Q.All contracts are agreements but all agreements are not contracts.

Elaborate

Contracts have always been an indispensable part of our lives. Knowingly or unknowingly,
we enter into a contract hundreds of time in a year. Even when we buy candy, we are entering
into an agreement with the shopkeeper. Every time we visit a restaurant or book a cab, we are
entering into a contract. Although the law of contract is developing with time, the
jurisprudence of contract remains the same. We know what a contract is all about but new
situations arise every day and a new question appears in the mind that whether this particular
agreement be regarded as a contract or not!

One of the common perplexities among people is recognizing the difference between a
contract and an agreement. They are frequently used interchangeably. For example, when the
owner of house hands over the rent agreement and says, “Please sign the contract”, this
creates uncertainty whether the document is an agreement or a contract.

We come across ‘contract killers’ in movies who charge money to kill people. Have you ever
thought, ‘Is a contract of killing someone for money, a valid contract?’ or ‘Can the man
giving the contract sue the contract killer in the court of law saying that the other party has
committed a breach of contract by not doing the job even after the payment of money?’.

How is an agreement formed?

To form an agreement, the following ingredients are required:

 Parties: There need to be two or more parties to form an agreement

 Offer/ Proposal: When a person signifies to another his willingness of doing or
omitting to do something with a view to obtain other’s assent. [Section 2(a)]
 Acceptance: When the person to whom the proposal is made signifies his assent
for the same thing in the same sense as proposed by the offeror. [Section 2(b)]
 Promise: When a proposal is accepted, it becomes a promise. [Section 2(b)]
 Consideration: It is the price for the promise. It is the return one gets for his act or
omission. [Section 2(d)]
An agreement is, therefore, a promise or set of promises forming consideration for all the
parties. [Section 2(e)]

Agreement = Promise or set of promises (offer + acceptance) + Consideration (for all the
parties)

If a 7-year-old boy is buying an ice-cream from an ice-cream vendor and giving Rs. 10 in
return, it becomes an agreement. This is because the boy offers to buy ice-cream and the
vendor accepts the offer which makes it a promise. The consideration for both was ice-cream
and money respectively.
How is a contract formed?
A contract is a lawful agreement. In other words, an agreement enforceable by law is a
contract.

Contract = Agreement + Legal enforceability

Or

Contract = Legally enforceable Agreement

Now, the law says that any contract entered with a person below the age of 18 years is not
enforceable. In the above case, the deal between the boy and ice-cream vendor was an
agreement but it cannot be termed as a contract because it is not legally enforceable.

Agreement and Contract: The difference

‘All contracts are agreements but all agreements are not contracts.’ This statement can be
understood from the above Venn diagram. The agreements which are enforceable under the
law of the land become contracts, which are denoted by the inner circle. The outer circle
denotes the agreements which are not contracts. The shaded part includes agreements which
are not enforceable by law and are known as void agreements.

The concept of Voidable contracts: There exist some agreements which are enforceable on
the part of one party but not on the option of other parties. It is on the discretion of that party
if it is willing to enforce the contract or make it non-enforceable i.e. void. The voidable
agreements are therefore both valid and void agreements. The dotted circle of voidable
agreements denotes that they can be termed as void or valid on the discretion of one party
thus covers the area of both valid and void agreements.

For example, if a person is buying a car which is just 3-4 years old and the owner lied about
the year of manufacturing of the car thereby committing fraud. Now, according to the Indian
Contract Act, 1872 fraud makes a contract voidable. Therefore, the buyer is on the discretion
that he can either buy the car or not, whereas the seller is bound by the promise he made.
How does an agreement become a contract?

To make an agreement, a contract, we need to ensure that the following conditions are
fulfilled:

The parties must be competent to contract

The parties entering into the contract are competent to contract when they:

 Have attained the age of majority i.e. 18 years of age,

 Are of Sound mind, and
 Are not expressly disqualified from contracting by the law
At the time of entering into an agreement, if a person is of unsound mind or is disqualified by
law; the agreement is considered to be void. On the other hand, an agreement entered with a
minor is void-ab-initio i.e. void from the very beginning and thus cannot be enforced. For
example, if a seven-year-old boy is buying an ice-cream; although he is entering into an
agreement with the ice-cream vendor, it is not considered as a contract because being a
minor; the party is not competent to contract. (Minor)

Similarly, if Vidya Balan in the movie Bhool Bhulaiya is entering into an agreement at the
time when she is considering herself as Manjulika, the agreement becomes void because of
her unsoundness of mind at the time of entering into the agreement. (Unsound mind)
For example; Mr A is declared as insolvent by the court and the court ordered that he is
disqualified from contracting. Now Mr A buys a flat on instalments and failed to pay any.
The owner of the flat cannot sue him because the contract was void. (disqualified from
contracting)

The consent must be free

The consent can be given expressly by words- oral or written or impliedly by gestures or
surrounding circumstances. (Section 13)

For example, A offered B to sell his car for Rs. 50,000. A asked him to come to the house in
the evening with cash if he is willing to buy the car. When B came to the house with cash in
the evening, it shows his implied consent to buy the car.

