PRINCIPLES OF

BUSINESS LAW
[For BBM Bangalore and Similar Courses]
 PRINCIPLES OF
BUSINESS LAW
[For BBM Bangalore and Similar Courses]

DR. S.N. MAHESHWARI

PROFESSOR EMERITUS & ACADEMIC ADVISOR
DELHI INSTITUTE OF ADVANCED STUDIES, DELHI-110 085

Formerly : Principal, Hindu College, Delhi University

Professor & Dean, Faculty of Commerce and Business Management, Goa University

DR. SUNEEL K. MAHESHWARI

PROFESSOR
EBERLY COLLEGE OF BUSINESS AND INFORMATION TECHNOLOGY
INDIANA UNIVERSITY OF PENNSYLVANIA, U.S.A.

Formerly : Professor, Division of Accountancy & Legal Environment

Marshall University, U.S.A.

MUMBAI  NEW DELHI  NAGPUR  BENGALURU  HYDERABAD  CHENNAI  PUNE  LUCKNOW

 AHMEDABAD  ERNAKULAM  BHUBANESWAR  INDORE  KOLKATA  GUWAHATI
© S.N. Maheshwari & S.K. Maheshwari
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First Edition : 2004

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 Preface
TO THE SECOND EDITION
We are pleased to place before the esteemed readers the Second Revised and Enlarged Edition of our book on
“Principles of Business Law” for Bachelor of Business Management (BBM) students of Bangalore University.
The Second Edition, besides maintaining the PLUS features of the First Edition of the book, viz., lucid presentation,
tailor-made approach, comprehensive text with plenty of illustrative material including case laws, questions and
problems for recapitulation etc., has several additional welcome features. These include the following:
 The book meets all the more comprehensively the course content requirement of the students appearing
in the paper Business Laws for BBM Bangalore and those having similar course contents.
 Since the publication of the First Edition, two important developments have taken place in respect of
corporate laws:
(i) Replacement of the Companies Act 1956, by a new Act titled as The Companies Act, 2013.
(ii) Enactment of The Companies (Amendment) Act 2015, providing for certain changes in The Companies
Act 2013.
All these developments have been incorporated at appropriate places in the book.
 In view of the Companies Act, 1956 not being completely repealed and enforcement of the Companies Act,
2013 in stages; an Appendix has been added in Section IV: ‘Elements of Company Law’, giving details of
sections of New Act which have been enforced.
 The text matter in several chapters has been strengthened, wherever necessary.
 The latest questions and problems from recent University and professional examinations have been incorporated
in the relevant chapters of the book.
 The book continues to follow an examination-oriented approach.
We are confident that with all these changes, additions, adaptations and updating, the readers will find the
revised and enlarged edition of the book all the more useful and rewarding for them.
Constructive and helpful suggestions for improvement of the book will be gratefully acknowledged.

A-2/ 156, Paschim Vihar DR. S.N. MAHESHWARI

New Delhi-110 063. DR. SUNEEL K. MAHESHWARI
 Contents
Introductory ............................................................................................................................ 1.1–1.2
Learning Objectives .......................................................................................................................... 1.1
Meaning of Law ............................................................................................................................... 1.1
Meaning of Mercantitle Law .............................................................................................................. 1.1
Sources of Indian Mercantile Law....................................................................................................... 1.1
Key Terms ....................................................................................................................................... 1.2
Test Questions.................................................................................................................................. 1.2

