% of total number of shareholders whichever
is lower is required to give such notice. Such a director shall not be appointed for a period of more
than 3 consecutive years then a cooling period of 3 years before such appointment in the same
company. A person can hold such directorship in two company‘s maximum second one not being the
competitor of the first one. Grounds of disqualifications, vacation of office, independent director are as
it is applicable on such directors as well.
Casual vacancy– Such vacancy can be filled by board if the director vacating the position was
appointed in general meeting. Although there is no obligation to fill such vacancy. Term of such
director shall not exceed the term of director for whom such vacancy was filled.
Proportional representation– Except for the government companies, to avoid the situation of
dominance of majority voting hands over the minor ones a company can appoint not less than 2/3 rd of
directors by proportional representation so that minority shareholders are not deprived off their
powers and rights in the company.
Every person has right to showcase his ability to stand in the position of director in the public
company. As per section 160 of the Act, any person can give his signed candidature at the registered
office of the company at least 14 days prior to the meeting with a deposit of Rs. 1 lakhs . Such
amount is refunded if the person acquires such position or he gets at least 25% of votes in favour.

Director cannot assign his office even though articles provide.

Any director wishing to attend board meeting through video conferencing has to inform the company
of his intentions in the beginning of the year.
Sitting fees for all the directors irrespective of gender or position shall be decided indiscriminately
which shall not exceed Rs.1 lakh per meeting.
As per section 162 a separate resolution at general meeting has to be passed for appointment for
every director. No single resolution can be passed for appointment of more than 1 director unless a
resolution has been passed with all votes casted in favour of passing a single resolution subject to
other conditions specified in section 162.
Notice of any meeting shall be given to every director whether he is in abroad, has informed about his
absence or any reason.

Company Meeting :
Meaning and Definition of Company Meeting:
The word ―meeting‖ is not defined anywhere in the Companies Act. Ordinarily, a company may be
defined as gathering, assembling or coming together of two or more persons (by previous notice or
by mutual arrangement) for discussion and transaction of some lawful business.
A company meeting may be defined as a concurrence or coming together of at least a quorum of
members in order to transact either ordinary or special business of the company.
 In the case of Sharp vs. Dawes (1971), the meeting is defined as ―An assembly of people for
a lawful purpose‖ or ―the coming together of at least two persons for any lawful purpose.‖
 According to P.K. Ghosh ―Any gathering, assembly or coming together of two or more persons
for the transaction of some lawful business of common concern is called meeting.‖

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  According to K. Kishore, ―A concurrence or coming together of at least a quorum of members
by previous notice or mutual agreement for transaction business for a common interest is
meeting.‖
Characteristics of a Company Meeting:
The characteristics of a company meeting are as follows:
1. Two or more persons (who are the members of the Company) must be present at the meeting.
2. The assembly of persons must be for discussion and transaction of some lawful business.
3. A previous notice would be given for convening a meeting.
4. The meeting must be held at a particular place, date and time.
5. The meeting must be held as per provisions/rules of Companies Act.

One-Man Meeting:
To convene a meeting, two or more persons must be present. A meeting cannot be constituted by
one person. However, there are certain circumstances where one person can constitute a valid
meeting.

They are as follows:-

1. Meeting Convened by Central Government:
Where the Central Government calls an annual general meeting under Sec. 167 of the Act, it
may direct that one member of the company present in person or by proxy shall constitute the
meeting.
2. Absence of Quorum in an Adjourned Meeting:
By quorum we mean the minimum number of the members who must be present at a meeting
as required by the rules. In the absence of quorum the proceedings of the company cannot be
started.
If the quorum does not complete within half an hour of the prescribed time, meeting will be
adjourned to the same time, place and date in the next week. If at the adjourned meeting also
the quorum does not complete, the members present shall be quorum and attending
members (even if one member is present) may be allowed to come to a decision and pass
resolutions. It means one member present in person shall constitute a valid meeting.
3. Meeting Convened by Company Law Board:
Where the Company Law Board calls a meeting under Sec. 186 of the Act (other than an
annual general meeting), it may direct that one member present in person or proxy shall be
deemed to constitute a valid meeting.
4. Class Meeting of Shareholders:
Where one person held all the shares of a particular class, that member alone was held to
constitute a valid meeting of that class of shareholders,
5. Meeting of One-Man Committee of Board of Directors:
As per Rule 77 of ‗Table A‘, the board of directors may delegate their works to a Committee
which may have only one member. When the meeting of such Committee will be held, only
one member will be present and he alone will constitute a valid meeting.