But, the consent so given by the person must be free and not influenced by any outside force.
The consent of a person is said to be free unless it is not caused by any of the acts mentioned
below: (Section 14)

 Coercion (Section 15)

 Undue Influence (Section 16)
 Misrepresentation (Section 18)
 Fraud (Section 17)
 Mistake (Section 20, 21, 22)
In the above-mentioned cases, the agreement becomes voidable on the part of the aggrieved
party because the consent was not free.

Some examples are given for a better understanding of the concept:

Coercion: If Mr Batman gets some property sale agreement signed by Mr Superman under a
threat that he will kill his mother, Mr Superman is on the discretion that he can enforce the
agreement or not because his consent was obtained under coercion.

Undue Influence: The teacher asked the students that whosoever pays her Rs. 200, that
student will get full marks in the viva. Now the teacher was in a fiduciary relationship with
the students and was taking undue advantage of such a position. Thus, any such contract
made by the teacher to student is voidable on the part of the students.

Misrepresentation: Mr Lal was willing to buy a car owned by Mr Peela. At the time he was
buying the car, he asked Mr Peela about the colour of the car and said that he wants a pearl
grey car. Mr Peela was an old and illiterate man who was not having much knowledge about
colour differentiation. Mr Peela believed that the car is pearl grey and answered in
affirmative.
Later on, Mr Lal came to know that the car was Metallic grey and not pearl grey. Here, Mr
Peela is liable for misrepresentation and Mr Lal is free to continue the contract or not.

Fraud: If in the above case, Mr Peela was aware of the actual colour of the car but lied to Mr
Lal; than he would have been guilty of fraud and such agreement would have been voidable.

Mistake: If both the parties are under a mistake of fact, the agreement becomes void. But if
any or both of the parties are under a mistake of law, the agreement becomes void. For
example, A and B entered into an agreement of sale of a particular drug. They were not aware
that such a drug is illegal in India. Their agreement is void.

The consideration and the object needs to be lawful

The consideration and object of an agreement are unlawful if it is:

 Forbidden by law
 Of such a nature that if permitted, would defeat the provisions of any law
 Fraudulent
 Involves or implies injury to person or property
 Regarded as immoral or opposed to public policy by the law
If any of the agreement contains abovementioned consideration or object, the agreement
becomes void. For example, entering into an agreement of killing somebody for money is
considered to be void. A person cannot approach the court saying that I have given the money
but the contract killer is not doing the job because the object was something which
is forbidden by law and thus the contract is void.

Similarly, if you are bribing a public officer to get some official papers to you; the papers
might be legal but the consideration you are paying is not lawful as it would defeat the
provisions of Prevention of Corruption Act.

The agreement should not expressly be declared to be void

There are certain kinds of contracts which are expressly declared by The Indian Contract Act,
1872 to be null and void. The following are some of the agreements which are not
enforceable in the eyes of law:

 Agreements without consideration except it is written and registered or is a

promise to compensate for something done or is a promise to pay a debt barred by
limitation law.
 Agreements in restraint of marriage
 Agreements in restraint of trade
 Agreements in restraint of legal proceedings
  Agreements void for uncertainty
 Agreements by way of wager
 Agreements contingent on an impossible event
 Agreements to do impossible act
Those agreements are void which are based on any of the subjects mentioned above. There is
no liability for not enforcing the contract and thus, the conditions of the contract are not
binding upon any of the party.

For example, if Devdas asks Paro not to get married for her entire life then he will give her
new dress and shoes in return; it cannot be considered as a valid contract because the
agreement is made in restraint of marriage.

Similarly, if the agreement is made to not to work for the entire life in exchange for a new
flat, it will not be considered as a valid contract as it is in restraint of trade.

Also, if a father enters into an agreement with his son that the father will get him a new
bicycle if the son scores 105% in his board exams. It will be considered a void agreement
because it is an agreement to do an impossible act.

The above-mentioned conditions are required to be fulfilled in order to make an agreement

legally enforceable. The agreement becomes void if any of the mentioned conditions are left
unfulfilled except in the case of free consent where the agreement becomes voidable instead
of void and giving the party, whose consent was not free at the time of entering into the
contract, the discretion to continue the contract or not.

Conclusion
The Indian Contract Act, 1872 can be interpreted to cover all kinds of possible agreements
and contracts. But, in several cases, it depends upon the facts and circumstances whether an
agreement is a contract or not. In a nutshell, all the agreements which are legally enforceable
become contracts. This concludes that there can be agreements which are not contract but
there can be no contracts which are not agreements.

Q.What is Contract of Agency?

Agency can be defined as the relationship between two persons, wherein a person has the
authority to act on behalf of another, bind him/her into a legal relationship with the third
party. There are two parties in a contract of agency – principal and agent.
Contract of Agency is based on the fact that one person cannot perform all the transactions
and so he can appoint another perform or act on his behalf.
Q.Who is a Principal?
Any person who employs another person to perform an act and who is being represented by
another person in dealing with the third party is the Principal.
Q.Who is an Agent?
 A person employed by the Principal, to act on his behalf, represent him in the dealings with
the third party and also to bring him into a contractual relationship with the third party, is
called an Agent.
In a contract of agency, the agent is not just the bridge between the principal and the third
party, but he can also make the principal answerable for the acts performed by him. Here it
must be noted that while the agent is acting for the principal, he works in the capacity of
principal.

Q.What are the Characteristics of the Agency?