Section 1
THE INDIAN CONTRACT ACT, 1872
1. General Pri nci ples................................................................................................................. 1.5–1.14
Learning Objectives .......................................................................................................................... 1.5
Scope and Application ...................................................................................................................... 1.5
Types of Rights................................................................................................................................ 1.6
Meaning of Contract ......................................................................................................................... 1.6
Essential Elements of a Valid Contract ................................................................................................ 1.7
Classification of Contracts ................................................................................................................. 1.8
Key Terms ..................................................................................................................................... 1.12
Test Questions................................................................................................................................ 1.12
Practical Problems .......................................................................................................................... 1.14
2. Of f er and Acceptance........................................................................................................... 1.15–1.30
Learning Objectives ........................................................................................................................ 1.15
Proposal or Offer ............................................................................................................................ 1.15
Types of Offer ................................................................................................................................ 1.18
Acceptance .................................................................................................................................... 1.19
Essentials of Valid Acceptance.......................................................................................................... 1.20
Communication of Offer and Acceptance .......................................................................................... 1.22
Revocation of Offer and Acceptance ................................................................................................. 1.23
Contracts by Post ........................................................................................................................... 1.25
Contracts over Telephone ................................................................................................................ 1.25
Agreement to Make Contract ........................................................................................................... 1.26
Key Terms ..................................................................................................................................... 1.26
Test Questions................................................................................................................................ 1.26
Practical Problems .......................................................................................................................... 1.28
3. Competence of Contracti ng Parti es ....................................................................................... 1.31–1.39
Learning Objectives ........................................................................................................................ 1.31
Minor ........................................................................................................................................... 1.31
 Persons of Unsound Mind................................................................................................................ 1.36
Persons Disqualified by Other Laws................................................................................................... 1.36
Key Terms ..................................................................................................................................... 1.37
Test Questions................................................................................................................................ 1.37
Practical Problems .......................................................................................................................... 1.38
4. Consent : Nature and Requi si tes .......................................................................................... 1.40–1.56
Learning Objectives ........................................................................................................................ 1.40
Consent ......................................................................................................................................... 1.40
Free Consent .................................................................................................................................. 1.40
Coercion ........................................................................................................................................ 1.41
Undue Influence ............................................................................................................................ 1.42
Fraud ............................................................................................................................................ 1.44
Misrepresentation ........................................................................................................................... 1.47
Mistake ......................................................................................................................................... 1.49
Key Terms ..................................................................................................................................... 1.53
Test Questions................................................................................................................................ 1.54
Practical Problems .......................................................................................................................... 1.55
5. Consi derati on ...................................................................................................................... 1.57–1.65
Learning Objectives ........................................................................................................................ 1.57
Meaning of Consideration ................................................................................................................ 1.57
Essential Elements of Consideration .................................................................................................. 1.58
Adequacy of Consideration .............................................................................................................. 1.60
Exceptions : No Consideration, No Contract ....................................................................................... 1.60
Key Terms ..................................................................................................................................... 1.62
Test Questions................................................................................................................................ 1.62
Practical Problems .......................................................................................................................... 1.64
6. Legali ty of the Object and Consi derati on .............................................................................. 1.66–1.71
Learning Objectives ........................................................................................................................ 1.66
Consideration and Object ................................................................................................................ 1.66
Unlawful Consideration and Object ................................................................................................... 1.66
Public Policy .................................................................................................................................. 1.67
Key Terms ..................................................................................................................................... 1.70
Test Questions................................................................................................................................ 1.70
Practical Problems .......................................................................................................................... 1.71
7. Voi d Agreements ................................................................................................................. 1.72–1.81
Learning Objectives ........................................................................................................................ 1.72
Agreements in Restraint of Marriage ................................................................................................ 1.72
Agreements in Restraint of Trade..................................................................................................... 1.73
Agreements by Way of Wager .......................................................................................................... 1.77
Agreements to do an Impossible Act ................................................................................................ 1.79
Key Terms ..................................................................................................................................... 1.79
Test Questions................................................................................................................................ 1.80
Practical Problems .......................................................................................................................... 1.80