Kinds of Company Meetings:

The meetings of a company may be classified into the following categories:
1. Meetings of shareholders:
I. Statutory meeting;
II. Annual general meeting (AGM)
III. Extra ordinary general meeting;
IV. Class meetings.

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2. Meetings of directors:
1. Meetings of board of directors;
2. Meetings of directors;
3. Meetings of creditors.
4. Meetings of debenture-holders.

1. Meetings of Shareholders:
The shareholders are the real owners of the company, but due to certain limitations they cannot take
part in the management of the company. They leave this to their representatives called the directors.
For controlling the board of directors and their activities ‗shareholders‘ ‗meetings‘ are held from time
to time. Meeting of shareholders can be classified as under.
I. Statutory Meeting:
Every public company having share capital must convene a general meeting of shareholders within a
period of not less than one month and not more than six months after the date on which it is
authorised to commence its business. This is the first meeting of the shareholders of the company
and it is held once in the whole life of the company.

The following companies need not to hold statutory meeting:

(i) Private company.
(ii) Company limited by Guarantee having no share capital.
(iii) Unlimited liability company.
(iv) A public company which was registered as a private company earlier.
(v) A company which has been deemed as a public company under Sec. 43 A.
Notice of the Meeting:
The directors are required to send a notice of the meeting to all the members of the company at least
21 days before the date of the meeting stating that it is the ‗statutory meeting‘ of the company. If the
notice convening this meeting does not name it as the ―Statutory Meeting‖ it will not Amount to
compliance with the provisions of this section.
Objects of Statutory Meeting:
The statutory meeting is held to inform the shareholders about matters relating to incorporation,
allotment of share, the details of the contracts concluded by the company, etc. According to
Stephenson, ―Statutory Meeting is convened in order to aord the shareholders an opportunity for
seeing what degree of success has attained the floatation of the company and in order that any
special matters requiring their approval may be laid before them.‖
Statutory Report:
The directors are required to prepare and send a report called the ‗Statutory Report‘ to every member
of the company at least 21 days before the date of the meeting. If the report is sent later it shall be
deemed to have been duly forwarded if it is so agreed to by a unanimous vote of the members
entitled to attend and vote at the meeting [Sec. 165 (2)]. A copy of this report should be sent to the
Registrar.

The statutory report must set out the following information:

(i) Shares allotted:
The total number of shares allotted distinguishing those allotted as fully or partly paid-up
otherwise than in cash and stating in case of shares partly paid-up the extent to which they
are so paid-up and in either case the consideration for which they have been allotted.
(ii) Cash received:
The total amount of cash received by the company in respect of all the shares allotted,
distinguished as aforesaid.
(iii) Abstract:

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 An abstract of the receipts of the company and of the payments made thereto, upto a date
within seven days of the date of the report, exhibiting under distinctive headings the receipts
of the company thereto from shares and debentures and other sources the payments thereto
and particulars concerning the balance remaining in hand and an account or estimate of the
preliminary expenses of the company, showing separately any commission, or discount paid
or to be paid on the issue or sale of shares or debentures.
(iv) Directors, auditors and other managerial personnel:
The names, addresses and occupations of its directors and auditors and also of its manager
and‘ secretary, if any, and the changes which have occurred since the date of the
incorporation.
(v) Contracts:
The particulars of any contract and the modification or the proposed modification of any
contract which is to be submitted for the approval of the members at the meeting.
(vi) Underwriting contract:
The extent to which the underwriting contract, if any, has not been carried out and the reason
therefore.
(vii) Arrears of calls:
The arrears, if any due on calls from any director and the manager.
(viii) Commission and brokerage:
The particulars of any commission or brokerage paid or to be paid to any director or to the
manager in connection with the issue or sale of shares or debentures of the company.

