Other Laws Inter Ca: Book - Ii

Inter CA
OTHER LAWS
BOOK - II
MESSAGE TO STUDENTS
ABOUT THE BOOK

This book has been compiled to help students for their Law paper. To make studying the subject
easier, the study material of this subject has been organized into two exhaustive volumes,
ensuring students will not have to refer to any other books while preparing for the subject.
BOOK I: COMPANY LAW
BOOK II: OTHER LAWS
Contents of the book How to use this book

 Chapter wise distribution of marks of  In the lecture, the faculty will follow
previous examinations from May 2018 this book during concept and topic
onwards (1st attempt of CA Inter). explanation. Hence, it is mandatory
 Comprehensive explanation of all for students to bring this book to
concepts and topics to be covered based class with them during the relevant
on the ICAI study material. (ICAI theory lectures.
is fully covered here)  This book is to be thoroughly read
 Chapter summary at the end of each and revised at home for preparing
chapter, highlighting the key points in the subject.
the topic.  Once the explanation is complete
 List of Case Laws, Latin terms at the in class, the faculty will discuss the
end of each chapter – provided for quick chapter based questions at length in
reference during study. class.
 Questions & Answers of all chapters  Students will be solving the question
taken from all ICAI materials (ICAI Study in the class and the faculty will also
Material, ICAI Revision Test Papers, ICAI provide detailed inputs on how the
Mock Test Papers, all Exam Questions, questions must be answered as per
MCQs from all sources including ICAI the ICAI guidelines.
Sample Questions)
(ALL Attempts from May’18 to May’21
Mock Test Papers, RTPs, Question Papers
are covered, Nov’21 RTP is also covered)
Note: The book does not cover Nov 2021 &

May 2022 Mock Test Papers, May 2022 RTPs,
Nov 2021 Question Paper & ICAI Suggested
Answer as these materials are issued by the
ICAI subsequent to the printing of this book.
Students are advised to download such
materials from the ICAI website www.icai.
org as and when it becomes available.
1
IMPORTANCE OF WRITING PRACTICE
You will hear your JKSC teachers repeat this regularly in the class, yet we must make this
point here:
If you wish to score your best marks in this subject, you will have to invest time and effort
in writing practice.
READING THE NOTES OR THE BOOKS TEN TIMES OVER IS NOT A REPLACEMENT FOR WRITING
PRACTICE.
The law subject, when discussed and taught in class, is easy to understand and students
enjoy the subject quite a bit. This gives them the false confidence that they will find the
subject easy to prepare for the exam – all they have to do is read and they will remember
everything.
The fact is each topic in this subject is vast and has to be attempted with certain parameters.
The information that you have about the topic must fit a predefined framework to help
the examiner realize that you know your subject well. You cannot merely string together
whatever facts you can remember while writing, in some random order.
This knowledge and understanding of how the answers are to be presented, what ICAI is
expecting of you from this paper, and how much of the topic you actually know can only
come when you PHYSICALLY WRITE the practice papers.
HOW TO STUDY EFFECTIVELY FOR THE EXAM?
 Once the theory of chapter has been completed and the faculty has discussed the
Q&A, it is time for you to study the theory, go through the notes and start doing
writing practice.
 Do not make pointers or charts or short forms of the notes. These have already been
provided in the book and the summary of the chapter is already provided at the end
of every chapter. Practicing a chapter like this will not help you answer the questions
in the final exam. Make sure you write the answers in the descriptive format just
like you are expected to write in the finals. This will help you understand what you
are forgetting, how to organize your content and help you manage your time, while
attempting the paper.
 How to learn Latin Terms
- These terms are well highlighted in the content of the chapters and a list of
such terms used in a given chapter is printed at the end of each chapter for your
reference.
- Students are advised to write the page number where the term appears in the
chapter alongside this quick reference list.
- This will make it easy to check the context of the technical term during revisions.
2
TYPES OF QUESTIONS ASKED IN EXAM & HOW TO ANSWER THEM?
 The paper is divided in 2 parts: 30 Marks Multiple Choice Questions and 70 Marks
Descriptive Questions.
 The descriptive questions in the exam can either be of theoretical or practical nature.
While there are multiple ways / approaches in which both types of questions can be
answered, the following approach is considered ideal:
• For theory questions: Students must write the answer in point format to make it
easy for the examiner to rapidly scan the answer.
• For practical / case study questions: It is recommended that students write these
answers in 3 paragraph formats. The flow of content in these answers should be
as follows:
o 1st paragraph: Write the relevant law and case law (if any)
o 2nd paragraph: Write the situation in the question and how it is related to the
legal provision.
o 3rd paragraph: Write the final conclusion.
 Presenting your answers in these formats enables the examiner to understand how
much you know and your clarity of thought, at a glance. A comprehensive answer
that is well structured and presented can only be written in the final paper if you have
practiced the same - in writing, regularly during your study time.
 What is expected in your answers
1) Concept explanation of the topic with all relevant content
2) You must quote Case Laws in the exam, use Legal and Latin Terms – this is
imperative for scoring good marks.
 Students must note that endlessly repeating one point in different words is not going
to help them get the desired marks. Only thorough preparation perfected by writing
practice and self-evaluation will help students in achieving the scores they want.
In conclusion, these books have everything you need to prepare for the CA Inter Corporate
& Other Laws paper. You do not need anything further in terms of reference material or
additional paper samples. We hope you will make the best use of this carefully compiled
study material and achieve success in your endeavours.
We wish you a very happy study time.
BEST OF LUCK!
JKSC
3
INDEX
Message to Students................................................................... 01
1 About The Book........................................................................................ 01
Importance of writing practice.................................................................. 02
How to study effectively for the exam?.......................................................02
Types of questions asked in exam & how to answer them?......................... 03
2 Chapter-wise marks distribution of Previous Exams..................04
OTHER LAWS
The Indian Contract Act, 1872.....................................................05-82
3 Unit 1: Contract of Indemnity and Guarantee.............................................05-15
Unit 2: Bailment and Pledge......................................................................16-31
Unit 3: Agency...........................................................................................32-48
4 The Negotiable Instruments Act, 1881.......................................83-148
5 The General Clauses Act, 1897....................................................149-183
6 Interpretation of Statutes.............................................................184-221
Revision Questions.......................................................................222-264
The Indian Contract Act, 1872...................................................................223-239
7 The Negotiable Instruments Act, 1881.......................................................240-246
The General Clauses Act, 1897..................................................................247-255
Interpretation of Statutes..........................................................................256-264
8 Past Exam Question Papers..........................................................265-302