The basic characteristics of the contract of the agency are discussed as under:

 Legal Binding: The crux of the contract of agency is that the principal is legally bound by
the acts performed by the agent.
 Consideration is not mandatory: There is no legal requirement of consideration, to support
the relationship between the principal and agent.
 Capacity of Principal: One who is legally competent to contract is eligible to employ an
agent, i.e. he should have attained the age of 18 years and of sound mind.
 Authority to contract: Authority to contract is the basic requirement to become an agent. So
a minor can also act as an agent, though he is not having the capacity, however, he can have
the authority to act as agent.
This is due to the fact that an agent initiates a contractual relationship amidst the principal
and third party, and so the contractual capacity of the agent is irrelevant.
Q. How can an Agency be created?
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,

1. 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.
o 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.
o Wife as an agent: 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:
o He has explicitly warned the dealer not to give the goods on credit to his wife, or
o He has explicitly forbidden his spouse to pledge his credit, or
o He has already supplied the mentioned stuff in sufficient quantity to his wife or
o 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.
In a contract of agency, the agent has to establish Privity of Contract, amidst the principal and
the third party. Here Privity of Contract means that no right is conferred or obligations are
imposed on any person who is not a party to the contract.
This means that the party to contract are entitled to sue each other to enforce the rights or
claim damages, but prevents others from doing so.
Parties agreed that the agent will act on behalf & instead of the principal in negotiating &
transacting bus with 3rd persons. 3 types

 Special: hired for an ltd purpose (CPA, attorney)

 General: employer/employee relations (wider affairs corporate lawyer)
 Universal: hired to do everything
Fiduciary: fundamental to agency, means that trust & confidence are involved

 Employer-Employee Relations: An employee is someone whose physical conduct is

not entirely controlled, or subject to control, by the employer. Employees who deal
with third parties are typically deemed to be agents.
 Employer-Independent contractor Relations: an independent contractor is not
controlled by another or subject to another’s control with regard to physical conduct.
He may or may not be an agent. Main determinant here is how much control is
exercised over the contractor.
 Formation of agency relationship:
o Consensual
o Need not be in writing
o No consideration required
 o Principal must have legal capacity to enter into contracts; not necessary for
agent (his power is derived from principal)
o Agency must be for legal purpose
o Agency by agreement: can be written or implied by conduct.
o Power of attorney must be written, can be special (limited) or general
o Agency by ratification: non-agent cuts deal for principal, principal approves
agency by estoppel: if principal causes a 3rd person to believe that another is
his agent, & the third person deals with supposed agent, the principal is
“estopped to deny” the agency relationship.
o Agency by operation of law: spouses, emergencies

Q.What are the duties of an agent?

Agent’s Duties:

o Performance: must use reasonable diligence & skill in performing work

required
o Notification: must notify principal of all matters concerning subject matter of
agency
o Loyalty: actions must be strictly for the benefit of the principal, not in the
interest of the agent or a third party
o Obedience: must follow lawful & clearly stated instructions of the principal
o Accounting: must maintain separate accounts for the principal’s funds & for
the agent’s funds, no intermingling is permitted
 Principal’s Duties:
o Compensation: must pay the agent for services rendered, & do so in a timely
manner
o Reimbursement & indemnification: must reimburse agent that disburses
money at principal’s request. Must compensate (indemnify) agent for any
costs incurred as a result of principal’s failure to perform the contract
o Cooperation: must cooperate with & assist an agent in performing his duties
o Provide safe working conditions
o Agent’s Rights & Remedies: has a corresponding right for every duty of the
principal.
o Normal contract & tort remedies
 Principal’s Rights & Remedies: has contract remedies for breach of fiduciary duties
& tort remedies. Main actions available:
o Constructive trust: imposed by courts when agent withholds monies that
belong to principal, allows principal to get what he deserves
o Avoidance: principal may avoid any contract entered into with agent if agent
breaches agency duties
o Indemnification: principal can be sued by a third party for an agent’s negligent
conduct, & in certain situations the principal can turn around & sue agent for
an equal amount of damages
 Scope of Agent’s Authority:
o Express: given orally or in writing, embodied in that which the principal has
engaged the agent to do
 o Implied: conferred by custom, can be inferred from agent’s position, or is
implied as reasonably necessary means to perform duties
o Apparent: arises when the principal, by either word or action, causes a third
party to reasonably believe that an agent has authority to act, even though
agent has no “actual” (express or implied) authority.
 Emergency Powers: agent may take action necessary to protect interests of principal
in an emergency without principal’s prior approval
 Ratification: express or implied, principal’s affirmation of a previously unauthorized
contract or act
o Liability for contracts:
 Disclosed / Partially disclosed principals: liable to a third party for
contract made by the agent
 Undisclosed principals: agent, not the principal, is liable as a party on
the contract. However, if principal has a duty to perform & fails to do
so, agent is entitled to indemnification by principal if third party seeks
restitution from agent
o Liability for Agent’s Torts: Principal may be liable for agent’s torts if they
result from the following:
 Principal’s own tortious conduct
 Principal’s authorization of tortious act
 Agent’s unauthorized but tortious misrepresentation (if representations
were made within scope of the agency)
 Doctrine of Respondeat Superior: principal-employer is liable for any harm caused to
a third party by an agent-employee in the scope of employment. This doctrine
imposes vicarious liability on the employer.
o Scope of employment: is employee doing what is normally expected of him, is
employee “on the job” from a time & location standpoint, does the employee’s
act benefit the employer
o Liability for employee’s negligence: act causing the injury must have occurred
within the scope of employment, employee going to & from work or to &
from meals is usually considered outside the scope of employment
o Notice of dangerous conditions: employer has assumed knowledge of any
dangerous conditions discovered by an employee & pertinent to employment
situation
 Liability for employee’s intentional torts: if torts committed within scope of
employment
 Liability for Independent Contractor’s Torts: General rule is that the employer is not
liable.
o Test: how much control the employer exerts over the contractor. Exceptionally
hazardous activities (blasting) that are contracted are an exception in that there
is no shield for the employer
 Liability for Agent’s Crimes: General rule is that a principal or employer is not liable
for agent’s or employee’s crime even if agent acted within scope of authority or
employment.