8. Conti ngent Contracts............................................................................................................ 1.82–1.85
Learning Objectives ........................................................................................................................ 1.82
Meaning of Contingent Contract ...................................................................................................... 1.82
 Essential Characteristics .................................................................................................................. 1.83
Rules Regarding Performance........................................................................................................... 1.83
Contingent Contract and Wagering Agreement ................................................................................... 1.84
Key Terms ..................................................................................................................................... 1.85
Test Questions................................................................................................................................ 1.85
Practical Problems .......................................................................................................................... 1.85
9. Perf ormance of Contracts ..................................................................................................... 1.86–1.95
Learning Objectives ........................................................................................................................ 1.86
Meaning and Types of Performance .................................................................................................. 1.86
Responsibility for Performance......................................................................................................... 1.88
Demand for Performance ................................................................................................................. 1.89
Reciprocal Promises ........................................................................................................................ 1.90
Time and Place for Performance ....................................................................................................... 1.92
Appropriation of Payments.............................................................................................................. 1.93
Key Terms ..................................................................................................................................... 1.94
Test Questions................................................................................................................................ 1.94
Practical Problems .......................................................................................................................... 1.95
10. Di scharge of Contracts ....................................................................................................... 1.96–1.105
Learning Objectives ........................................................................................................................ 1.96
Meaning and Modes of Discharge ..................................................................................................... 1.96
Agreement ..................................................................................................................................... 1.96
Performance of Contract .................................................................................................................. 1.98
Lapse of Time ................................................................................................................................ 1.98
Operation of Law............................................................................................................................ 1.98
Material Alteration ......................................................................................................................... 1.99
Supervening Impossibility of Performance......................................................................................... 1.99
Breach ........................................................................................................................................ 1.102
Key Terms ................................................................................................................................... 1.103
Test Questions.............................................................................................................................. 1.104
Practical Problems ........................................................................................................................ 1.104
11. Quasi-Contracts................................................................................................................ 1.106–1.110
Learning Objectives ...................................................................................................................... 1.106
Concept of Quasi-Contracts............................................................................................................ 1.106
Types of Quasi-Contracts ............................................................................................................... 1.106
Key Terms ................................................................................................................................... 1.109
Test Questions.............................................................................................................................. 1.109
Practical Problems ........................................................................................................................ 1.110
12. Remedi es f or Breach of Contract ...................................................................................... 1.111–1.124
Learning Objectives ...................................................................................................................... 1.111
Types of Remedies ........................................................................................................................ 1.111
Rescission .................................................................................................................................... 1.111
Damages...................................................................................................................................... 1.112
Liquidated Damages and Penalty .................................................................................................... 1.116
Quantum Meruit .......................................................................................................................... 1.118
Specific Performance..................................................................................................................... 1.119
 Injuct ion ..................................................................................................................................... 1.119
Restitution ................................................................................................................................... 1.120
Key Terms .................................................................................................................................... 1.120
Test Questions............................................................................................................................... 1.121
Practical Problems ......................................................................................................................... 1.122
13. Contracts of Agency ......................................................................................................... 1.125–1.144
Learning Objectives ....................................................................................................................... 1.125
Meaning and Nature of Agency ....................................................................................................... 1.125
Agent and Servant ........................................................................................................................ 1.126
Agent and Bailee........................................................................................................................... 1.126
Kinds of Agents ............................................................................................................................ 1.126
Creation of Agency ....................................................................................................................... 1.127
Extent of Agent’s Authority ........................................................................................................... 1.130
Delegation of Agent’s Authority ..................................................................................................... 1.131
Agency and Contracts with Third Persons ........................................................................................ 1.132
Personal Liability of Agent ............................................................................................................. 1.134
Rights of an Agent ....................................................................................................................... 1.135
Duties of an Agent ........................................................................................................................ 1.137
Termination of Agency .................................................................................................................. 1.138
Key Terms .................................................................................................................................... 1.141
Test Questions............................................................................................................................... 1.141
Practical Problems ......................................................................................................................... 1.142