Certification of Report:
The statutory report must be certified as correct by not less than two directors; one of whom shall be
the managing director, if any The auditors of company then shall certify it as correct regarding the
shares allotted, cash received in respect of such shares and the receipts and payment of the
company. [Sec. 165(4)]
A certified copy of the statutory report shall be filed with the registrar for registration immediately after
the same has been sent to the members of the company.[Sec. 165(5)]
Procedure at the Meeting:
At the commencement of the meeting the Board shall place a list showing the name, addresses and
occupation of the members of the company and the number of the shares held by them. During the
continuance of the meeting the list shall remain open for inspection by members.
The members present at the meeting may discuss any matter relating to the formation of the
company or arising out of statutory report, whether previous notice has been given or not. The
meeting cannot pass a resolution on any item or on a subject unless notice has been given according
to the provisions of the Act.

Effect of Non-compliance:
(i) If default is made in complying with the provisions of Section 165, every director or other officer of
the company who is in default will be liable to a fine which may extend to Rs. 500.
(ii) If the statutory meeting is not held or the statutory report is not filed as per the provisions of
Companies Act, the company may be compulsorily wound up under the orders of court. [Sec. 43(6)]
The court may, however, give direction for the statutory report to be filed or a meeting to be held as
the case may be and refuse to order the winding up of the company. [Sec. 443(3)]
II. Annual General Meeting (AGM):
It is a meeting of shareholders which is held once in a year. The object of holding this meeting is to
review the progress and prospects of the company and elect its office-bearers for the coming year.
Holding of the Meeting:

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The first annual general meeting of the company is held within 18 months of its incorporation. After
holding such meeting it is not necessary to hold any other annual general meeting in the year of its
incorporation and in the next year.
Subsequent annual general meeting must be held by the company each year within six months of the
closing of the financial year. I the interval between any two annual general meetings must not be
more than fifteen months. The registrar is empowered to extend the time upto a period to three
months except in the case of first annual general meeting.
Notice:
The Board of Directors has to call Annual General Meeting giving 21 days notice to all the members
entitled to attend the meeting. However, such a meeting may be called with shorter notice, if it is
agreed to by all the members to vote in the meeting.
Certified copies of Profit and Loss Account and Balance Sheet, Directors‘ Report and Auditor‘s
Report should also be forwarded to the members at least 21 days before the holding of the meeting
of the company. Considering the importance of annual general meeting to shareholders it has been
held that the directors must call the meeting even though the accounts are not ready or the company
is not functioning.
Effect of Non-Compliance:
(i) If default is made in holding the annual general meeting in accordance with the above provisions,
the Central Government may on the application of any member of the company, call or direct for the
calling of the meeting and give such directions for this purpose as it thinks proper. The directions may
include that one member of the company present in person or by proxy shall be deemed to constitute
the meeting. (Sec. 167)
(ii) If default is made in holding a meeting of the company in accordance with the above provisions,
the company and its every officer who is in default shall be punishable with a fine which may extend
to five hundred and in case of continued defaults, with a further fine which may extend to Rs. 250 for
every day during which such default continues,

(i) Routine Business:

(a) Adoption of Annual Accounts, Directors‘ Report and Auditors‘ Report.
(b) To declare the dividend.
(c) To elect the directors in place of those retiring by rotation.
(d)To appoint auditors and fix their remuneration.

(ii) Special Business:

(a) To increase Authorised Capital.
(b) To alter the Articles of Association, etc.