Q.When can an agency be terminated? Give example.

 Termination of an Agency:
 o Lapse of time: agency ends when time period expressed in the agreement
comes to a close, or reasonable time & can be terminated at will by either
party.
o Purpose achieved: if agency was for a particular purpose, it ends upon
completion occurrence of a specific event: e.g., when I get back from vacation,
you no longer handle my affairs
o Mutual agreement: enough said
o Termination by one party: either party has the power to terminate, but may not
have the right to terminate & could be liable for breach of contract.
o Agent’s act of termination is renunciation, principal’s is revocation
o Termination by operation of law: certain events terminate agency
automatically (death, insanity)
o Notice required for termination:
 Principal’s duty to notify third parties who know of the agency.
 Must notify directly if third party has dealt with agent.
 Agent’s actual authority continues until he receives termination notice.
 Agent’s apparent authority continues until third party has been notified.
 If agent’s authority is written, it must be revoked in writing.

Q. Give the Definition of Law and also state its branches.

Law, as it is the command of the Sovereign. Law in its legal sense, as distinguished from
other uses of the term, means those principles and rules that governs and regulates social
conduct and the observance of which can be enforced in courts.

Several definitions of law are as follows:

 “Law is that portion of the established habit and thought of mankind which has gained
distinct and formal recognition in the shape of uniform rules backed by the authority
and power of the Government”- Woodrow Wilson
The State makes law. Violation of State law involves a penalty which is enforced by the
Government through the sovereign power of the State. Whatever is not enforceable is not
law; Laws of State are applicable to all without exception in identical circumstances.

It is neither desirable nor feasible to control all kinds of activities of people through a uniform
set of rules and principles. Civilised societies, therefore, provide and enforce different sets of
rules and guiding principles for different kinds of social behaviour.

Several branches of law are:

 Civil Law
 Business Law
 Constitutional Law
 International Law
 Industrial Law
Q. What is Discharge of contract ?What are the various modes of discharge of a contract?

A contract is said to be discharged when the obligations created by it come to an end.

In other words discharge of contract means ' termination of the contractual relationship
between the parties'. There are various modes of Discharge of Contract, a contract may be
discharged either in a positive way (Positive - by performance) or in negative. (Negative - by
breach or failure to perform contractual obligation by either of the parties).
Discharge of contract -

There are various modes of discharge of a contract which are as follows :

1. By performance
2. By agreement or consent
3. By impossibility
4. By lapse of time
5. By operation of law
6. By breach of contract
1.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. 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.

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-. i.e., 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- i.e., when all or some of the terms of the contract are canceled.

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 fulfillment 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- i.e., 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 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:

A contract may be discharged by operation of law.

It includes discharge by

a) Death
b) Merger
c) Insolvency/ Bankruptcy
d) Unauthorized Alteration of the terms of a written agreement, and
e) Rights and liabilities becoming vested in the same person.
f) Judgement of Court
6. Discharge by breach of Contract:

Breach of contract means failure to perform the contractual obligation by either of the
parties without any lawful excuse. It is a ground for discharge of the contract.

Breach of contract may be -

1) Actual breach, or 2) Anticipatory breach.

1) Actual breach of contract may occur a) at the time when the performance is due, or b)
during the performance of the contract.
2) Anticipatory breach of contract occurs when a party repudiates his liability or obligation
under the contract before the time for performance arrives.

Q.Both the shareholders of the Private Company died in a car accident. Decide whether
Company’s existence also comes to an end.

The Company’s existence is not affected by the death of its shareholders, since the Company
has separate legal entity. This is clearly established in Salomon Vs. Salomon & Co. Ltd, Lee
Vs. Lee Air farming Ltd & Kandoli tea Co. Ltd. cases. Further the Company has having
perpetual succession.

Q. In a private Company, after the death of Mr.X entire capital of the company is held by his
son Y. Decide, whether Y can continue business of the co. with single shareholder.

In such a situation, Y can continue to carry on the business of the Company but, in
accordance with the provisions of Sec.45 of the Act, if the same position continues for more
than six months, then y will become personally liable for all the liabilities of the Company
contracted after six months from the date he becomes only shareholder.
Q. The number of members in a public Company became reduced to six on the 10th
September, 1988, the Company incurs trade debts on 11th September, 1988, 2nd February,
1989 and 17th March, 1989. How far are the remaining six members liable for the debts?