Section 2
THE SALE OF GOODS ACT, 1930
1. General Pri nci ples................................................................................................................. 2.3–2.12
Learning Objectives .......................................................................................................................... 2.3
Meaning of Contract of Sale .............................................................................................................. 2.3
Essentials of Contract of Sale ............................................................................................................ 2.3
Distinction between Sale and Agreement to Sell .................................................................................. 2.4
Sale Distinguished from Other Contracts............................................................................................. 2.5
Formation of Contract of Sale............................................................................................................ 2.7
Goods ............................................................................................................................................. 2.7
Perishing of Goods ........................................................................................................................... 2.8
Price ............................................................................................................................................... 2.9
Some Important Legal Terms ........................................................................................................... 2.10
Key Terms ..................................................................................................................................... 2.10
Test Questions................................................................................................................................ 2.11
Practical Problems .......................................................................................................................... 2.12
2. Condi ti ons and Warranti es .................................................................................................. 2.13–2.24
Learning Objectives ........................................................................................................................ 2.13
Meaning of Conditions and Warranties.............................................................................................. 2.13
Difference Between Condition and Warranty ...................................................................................... 2.14
Express and Implied Conditions and Warranties ................................................................................. 2.15
 Doctrine of Caveat Emptor .............................................................................................................. 2.20
Key Terms ..................................................................................................................................... 2.21
Test Questions................................................................................................................................ 2.21
Practical Problems .......................................................................................................................... 2.22
3. Transf er of Ownershi p ......................................................................................................... 2.25–2.35
Learning Objectives ........................................................................................................................ 2.25
Importance of Transfer of Ownership ............................................................................................... 2.25
Rules Regarding Transfer of Ownership ............................................................................................. 2.25
Transfer of Title by Non-owners....................................................................................................... 2.28
Key Terms ..................................................................................................................................... 2.31
Test Questions................................................................................................................................ 2.31
Practical Problems .......................................................................................................................... 2.32
4. Perf ormance of a Contract of Sale ........................................................................................ 2.36–2.42
Learning Objectives ........................................................................................................................ 2.36
Duties of Seller and Buyer .............................................................................................................. 2.36
Delivery ........................................................................................................................................ 2.36
C.I.F. Contract ................................................................................................................................ 2.40
Key Terms ..................................................................................................................................... 2.41
Test Questions................................................................................................................................ 2.41
Practical Problems .......................................................................................................................... 2.42
5. Remedi al Measures ............................................................................................................. 2.43–2.51
Learning Objectives ........................................................................................................................ 2.43
Meaning of Unpaid Seller ................................................................................................................ 2.43
Rights of Unpaid Seller ................................................................................................................... 2.43
Key Terms ..................................................................................................................................... 2.48
Test Questions................................................................................................................................ 2.49
Practical Problems .......................................................................................................................... 2.50