III. Extraordinary General Meeting:

Extraordinary meeting is a general meeting which is held between two Annual General Meetings.
Extraordinary General Meeting is Called to discuss any particular matter of urgent importance to the
company. This meeting is called for the consideration of any specific subject, decision of which
cannot be postponed to the next Annual General Meeting.
This meeting may also be called to discuss the following:
(i) Alteration of any clause of Memorandum of Association; or
(ii) Changes in the Articles of Association; or
(iii) Scheme of the reduction of share capital etc.
The Extraordinary General Meeting may be called by the Directors or may be convened by the
Shareholders if the Board of Directors does not arrange for it despite their requisition to call it.
Directors may call the Extraordinary General Meeting in accordance with the procedure laid down in
the Articles of Association of the company.

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Shareholders holding at least one-tenth of the paid-up share capital of the company can make a
requisition to the Board of Directors to convince such a meeting.
If due to any reason it is impracticable to hold extraordinary general meeting the Company Law Board
may order to call such meeting either on its own initiative or on the application of any director or any
member of the company who are entitled to vote at the meeting.
Section 186 of the Companies Act empowers the Company Law Board to call only extraordinary
general meeting and not the annual general meeting of the company. If no such meeting is convened
within 21 days of their requisition, shareholders may themselves convene the meeting within 3
months from the date of their requisition.
A notice of 21 days has to be given to members indicating the nature and particulars of the
resolutions to be discussed. The special resolutions passed at Extraordinary General Meeting have to
be filed with the Registrar within 15 days.

IV. Class Meetings:

When the meeting of a particular class of shareholders takes place such as preference shareholder
meeting, it is known as class meeting. Such a meeting can be attended only by that class of
shareholders. The articles define the procedure for calling such meeting. Such a meeting is called for
the alteration in the rights and privileges of the shareholders and for the purpose of conversion of one
class of shares into another.

2. Meetings of Directors:
I. Meetings of Board of Directors:
At Least One Meeting in Every Three Months:
The directors of a company exercise most of their powers in a joint meeting called the meeting of the
Board.
In the case of every company, a meeting of the Board of Directors must be held:
(i) At least once in every three months, and
(ii) At least four such meetings shall be held in every year. [Sec. 285]
In other words, no three months should pass without directors‘ meeting being held, and no year
should expire without at least four directors‘ meetings having been held in it.
The object of this section is to ensure that the Board meetings are held at reasonably frequent
intervals so that the directors may be in touch with the management of the affairs of the company.
However, the Central Government is empowered to relax the rule with regard to any class of
companies (Section 285). The object of this provision is to save smaller companies having insufficient
business to be transacted at Board meetings from unnecessary hardships and expenditure involved
in holding them.

Notice of the Meeting:

Notice Of every meeting of the Board of Directors must be given in writing to every director in India
and at his usual address in India to every other director who is outside India for the time being (Sec.
286). A director has no power to waive his right of notice. Notice must be given to a director, even if
he has stated that he will be unable to attend the meeting.
There is no need to send notice, if the articles provide for meetings to be held at regular intervals‘
e.g., monthly, the time and place being fixed. Also, if all the directors should meet casually, and are
willing to hold a meeting, the meeting can be held notwithstanding the absence of notice.
Unless the articles of the company provide a definite period of notice, a reasonable notice must be
given of the Board meeting. What is a reasonable notice will depend on any particular case. If a
proper notice is not given the proceedings are invalid unless all the directors are present at the
meeting.

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The notice should mention the place, time and date of the meeting. The day must be a working day
and the time should be during business hours unless agreed otherwise by all the directors. It is not
necessary to state in the notice the business to be transacted, unless the articles of the company or
the Act so require.

Agenda:
The term ‗agenda‘ means things to be done. In the present context it is a statement of the business to
be transacted at a meeting. It also sets out the order in which the business is to be dealt with. Though
the Companies Act does not make it obligatory on the secretary to send an agenda or to incorporate
the same in the notice of Board Meeting, yet by convention it necessarily accompanies the notice
calling the meeting.
When the agenda is enclosed with the notice each director gives due consideration to the proposed
business and comes with necessary preparations for discussion in the meeting.