The remaining six members are liable for the debts incurred after 6 months of the reduction
in the number of members below the statutory minimum specified in Sec. 45 of the
Companies Act, 1956 i.e., for debt contracted on 17th March, 1989.

Q.Define a Company.

According to Prof. Haney :- A company is an artificial person created by law, having

separate entity, with a perpetual succession and a common seal.

According to Justice James:- company is an association of persons united for a common

object.

Section 2 (2()) of the Companies Act, 2013 define a company as “a company incorporated
under this Act or under any previous company law.” A company incorporated under any
previous company law means an existing company.

Q. State any four features of a Company?

A few significant characteristics of a company are as follows:

1. Artificial Legal Person: A company is an artificial person as against a natural

person. It is created by a process of law.
2. Separate Legal Entity: A Company has a separate and distinct legal entity from its
shareholders/ members. It can enter into contracts, sue and be sued in its own name by
its members as well as outsiders.
3. Limited Liability: The liability of the members for the debts of the company is
limited to the amount unpaid on their shares howsoever heavy losses the company
might have suffered.
4. Transferability of Shares: The shares in a public company are freely transferable
subject to conditions prescribed by its articles. However, a private company has to
restrict the right to transfer its shares by its articles.
Q.What do you mean by perpetual succession of company?

Perpetual Succession : A company is a legal entity with perpetual succession. It is capable of

surviving beyond the lives of its members. It never dies. Because, law creates it and law
alone can dissolve Its existence is even not affected by the change, lunacy, retirement, death
or insolvency of its members. It may be noted that even in case of OPC (One Person
Company), the feature of perpetual succession has been ensured. For this purpose, the Act
provides that memorandum of OPC shall indicate the name of other person (Nominee) with
his consent. This person shall in the event of subscriber’s (Member’s) death or his incapacity
to contract, become member of the company. I Section 31 } Thus, even a OPC has the
characteristics of perpetual succession. Members may come and go but a company goes on
forever and remains the same entity. The company may “be compared with a flowing risE
where the water keeps on changing continuously sfll the identity of the remains the same.
ntus, a company has perpetual existence, irrespective of changes in its membership.

Q. What is meant by Separate Legal Entity of Company?

A has a legal entity distinct and separate from its constituent members (shareholders). It is an
autonomous body, self-controlling self-governing. It has the right to own and transfer the title
to poverty in any way it It can enter into contracts, open a bank account in its own name, sue
and be sued by its members as well as outsiders. A member can not claim any ownership
rights in the assets of the company either individually or jointly during the existence of the
company or in its winding up. The property of the company is to be used for benefit of the
company and not for the personal benefit of the shareholders. principle of separate legal
entity of the company was judicially recognized by the House of Lords in 1867 in the case of
Oakes Vs. Turquand and Hording (1867). It was then held that since an incorporated
company has a legal personality distinct from that of its members, a creditor of such a
company has remedy only against the company and not against an individual shareholder.
Thus, a creditor of an incorporated company has remedy only against the company for his
debts and not any of the members of whom it is composed. The position was further clarified
by the House of Lords in the famous case of Salomon v. Salomon Co. Ltd. (1897).

Q. What is meant by the term ‘Body Corporate?

Sub-section (11) of Section 2 of the companies Act, 2013 defines the expression ‘body
corporate’ as follows, “body corporate” or “corporation” includes a company incorporated
outside India, but does not include

1. A co-operative society registered under any law relating to co-operative societies

2. Any other body corporate (not being a company as defined in the Act) which the
Central Government may notify. Thus, the words ‘body corporate’ are not equivalent
to the words ‘incorporated company’. An .incorporated company is a body corporate
but many bodies corporate are not incorporated companies. The expression ‘body
corporate’ or ‘corporation’ is, thus, wider than the word ‘company’. The term ‘body
corporate’ includes the following:
3. Foreign companies.
4. Corporations formed under Special Act of Central Government or State Government.
5. Public Financial Institutions under Section 2 (72), e.g., LIC, CICI,t IDBI, GIC, Power
Finance Corporation Ltd., Rural Electrification brporation Ltd., Infrasfructure
Development Finance Company Ltd., etc.
6. Nationalized Banks
7. Limited Liability Partnership formed and registered under the Limited Liability
Partnership Act, 2008.
8. One Person Company.
Q.What is meant by ‘Corporate Veil’? (Corporate Law Short Question)

One of the fundamental principles of company law is that a company has personality that is
distinct from that of its shareholders. once a company is formed and registered under the Act,
it is a separate legal entity distinct from its members. It can sue and be sued in visit own
name.This rule was laid down by the House of Lords in Salomon v. Salomon & Co., in 1897
in which it was held that even if one individual held almost all the shares and debentures in a
company, and if the remaining shares were held on trust for him, the company is not to be
regarded as a mere shadow that individual. The principle of separate entity is regarded as a
curtain, a veil, or shield between the company and its members, thus protecting the later from
the liability of the former. The veil is impassable as an iron curtain. This theory of corporate
entity is still the basic principle on which the whole law of corporations is based.

Question 7 :- Describe the case ‘Salomon Vs. Salomon and Co. Ltd.