Section 3

THE INDIAN PARTNERSHIP ACT, 1932

1. General Pri nci ples................................................................................................................. 3.3–3.13
Learning Objectives .......................................................................................................................... 3.3
Meaning of Partnership ..................................................................................................................... 3.3
Essential Characteristics of Partnership................................................................................................ 3.3
Partnership and Joint Hindu Family Firms........................................................................................... 3.5
Partnership and Co-ownership ............................................................................................................ 3.6
Partnership and Club ........................................................................................................................ 3.6
Tests of Partnership .......................................................................................................................... 3.7
Registration of Partnership Firms ....................................................................................................... 3.8
Key Terms ..................................................................................................................................... 3.11
Test Questions................................................................................................................................ 3.11
Practical Problems .......................................................................................................................... 3.13
2. Formati on of Partnershi p .................................................................................................... 3.14–3.25
Learning Objectives ........................................................................................................................ 3.14
 Partnership Deed ............................................................................................................................ 3.14
Position of Minor ........................................................................................................................... 3.15
Duration of Partnership .................................................................................................................. 3.16
Classes of Partners .......................................................................................................................... 3.16
Reconstitution of a Firm................................................................................................................. 3.18
Rights of Outgoing Partner ............................................................................................................. 3.20
Partnership Property ....................................................................................................................... 3.21
Key Terms ..................................................................................................................................... 3.22
Test Questions................................................................................................................................ 3.22
Practical Problems .......................................................................................................................... 3.24
3. Ri ghts and Li abi li ti es of Partners........................................................................................ 3.26–3.34
Learning Objectives ........................................................................................................................ 3.26
Relations of Partners with One Another ............................................................................................ 3.26
Rights of Partners .......................................................................................................................... 3.26
Duties of Partners........................................................................................................................... 3.28
Relations of Partners with Third Parties ............................................................................................ 3.29
Key Terms ..................................................................................................................................... 3.32
Test Questions................................................................................................................................ 3.32
Practical Problems .......................................................................................................................... 3.33
4. Di ssoluti on of Partnershi p Fi rms ......................................................................................... 3.35–3.42
Learning Objectives ........................................................................................................................ 3.35
Dissolution of Partnership and Dissolution of Firm ............................................................................ 3.35
Modes of Dissolution of Firm........................................................................................................... 3.35
Consequences of Dissolution ............................................................................................................ 3.37
Rules for the Settlement of Accounts after Dissolution ...................................................................... 3.38
Public Notice ................................................................................................................................. 3.39
Key Terms ..................................................................................................................................... 3.40
Test Questions................................................................................................................................ 3.40
Practical Problems .......................................................................................................................... 3.41