Quorum:
There must be a proper quorum for every meeting. The quorum for Board Meeting should be at least
two directors or one-third of total strength of the Board of Directors, whichever is more subject to a
minimum of two directors. While determining the total strength, the vacancies are not counted.
Again the directors who are interested in any of the resolutions to be passed at the Board Meeting
shall not be counted for the purpose of quorum of that resolution. If at any time the number of
interested directors exceeds or is equal to two-thirds of the total strength of directors, then the
remaining directors who are not interested will be the quorum for that item, provided their number is
not less than two [Sec. 283].
If the meeting of the Board could not be held for want of quorum then unless the articles otherwise
provide the meeting shall automatically stand adjourned till the same day in the next week and at the
same time and place.
Where that day happens to be a public holiday then the meeting stands adjourned to the next
succeeding day, at the same time and place. If a meeting could not be held for want of a quorum, it
shall all right be counted towards the minimum number of meetings which must be held in every year
under Sec. 285. [Sec. 288]

Board meetings are called for the following business:

(i) To issue shares and debentures.
(ii) To make calls on shares.
(iii) To forfeit the share
(iv) To transfer, the shares.
(v) To fix the rate of dividend.
(vi) To take loan in addition to debentures.
(vii) To invest the wealth of the company.
(viii) To think over the difficulties of the company.
(ix) To determine the policies of the company.

II. Meetings of the Committees of Directors:

The Board of Directors may form certain committees and delegate some of its powers to them. These
committees should consist of only directors. The delegation of powers to such committees is to be
authorised by the Articles of Association and should be subject to the provisions of the Companies
Act.
In a large company routine matters like Allotment, Transfer, Finance are handled by sub-committees
of the Board of Directors. The meetings of such committees are held in the same way as those of
Board Meetings.

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3. Meetings of Creditors:
The meetings of creditors are called when the company proposes to make a scheme for arrangement
with its creditors.
Section, 391 to 393 of the Companies Act not only give powers to the company to compromise with
the creditors but also lay down the procedure of doing so.
4. Meetings of Debenture Holders:
Meetings of the debenture holders are held according to the conditions contained in the debenture
trust deed.
These meetings are called from time to time where the interests of debenture holders are involved at
the time of reconstruction, reorganisation, amalgamation or winding up of the company.
The rules and regulations entered in trust deed relate to the notice of the meeting, appointment of a
Chairman of the meeting, passing the resolutions, quorum of the meeting and the writing and signing
of minutes.

Resolution Adopted at the Meeting: Meaning, Rules and Types

Meaning of Resolution:
A resolution is the final form of a decision taken at a meeting by voting on a motion, with or without
amendment.

A Resolution must not be confused with a motion:

A motion is considered at a meeting, a resolution is the outcome of the discussion. A resolution is
binding on the organisation. It becomes effective when it is passed but minutes make the evidence of
such resolution. Sometimes there is a legal formality, as we find in the Companies Act, to file a copy
of a resolution with some appropriate authority (e.g., the Registrar of Companies) to make it effective.

Rules Regarding Resolution:

Every association has to function guided by the resolutions adopted at the meetings at different
levels—resolutions passed at general meetings, at executive meetings and at committee meetings, if
any. In an Assembly or in Parliament proposed Bills are passed in the forms of resolutions which
become the Acts subsequently. Therefore, the importance of resolutions is immense. Certain rules
have to be strictly observed for passing resolutions.

They are:
(1) The drafting of a resolution has to be carried out with great care so that the purport or meaning of
the resolution is easily and clearly understandable and there is no ambiguity (double meaning). The
secretary, who is supposed to be an expert in the line, helps in the drafting process. The motion itself
shall be drafted in such a manner that it can be adopted as a perfect resolution. This is particularly
true for a formal resolution.
(2) There are different styles and forms of drafting a resolution. Any one style can be followed. It is
desirable that a formal resolution is drafted in a specialized style.
(3) A resolution must be entered in the Minute Book in verbatim, i.e., word for word.
(4) Once a resolution is passed it cannot be revoked or cancelled either at the same meeting or at
any subsequent meeting by passing another resolution.