Ans:- In Salomon Vs. Salomon and Co. Ltd., Salomon was holding substantially the entire
share capital in his name and to fulfill the statutory requirement of at least 7 members, his
wife, a daughter and four sons joined him to form the company. The company ran into
financial difficulties after sometime and went into liquidation. The creditors claimed priority
over the debentures stating that Mr. Salomon and Salomon and Co. Ltd. were one and the
same person, the company was only a facade to defraud the innocent creditors. It was held
that the company had an independent existence distinct from its members. Therefore, Mr.
Salomon was entitled to be paid his dues first as a secured creditors.

Q. How many minimum and maximum number of members in a-private company?

Except One Person Company, the minimum number of members required to form a private
company is two and maximums number Of members is 200, excluding members who are or
were in the employment Of the company. It may also be noted that if two or more persons
hold shares jointly, such joint shareholders shall be treated a single member.

Q. How many minimum and maximum number of members in a public company?

A public Company must leave a oh 7 members. However, there is no restriction, on the,

number! of members in a public company.

Q.What is meant by ‘Private Company?

Company: as defined by section 2 (68) means a company having a minimum paid-up share
capital as may be prescribed and by its articles of association

(i) Restricts the right of the members of the company to transfer its shares

(ii) Except in case of one person company, limits the number of its members to 200,
excluding members who are or were in the employment of the company.

(iii) Prohibits any invitation to the public to subscribe for any securities of the company name
of a private company must end with words ‘Private Limited’.

It is worth mentioning that prior to the commencement of the Companies (Amendment) Act,
2015, there existed a requirement of minimum paid up share capital I lakh for incorporation
of a private company. The Amendment Act has omitted this requirement so that there may be
ease of doing business.

Q.What is meant by ‘Public Company? (Corporate Law Short Question)

Public Company : According to Section 2 (71) of the Companies Act, 2013, ‘Public
Company’ means a company which is not a private company. It can invite the public to
subscribe its shares and does not have any restriction on the transfer of shares. The minimum
number of persons required to form a company is seven and there is no maximum limit.
Subsidiary of a public company whether constituted as a private company or public company
shall be regarded as public company. It is worth mentioning that prior to the commencement
of the Companies (Amendment) Act, 2015, there existed a requirement of minimum paid up
share capital of 5 lakhs for incorporation of a public company. The Amendment Act has
omitted this requirement which would mean ease in incorporation of companies.

Q. What are the kinds of company on the basis of members?

On the basis of the number of members, a registered company may

(i) Private Company

(ii) Public Company ; And

(iii) One Person Company

Q. What is meant by ‘One Person Company?

One person company (OPC) is a new concept in India under the Companies Act, 2013.
Section 2 (62) of the Companies Act, 2013 defines that Person Company” means a company
which has only one person as a member. One person company is required to identify in its
name in bracket as “One Person Company” after its name. Formation (Section 3 (1)1. A One
Person Company (OPC) may be formed for any lawful purpose by one person, as a private
company, by subscribing his name to a Memorandum of AssoCiation and complying with
the requirements of the Act in respect of registration. Section 3 (1) further provides that the
Memorandum of Association of One Person Company shall indicate the name of the other
person who shall become the member of the company in the event of subscriber’s death or his
incapacity to contract due to insanity, etc. A written consent of such person would be
required to be filed with the Registrar of Companies at the time of incorporation along with
memorandum and articles. Such person can withdraw his consent. The name of such person
can aiso be changed by the member at any time. Any change in the name of the person
nominated by the member shall be intimated to the Registrar within such time and in such
manner as may be prescribed. Any change in the name of the nominee shall not be deemed to
be a change in the memorandum of the company.

Q. What do you mean by ‘Holding Company?

Holding Company : “Holding company in relation to one or more companies means a
company of which such companies are subsidiary (Section 2 (46)1 companies.” Thus, a
holding company is the company which has one or more subsidiary company/companies. In
simple words, where a company has direct or indirect control over another company or other
companies, the controlling company is known as the holding company. Thus a company
which controls other company or companies is called a holding company.

Q. What do you mean by ‘Subsidiary Company?

Subsidiary Company : The companies Act states that a subsidiary company means a
company in which the holding company has control in any of the following ways :

(i) Control the composition of the Board of directors.

(ii) Exercises control on more than one-half of its total share capital either at its own or
together with one or more of its subsidiary companies. It should be noted that a company
shall be deemed to be a subsidiary company of a holding company even if the control is
exercised by the (Section 2 (87)1 another subsidiary of the holding company.

Q. What do you mean by ‘Government Company?

Government Company (Section 2 (45)1 : A government company means any company which
has at least •51% of the paid-up share capital held either by the Central Government, or by
any State Government or Governments or partly by the Central Government and partly by
one or more State Governments, A Government Company also includes a company which is
a subsidiary company of a Government Company. Such companies are formed to enable the
Government to undertake business ventures and to Combine the operating flexibility of
privately-organized companies with the advantage of State regulation and control in the
public interest..

Q.What do you mean by ‘Chartered Companies?

Chartered Companies : If a company is incorporated under a special charter granted by the

King or Queen, it is called a chartered company. The powers and nature of business of a
chartered company are defined by the charter which incorporated it. The Companies Act did
not apply to them. For example, The East India Company and The Bank of England was
incorporated by the grant Of a special royal charter. Such companies are found only in
England and find no place in India after independence.