Section 4
ELEMENTS OF COMPANY LAW
1. Company and Its Forms ......................................................................................................... 4.3–4.28
Learning Objectives .......................................................................................................................... 4.3
Int roduct ion .................................................................................................................................... 4.3
Scope And Aplication ............................................................................................................................ 4.4
Administration of Companies Act ...........................................................................................................4.4
Definition ............................................................................................................................................4.5
Essential Characteristics of Company ................................................................................................... 4.6
Illegal Association ............................................................................................................................ 4.8
Lifting Up of the Corporate Veil ...................................................................................................... 4.10
Kinds of Companies ........................................................................................................................ 4.13
Difference Between Company and Partnership .................................................................................... 4.17
Distinction Between Private Company and Public Company ................................................................. 4.19
 Privileges of Private Company .......................................................................................................... 4.20
Advantages of Company .................................................................................................................. 4.22
Disadvantges of Company ................................................................................................................ 4.22
Conversion of a Private Company into a Public Company .................................................................... 4.23
Conversion of a Public Company into a Private Company .................................................................... 4.23
Conversion of One Person Company (OPC) into Public or Private Company ............................................ 4.24
The Securities and Exchange Board of India(SEBI) ............................................................................. 4.24
Service of Documents ..................................................................................................................... 4.25
Key Terms ..................................................................................................................................... 4.26
Test Questions................................................................................................................................ 4.26
Practical Problem ........................................................................................................................... 4.28
2. Formati on of a Company ...................................................................................................... 4.29–4.38
Learning Objectives ........................................................................................................................ 4.29
Promotion ..................................................................................................................................... 4.29
Incorporation ................................................................................................................................ 4.33
Commencement of Business ............................................................................................................ 4.35
Key Terms ..................................................................................................................................... 4.35
Test Questions................................................................................................................................ 4.36
Practical Problems .......................................................................................................................... 4.37
3. Memorandum of Associ ati on ................................................................................................ 4.39–4.50
Learning Objectives ........................................................................................................................ 4.39
Meaning of Memorandum................................................................................................................ 4.39
Clauses of Memorandum.................................................................................................................. 4.39
Form of Memorandum ..........................................................................................................................4.41
Alteration of Memorandum of Association ........................................................................................ 4.41
Doctrine of Ultra-Vires.................................................................................................................... 4.46
Key Terms ..................................................................................................................................... 4.48
Test Questions................................................................................................................................ 4.48
Practical Problems .......................................................................................................................... 4.49
4. Arti cles of Associ ati on ......................................................................................................... 4.51–4.59
Learning Objectives ........................................................................................................................ 4.51
Meaning of Articles ........................................................................................................................ 4.51
Form of Model Articles .........................................................................................................................4.51
Contents of the Articles................................................................................................................. .4.52
Binding Effects of Memorandum and Articles.................................................................................... 4.52
Alteration of Articles...................................................................................................................... 4.55
Distinction Between Memorandum of Association and Articles of Association ....................................... 4.55
Constructive Notice of the Memorandum and Articles ........................................................................ 4.56
Doctrine of Indoor Management ...................................................................................................... 4.56
Key Terms ..................................................................................................................................... 4.57
Test Questions................................................................................................................................ 4.57
Practical Problems .......................................................................................................................... 4.59
5. Prospectus........................................................................................................................... 4.60–4.73
Learning Objectives ........................................................................................................................ 4.60
Need and Meaning .......................................................................................................................... 4.60
Requirements as to Prospectus......................................................................................................... 4.60
Contents of Prospectus ................................................................................................................... 4.62
 Effect of Omissions and Mis-statements in a Prospectus...................................................................... 4.63
Deposits from Members or Public ..................................................................................................... 4.64
Public Offer of Scurities of be in Dementerialized Form...................................................................... 4.65
Advertisement of the Prospectus...................................................................................................... 4.66
Shelf Prospectus............................................................................................................................. 4.66
Red Herring Prospectus ................................................................................................................... 4.66
Listing of Securities ....................................................................................................................... 4.66
Book Building ............................................................................................................................... 4.68
Credit Rating .......................................................................................................................................4.69
Insider Trading ....................................................................................................................................4.71
Key Terms .................................................................................................................................. ...4.71
Test Questions................................................................................................................................ 4.72
Practical Problems .......................................................................................................................... 4.73
6. Allotment of Shares ............................................................................................................. 4.74–4.78
Learning Objectives ........................................................................................................................ 4.74
General Principles of Allotment ....................................................................................................... 4.74
Statutory Restrictions on Allotment of Securities .............................................................................. 4.85
Return of Allotment ...................................................................................................................... 4.76
Key Terms ..................................................................................................................................... 4.76
Test Questions................................................................................................................................ 4.77
Practical Problems .......................................................................................................................... 4.77
7. Shares and Share Capi tal ................................................................................................... 4.79–4.100
Learning Objectives ........................................................................................................................ 4.79
Meaning of Share ........................................................................................................................... 4.79
Nature of Share ............................................................................................................................. 4.79
Kinds of Shares.............................................................................................................................. 4.80
Share Capital ................................................................................................................................. 4.81
Shareholders’ Voting Rights............................................................................................................. 4.81
Commission on Issue of Shares and Debentures ................................................................................. 4.81
Purchase by Company of its Own Shares ........................................................................................... 4.82
Loans by Company for Purchase of Own Shares ................................................................................. 4.82
Power of Company to Purchase (Buy-Back) Own Securities.................................................................. 4.83
Transfer to Capital Redemption Reserve ............................................................................................ 4.83
Issue of Sweat Equity Shares ........................................................................................................... 4.84