Types of Resolutions:
(1) Ordinary Resolution:
This type of resolution has the following characteristics:
(a) This can be passed by a simple majority of votes and even by a margin of one vote. It can be
passed (or lost) by the casting vote of the chairman.
(b) This type of resolution is necessary to take decisions on ordinary matters of the association.

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(c) This is the most common type of resolution.
(d) Formalities for passing such a resolution (unlike a special resolution) are not so strict.

(2) Special Resolution:

(a) It needs a specific margin of votes to be passed. For example—Two-thirds majority or three-
fourths majority. Every association in its bye-laws mentions what shall be the margin. There
may be statutory rules too. For example, the Companies Act states that there shall be three-
fourths majority out of the members present (in person or by proxy) and voting. According to our
Constitution, any Article of the Constitution can be altered by two-thirds majority of all the
members of Parliament.
(b) Such resolutions are necessary when any decision has to be taken affecting the very
constitution of the organisation, e.g., altering the objects of the organisation
(c) This type of resolution is not commonly necessary.
(d) There may be strict formalities to be followed for the purpose (as found in the Companies Act).
Concept of types of resolutions comes mostly from the Companies Act. There are various types
of resolutions mentioned in the Companies Act, mainly applicable to members‘ meetings.

Resolutions as found in the Companies Act:

(1) Ordinary Resolution:
According to Sec. 189(1), an ordinary resolution is that which can be passed at a general
meeting by simple majority (including a casting vote of the chairman, if any), votes being cast
by the members present either in person or by proxy and either by show of hands or by poll.
(2) Special Resolution:
According to Sec. 189(2), a special resolution is that which can be passed at a general
meeting, votes being cast by the members present either in person or by proxy and either by
show of hands or by poll, provided that (a) in the agenda it is mentioned that the resolution
shall be passed as a special resolution, (b) a notice has been duly issued and (c) three-fourth
of the votes cast are in favour of the resolution.
It has to be noted that at a Board meeting there is no question of any special resolution. But,
sometimes to pass a particular type of resolution the consent of all the directors present is
necessary. (In the past, special resolution was known as extraordinary resolution).
(3) Resolution with Special Notice:
According to the Companies Act, certain resolutions require a special notice for their validity.
The resolution itself may be passed as an ordinary resolution. The notice for a members‘
meeting is prepared and issued by the Board of Directors (the secretary does it in practice)
and the agenda is included in the notice.
If any member who wants to move any motion at the meeting must be given the opportunity to
do it and generally for that this Section has been provided. According to Sec. 190, certain
resolutions, as wanted by the Act or as mentioned in the articles, require special notice.
It means that a member, intending to move a resolution, shall give a notice to the company at
least fourteen days before the meeting and the company shall circulate the notice of the
resolution to all the members at least seven days before the meeting.
Suppose, a director is to retire by rotation and his name has been mentioned in the notice as
offering for re-election A member wants to propose the name of another person. He must
send the name of that person at least fourteen days before the meeting and the company
shall circulate the name at least seven days before the meeting (Sec. 257).
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(4) Resolution by Circulation:
The Board of Directors of a Company (or the members of a committee appointed out of the
directors of a company) may pass a resolution without holding a meeting. This can be done by
circulating a draft of the resolution together with necessary papers, if any, to all the directors
(or the members of the committee) at their usual address in India, and who are in India.

The resolution is deemed to be passed provided:

(a) The all or the majority have approved it and
(b) The total number of directors then in India is not less than the quorum

(5) Resolutions to be filed:

Copies of some resolutions, e.g., as resolution on change of any clause of any document, have to be
filed with the Registrar.