Q. What do you mean by ‘Listed Companies?

Listed Companies : Listed company means a company which has any of its securities listed
on any recognized stock exchange. (Section 2 (52)1 A listed company or a company
intending to list its securities on a recognized stock exchange can issue a prospectus for
inviting public for subscription of its securities. A listed company is regulated by the
provisions of Companies Act and the rules and regulations framed under it by the Ministry of
Corporate Affairs (MCA). However, all such companies are also liable to comply with all the
regulations notified by the Securities Exchange Board of India (SEBI) more particularly with
respect to the issue and transfer of securities (Section 24 (1)1 and non-payment of dividend.
All other matters relating to prospectus, return of allotment, redemption of preference shares
and any other matter specifically provided in this Act shall be governed by the Central
Government, the Tribunal or (Explanation to Section 24 (1)1 the Registrar, as the case may
be.

Q.What do you mean by Unlisted Companies?

Unlisted Companies : Unlisted companies are those companies which do not have any of its
securities listed on any recognized stock exchange. They source their capital from their
members and the friends and relatives of their members and directors. Such companies are
not empowered to issue prospectus or red herring prospectus for inviting public for
subscription of their securities. Such companies are not liable to comply with any regulations
issued by the Securities and Exchange Board of India or SEBI. But they are liable to comply
with the rules and guidelines issued by the Central Government or MCA. Their all matters are
administered by the Central Government i.e. MCA.

Q. What do you mean by foreign companies?

As per Section 2 (42) of the Companies Act, 2013 ‘foreign company’ means a company
incorporated outside India which-

(a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode, and

(b) Conducts any business activity in India in any other manner. However, where not less
than 50 per cent of the paid-up share capital of a company incorporated outside India and
having an established place of business in India, is held by one or, more citizens of India or
by one or more bodies corporate incorporated in India, whether singly or in the aggregate,
such company shall be regarded as if it were a company incorporated in (Section 379) India.

Q. What do you mean by Illegal Association?

A body of persons for the achievement of some common object is called an “association”.
An illegal association is an association of more than the prescribed number of persons which
carries a business without being registered under any law. According to Section 464 of the
Companies Act, 2013 and Rule 10 of the Companies (Miscellaneous) Rules, 2014, an
association consisting of more than 50 persons carrying on any business for profits shall be
termed as ‘illegal association’ if it is not registered as a company under the Companies Act or
is not formed according to the provisions of under any other Indian Law. Section 464 further
provides that the number of members which may be prescribed under the rules shall not
exceed 100. (It may be noted that at present the number prescribed is 50).

Q. Distinguish between a Private and a Public Company?

 Distinction between a Private and a Public Company Following are the main points of
distinction between a private and a public company:

1. Minimum number of members. The minimum number of members required to form a

private company is 2, whereas for a public company at least 7 members are needed.
2. Maximum number of members. The maximum number of members in a public
company is unlimited. But a privage companycannot have more than 200 members
excluding the past and present employees of the company.
iii. Invitation to public. A private company is prohibited to invite public to subscribe to its
share capital. it need not issue a prospectus. But a public company can invite the public to
subscribe to its shares or purchase its shares.

1. Transferability of shares. Articles of Association of a private company impose

restrictions on the transfer of shares. But the shares of a I Section 2 (68) public
company are freely transferable.

Q:- Explain the procedure of conversion of a private company into a public company?

Ans:- Conversion of a Private Company into a Public Company A private company may
convert into a public company by following the provisions Of Section 14 Of the Companies
Act, 2013. The provisions are:

(a) Passing of a special resolution to alter its articles of association to exclude the restrictions
of private company viz. transfer-ability of shares, maximum number of members and
prohibition on inviting the public for subscription of securities.

(b) Filing of altered articles of association along with a copy of special resolution in the
prescribe form (INC 27) to the concerned Registrar of Companies within •15 days of passing
of resolution. The company shall cease to be a private company as from the date of alteration
of articles of association.

Q. Explain the procedure of conversion of a public company into a private company?

Ans:- Conversion of a Public Company into a Private Company A public company may
convert into a private company by following the provisions of Section 14 of the Companies
Act, 2013. The provisions are:

(a) Passing Of a special resolution to alter its articles of association to include the restrictions
of private company viz. transferability of shares, maximum number of members and
invitation to the public for subscription of securities.

(b) Approval of the Tribunal (not yet enforced as the Tribunal has not yet been constituted.
Till that the approval from the Central Government is to be taken).

(c) Filing of a copy of order of the Tribunal approval, copy of the altered articles of
association along with a copy of special resolution in the prescribed form to the concerned
Registrar of Companies within 15 days of approval from the Tribunal. The company shall
become a private company from the date of approval from the Tribunal.

Q. Who is a promoter?

Promoter : Promoter is a person who conceives the idea of starting a business, plans the
formation of a company and actually brings it into existence. He may be said to be “the father
of the company who sees the prospects of gain in a business which he wishes to set up, and
believes that he can persuade others too to think as he does.” A promoter ‘is ‘one who
undertakes to form a company with reference to a given object and who takes the necessary
steps to accomplish that purpose. Thus, a promoter discovers, formulates and assembles a
business proposition• and brings about a company into existence for its development. A
promoter may be an individual, a family, a firm, an association of person, a company or even
the government.