Issue of Shares at Premium ............................................................................................................. 4.84
Prohibition on Issue of Shares at Discount ....................................................................................... 4.85
Issue and Redemption of Preference Shares....................................................................................... 4.85
Further Issue of Capital .................................................................................................................. 4.86
Conversion of Loans into Capital ..................................................................................................... 4.87
Share Certificate............................................................................................................................. 4.87
Stocks........................................................................................................................................... 4.88
Transfer of Shares .......................................................................................................................... 4.88
Transfer of Security in case of Listed Company ................................................................................. 4.93
Transfer when Company is under Winding Up ................................................................................... 4.93
Transmision of Shares..................................................................................................................... 4.94
Nomination of Shares ..................................................................................................................... 4.94
Lien on Shares............................................................................................................................... 4.95
Dematerialization ........................................................................................................................... 4.95
Key Terms ..................................................................................................................................... 4.96
Test Questions................................................................................................................................ 4.97
Practical Problems .......................................................................................................................... 4.99
 8. Membershi p of Company ................................................................................................. 4.101–4.113
Learning Objectives ...................................................................................................................... 4.101
Members without being Shareholders ............................................................................................. 4.101
Shareholders without being Members ............................................................................................. 4.102
Modes of Acquiring Membership .................................................................................................... 4.102
Termination of Membership ........................................................................................................... 4.103
Persons who can be Members ......................................................................................................... 4.104
Joint Shareholders ....................................................................................................................... 4.106
Rights of Members ....................................................................................................................... 4.106
Liability of Members..................................................................................................................... 4.104
Calls on Shares ............................................................................................................................ 4.107
Advance Payment of Calls ............................................................................................................. 4.108
Forfeiture of Shares ...................................................................................................................... 4.108
Surrender of Shares...................................................................................................................... 4.110
Test Questions.............................................................................................................................. 4.111
Practical Problems ........................................................................................................................ 4.112
9. Meeti ngs and Proceedi ngs ............................................................................................... 4.114–4.135
Learning Objectives ...................................................................................................................... 4.114
Kinds of Meetings ........................................................................................................................ 4.114
Statutory Meeting ........................................................................................................................ 4.114
Annual General Meeting................................................................................................................ 4.115
Extraordinary General Meeting ....................................................................................................... 4.116
Meetings Convened by National Company Law Tribunal .................................................................... 4.117
Class Meetings.............................................................................................................................. 4.118
Other Meetings ............................................................................................................................ 4.118
Procedures and Requisites of Valid General Meeting.......................................................................... 4.119
Resolutions.................................................................................................................................. 4.125
Passing of Resolutions by Postal Ballot ........................................................................................... 4.127
Minutes of the Proceedings ........................................................................................................... 4.128
Key Terms ................................................................................................................................... 4.129
Test Questions.............................................................................................................................. 4.129
Practical Problems ........................................................................................................................ 4.131
10. Borrowi ng Powers............................................................................................................ 4.136–4.146
Learning Objectives ...................................................................................................................... 4.136
Extent of Borrowing Powers .......................................................................................................... 4.136
Powers to Give Security ................................................................................................................ 4.136
Charge on Uncalled Capital ............................................................................................................ 4.136
Consequences of Ultra Vires Borrowings.......................................................................................... 4.137
Remedies available to the Lender of Money ..................................................................................... 4.137
Debentures .................................................................................................................................. 4.138
Difference between Debentures and Shares ...................................................................................... 4.141
SEBI Guidelines for Issue of Debt Instruments ................................................................................ 4.142
Charge ........................................................................................................................................ 4.143
Key Terms ................................................................................................................................... 4.145
Test Questions.............................................................................................................................. 4.146
11. Manageri al Personnel and Thei r Remunerati on ................................................................ 4.147–4.154
Learning Objectives ...................................................................................................................... 4.147
Meaning of Managerial Personnel ................................................................................................... 4.147
 Key Managerial Personnel ............................................................................................................... 4.147
Choice of the Managerial Personnel ................................................................................................. 4.148
Overall Limit Managerial Remuneration ........................................................................................... 4.149
Schedule (V) Part (II) Remuneration ............................................................................................... 4.150
Key Terms .................................................................................................................................... 4.153
Test Questions............................................................................................................................... 4.154
12. Accounts, Audi t and Investi gati on ................................................................................... 4.155–4.177
Learning Objectives ....................................................................................................................... 4.155
Books of Account ......................................................................................................................... 4.155
Statutory Books of Account and Statutory Registers......................................................................... 4.156
Financial Statements ..................................................................................................................... 4.161
National Financial Reporting Authority ........................................................................................... 4.164
Corporate Social Responsibility ....................................................................................................... 4.165
Internal Audit .............................................................................................................................. 4.166
Audit and Auditors ....................................................................................................................... 4.166
Cost Records & Cost Audit .............................................................................................................. 4.171
Investigation ................................................................................................................................ 4.172
Key Terms .................................................................................................................................... 4.175
Test Questions............................................................................................................................... 4.176
Practical Problems ......................................................................................................................... 4.177
13. Compromi ses, Arrangements and Amalgamati on .............................................................. 4.178–4.185
Learning Objectives ....................................................................................................................... 4.178
Compromises and Arrangements...................................................................................................... 4.178
Reconstruction & Amalgamation ..................................................................................................... 4.181
Amalgamation of Companies in Public Interest ................................................................................ 4.183
Preservation of Books and Papers of the Amalgamated Company ......................................................... 4.184
Key Terms .................................................................................................................................... 4.184
Test Questions............................................................................................................................... 4.184
Practical Problems ......................................................................................................................... 4.184