Winding Up of a Company
Winding up of a company is defined as a process by which the life of a company is brought to an end
and its property administered for the benefit of its members and creditors. In words of Professor
Gower, ―Winding up of a company is the process whereby its life is ended and its Property is
administered for the benefit of its members & creditors. An Administrator, called a liquidator is
appointed and he takes control of the company, collects its assets, pays its debts and finally
distributes any surplus among the members in accordance with their rights.‖

Modes of Winding up of a Company

As per section 270 of the Companies Act 2013, the procedure for winding up of a company can be
initiated either:

a) By the tribunal or,

b) Voluntary.

a) Winding up by the tribunal: As per new Companies Act 2013, a company can be wound up by a
tribunal in the below mentioned circumstances:
1. When the company is unable to pay its debts
2. If the company has by special resolution resolved that the company be wound up by the
tribunal.
3. If the company has acted against the interest of the integrity or morality of India, security of the
state, or has spoiled any kind of friendly relations with foreign or neighboring countries.
4. If the company has not filled its financial statements or annual returns for preceding 5
consecutive financial years.
5. If the tribunal by any means finds that it is just & equitable that the company should be wound
up.

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6. If the company in any way is indulged in fraudulent activities or any other unlawful business, or
any person or management connected with the formation of company is found guilty of fraud,
or any kind of misconduct.

Filling up winding up petition: Section 272 provides that a winding up petition is to be filed in the
prescribed form no 1, 2 or 3 whichever is applicable and it is to be submitted in 3 sets. The petition for
compulsory winding up can be presented by the following persons:
a) The company
b) The creditors; or
c) Any contributory or contributories
d) By the central or state govt.
e) By the registrar of any person authorized by central govt. for that purpose

Final Order and its Contents: The tribunal after hearing the petition has the power to dismiss it or to
make an interim order as it think appropriate or it can appoint the provisional liquidator of the
company till the passing of winding up order. An order for winding up is given in form 11.

b) Voluntary winding up of a company: The company can be wound up voluntarily by the mutual
decision of members of the company, if:
a) The company passes a Special Resolution stating about the winding up of the company.
b) The company in its general meeting passes a resolution for winding up as a result of expiry of the
period of its duration as fixed by its Articles of Association or at the occurrence of any such event
where the articles provide for dissolution of company.

Procedure for Voluntary Winding Up:

1. Conduct a board meeting with 2 Directors and thereby pass a resolution with a declaration
given by directors that they are of the opinion that company has no debt or it will be able to
pay its debt after utilizing all the proceeds from sale of its assets.
2. Issues notices in writing for calling of a General Meeting proposing the resolution along with
the explanatory statement.
3. In General Meeting pass the ordinary resolution for the purpose of winding up by ordinary
majority or special resolution by 3/4th majority. The winding up shall be started from the date
of passing the resolution.
4. Conduct a meeting of creditors after passing the resolution, if majority creditors are of the
opinion that winding up of the company is beneficial for all parties then company can be
wound up voluntarily.
5. Within 10 days of passing the resolution, file a notice with the registrar for appointment of
liquidator.
6. Within 14 days of passing such resolution, give a notice of the resolution in the official gazette
and also advertise in a newspaper.

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7. Within 30 days of General meeting, file certified copies of ordinary or special resolution
passed in general meeting.
8. Wind up the affairs of the company and prepare the liquidators account and get the same
audited.
9. Conduct a General Meeting of the company.
10. In that General Meeting pass a special resolution for disposal of books and all necessary
documents of the company, when the affairs of the company are totally wound up and it is
about to dissolve.
11. Within 15 days of final General Meeting of the company, submit a copy of accounts and file an
application to the tribunal for passing an order for dissolution.
12. If the tribunal is of the opinion that the accounts are in order and all the necessary
compliances have been fulfilled, the tribunal shall pass an order for dissolving the company
within 60 days of receiving such application.
13. The appointed liquidator would then file a copy of order with the registrar.
14. After receiving the order passed by tribunal, the registrar then publish a notice in the official
Gazette declaring that the company is dissolved.

Effect of Winding up by tribunal (Sec. 279): According to this section, the order for winding up of a
company shall operate in favour of all the creditors and all contributories of the company as if it had
been made out or the joint petition of creditors and contributories.
Effect of voluntary winding up (Sec. 309): In the case of a voluntary winding up, the company shall
from the commencement of the winding up cease to carry on its business except as far as required
for the beneficial winding up of its business. The corporate state and corporate powers of the
company shall continue until it is dissolved.

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