Section 2 (69) of the companies Act, 2013 defines the term (a) Who has been named as such
in a prospectus or is identified by promoter as a person .

(a) the company in the annual return; or

(b) Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or

(c) In accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act. This shall, however not apply to a person who is acting merely
in a professional capacity.

This definition is purely a legal one. It ‘does not reveal the nature and role of a promoter in
formation Of a company. It therefore, becomes imperative to go through certain other
definitions of the term ‘promoter’. A few other definitions are as under : Justice C. Cockburn
described a promoter as ‘ ‘one who undertakes to form a company with reference to a given
project and to set it going, and who takes the necessary steps to accomplish that purpose. ‘
According to Palmer, “A person who originates a scheme for. the formation of the company,
has the Memorandum and the Articles prepared, executed and registered and finds the first
directors, settles the terms of preliminary contracts and prospectus (if any) and makes
arrangement for advertising and circulating the Prospectus and placing the capital is a
promoter.

Q.Explain the functions of a Promoter.

The Promoter performs the following functions:

1. a) To conceive an idea of starting a business

2. b) To collect the requisite number of persons,
3. c) To decide about the name, object and capital,
4. d) To get the documents of the proposed company,
 5. e) Consent of directors,
6. f) To enter into preliminary contracts with the vendors,
7. g) To arrange for filing the necessary documents with the registrar, 48. Preparation
and filing of prospectus,
8. h) To arrange the minimum subscription.
Q What preliminary steps are taken for incorporation of a company?

The promoters have to go through the following preliminary steps before applying for
incorporation Of the proposed company:

(i) To ascertain from the Registrar of Companies whether the name by which the new
company is to be started is available or not.

(ii) To obtain a Letter of Intent (to be converted later on into an Industrial License) under
Industries (Development and Regulation) Act, 1951, if the company’s business comes within
the purview of this Act.

(iii) To fix up. underwriters, brokers, solicitors, auditors and signatories of the memorandum.

(iv) To get Memorandum and Articles of Association prepared and printed. After taking the
above mentioned preliminary steps, the promoter makes an application for registration of the
company to the Registrar of Companies.

Q. Which documents are filed with the registrar for registration of a company?

The following documents are to be filed to Registrar of Companies (ROC) to incorporate a

company.

(i)The memorandum and articles of the company duly signed by all the subscribers to the
memorandum in such manner as may be prescribed;

(ii) A declaration in the prescribed form as to compliance with legal requirement;

(iii) An Affidavit from each of the subscribers to the memorandum and from persons named
as the first directors, if any, in the articles;

(iv) The address for correspondence till its registered office is established;

(v) The particulars of every subscriber to the memorandum along with identity, as may be
prescribed;

(vi) The particulars of the persons mentioned in the articles as the first directors of company
including proof of identity as may be prescribed;
(vii) The particulars of the interests of first directors in such form and manner as may be
prescribed.

Q. What do you mean by ‘Memorandum of Association?

The Memorandum of Association is the most important document of the company. In fact, it
is the foundation on which the structure of a company is based. It is the charter of a company
which contains the fundamental conditions upon which alone the company can be
incorporated. It defines the company’s relations with the outside world. It lays down the
powers and objects of a company and the scope of operations beyond which cannot do
anything. Any action outside the scope of the Memorandum of Association will be ultra vires
(beyond powers) of the company and so void.

Q.Briefly explain the contents/clauses or subject-matter of Memorandum of

Association.

Section 4 of Companies Act, 2013 prescribes the contents of the memorandum.

Memorandum of Association contains the following clauses :

(i) Name clause

(ii) Registered office clause or Situation clause,

(iii) Object clause,

(iv) Liability clause,

(v) Capital clause,

(vi) Association clause or Subscription clause.

Q. Is it compulsory to prepare/frame the ‘Memorandum Of Association’ for each and

every company? Explain.The memorandum of association is one of the basic documents
which is required to be originally framed by every company and filed with the Registrar for
its registration. A company can not be registered without a memorandum of association and
that is why it is sometimes called a life giving document. It sets out the constitution of
company and as such it is the foundation upon which the structure of a company is build. As
per Section 4(6), the memorandum of a company shall be in the respective forms specified in
Tables A, B, C, D and E in Schedule I annexed to the Companies Act, 2013 as may be
applicable to the Company.

Q.How the registered office of a company can be changed from one place to another
place in the same state?
 (a) Changing Place within the same state under the jurisdiction of the same Registrar : In
such case, passing of special resolution by the company authorising the change is required
and notice Of said change along with the copy of special resolution shall be given to the
Registrar within 15 days of the change, who shall record the same.

(b) Shifting of the registered office within the same state from the jurisdiction of one
Registrar of Companies to the jurisdiction of another Registrar of companies requires passing
of special resolution by the company and confirmation by the Regional Director on an
application made by the company in this regard.

Q. What is Articles of Association?

Articles of Association is an important document of a company.It contains rules, regulations

and bye-laws for the internal administration of the company. Articles regulate the internal
management of the company and also govern the relationship between the company and its
constituent members by prescribing their rights and obligations. In short, the articles of
association of a company contain the rules relating to the management of its intemal affairs.
Section 2(5) of the Companies Act, 2013 defines articles of association as follows: “Articles
means the articles of association as originally framed or as altered from time to time in
pursuance of any previous company law or of this Act.”