Section 5
BBM BANGALORE QUESTION PAPERS 5.1–5.17
 INTRODUCTORY
LEARNING OBJECTIVES
A caref ul study of thi s chapter wi ll enable you to :
 understand the concept of law;
 differentiate between Law and Mercantile Law;
 identify the different sources of Indian Mercantile Law; and
 explain the meaning of certain key terms.

MEANING OF LAW
The term law refers to rules of conduct enforced by the State to maintain peace and order in the society. Their objective
is to provide security and uniformity by regulating human actions. In the absence of law, life and business will become
a matter of survival not only of the fittest but also of the most ruthless. Since laws are backed by the authority and the
power of the State, they are enforceable against all individuals irrespective of their social status.
It will be appropriate here to give definitions of the term law by some eminent scholars :
“Law is the body of principles recognised and applied by the State in administration of justice.” — Salmond
“A law is a rule of conduct imposed and enforced by the sovereign.” — Austin
“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 inanimate, rational or irrational.” — Blackstone
Thus, law may be defined as the system of rights and obligations which the State enforces.

MEANING OF MERCANTILE LAW

The term ‘Mercantile Law’or ‘Law Merchant’refers to those legal rules which govern and regulate mercantile or business
transactions. These rules, regulations, etc. bring a sense of seriousness and definiteness in business dealings. They provide
for rules regarding the validity of making contracts and their performance. They deal with various types of contracts such
as those relating to partnership, sale of goods, agency, bailment, indemnity and guarantee. Mercantile Law also includes
in its fold the laws relating to the joint stock companies, carriage of goods, insurance, insolvency, etc.

SOURCES OF INDIAN MERCANTILE LAW

The main sources of Indian Mercantile Law are as follows :
(1) Engli sh Mercanti le Law : Indian Mercantile Law is largely based on English Mercantile Law. As a matter of fact,
even after independence, in the absence of provisions regarding any matter of the Indian law, the provisions of
the English law are generally accepted in the Indian Courts.
(2) Statutes of Indi an Legi slatures : Most of the Indian laws are in the form of Acts passed by the Legislatures.
Both the Central Legislatures (i.e., the Parliament) and the state Legislatures are empowered to enact laws
relating to matters which come within their jurisdiction. For example, the Companies Act, 1956 has been enacted
by the Parliament while the different State Legislatures have enacted the Sales Tax Acts applicable to their
respective States.
1.2 The Indi an Contract Act, 1872

(3) Judi ci al Deci si ons : Past judicial decisions

acquire t he force of precedents and are
generally followed by law courts in deciding
similar cases. In our country, the courts
have been divided into three groups : (i)
the Supreme Court, (ii) the High Courts and
(iii) the Sub-ordinate Courts. The Supreme
Court is the final court of appeal. For the
court of same stature, earlier decisions have
only a guiding and persuasive value.
However, for a court of a lower stature, the
decision given by the court of a higher stature regarding the same subject matter is usually taken as having
binding effects.
(4) Customs and Usage : Customs and Usage also play a significant role in regulating business transactions. This
fact has been accepted by many Indian statutes. For example section 1 of the Indian Contract Act states that
‘nothing therein contained shall affect any usage or customs of trade’. Similarly Section 1 of the Negotiable
Instruments Act also provides that ‘nothing therein contain shall affect any legal usage relating to Instruments
in an oriental language1.

––––––––––––––––––––––––––––––––––––– KEY TERMS –––––––––––––––––––––––––––––––––––––

 Law : Rules of conduct enforced by State to maintain peace and order in the society.
 Mercanti le Law : Legal rules which govern and regulate mercantile transactions.

–––––––––––––––––––––––––––––––––– TEST QUESTIONS ––––––––––––––––––––––––––––––––––

Objecti ve Type : Test Your Knowledge
1. State whether each of the following statements is True or False
(i) Laws are framed by the State to maintain peace and order in the society.
(ii) Mercantile Law and Law Merchant are synonymous terms.
(iii) Customs and usages have no role to play in regulating business transactions.
(iv) Past judicial decisions have to be accepted by the law courts while giving decisions in future.
(v) Both the Parliament and State Legislatures have the power to make laws.
[Ans. (i) True; (ii) True; (iii) False; (iv) False; (v) True]
2. Fill in the blanks:
(i) The decisions of a High Court are binding on all the ___________ Courts. (CS Foundation, June 2008)
(ii) Law means a ___________ of rules. (CS Foundation, June 2008)
[Ans. (i) Subordinate (ii) Set]

Essay Type : For Review, Discussion and Practice

1. Explain the meaning of the term ‘law’. Differentiate it from Mercantile Law.
2. State the main sources of Indian Mercantile Law. (CS Foundation, Dec. 2004, June 2011)

1. These Inst ruments are popularly t ermed as ‘Hundis’.