Chapter-wise marks distribution of Previous Exams
Topic Name May’18 Nov’18 May’19 Nov’19 Nov’20 Jan’21

1. Part I: The Companies
Act, 2013
Unit 1: Preliminary 6 10 9 4 10
Unit 2: Incorporation - 6 - 5 3 5
of Company and other
Matters Incidental
thereto
Unit 3: Prospectus 6 17 6 4 10
and Allotment of
Securities
Unit 4: Share Capital 13 2 5 10 8 10
and Debentures
Unit 5: Acceptance of 6 6 2 6 6 7
Deposits by Company
Unit 6: Registration of 6 6 2 5 4
Charges
Unit 7: Management & 19 14 16 4 4 8
Administration
Unit 8: Declaration 6 10 7 5 8 5
and Payment of
Dividend
Unit 9: Accounts of 10 7 7 8 6 3
Companies
Unit 10: Audit and 6 6 3 6 6 6
Auditors
78 84 57 57 55 54
Part II: Other Laws
1. The Indian Contract 15 13 12 12 11 12
Act, 1872
2. The Negotiable 13 13 10 10 13 10
Instruments Act, 1881
3. The General Clauses 10 10 5 7 8 7
Act, 1897
4. Interpretation of 10 10 6 6 6 6
Statutes
48 46 33 35 38 35
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The Indian Contract Act,1872
Chapter 1
Introduction
In CPT/ CA Foundation you have studied Indian Contract Act, 1872, from Section 1 to 75.
Sections 76 to 123 were sections related to Sale of Goods which were repealed from this
Act and Sale of Goods Act, 1930 was formed. In this chapter we will study from Section
124 to Section 238 divided in following 3 units:
Unit 1: Contract of Indemnity and Guarantee
Unit 2: Bailment and Pledge
Unit 3: Agency
UNIT 1: CONTRACT OF INDEMNITY AND GUARANTEE

INDEMNITY
1.1: Meaning of Indemnity Contract (Section 124)

• As per Section 124, indemnity contract is a contract, by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by
the conduct of any other person, is called a contract of indemnity.

• To indemnify means to compensate or make good the loss.
The contract of indemnity is entered into with the object of
protecting the promisee against anticipated losses.

• The person who promises to make good the loss is called ‘indemnifier’ and the
person whose loss is to be made good is called the ‘indemnified’ or ‘indemnity-
holder.
• However, the above definition of indemnity restricts the scope of contracts of
indemnity in as much as it covers only the loss caused:
(i) By the conduct of the promisor himself, or
(ii) By the conduct of any other person.
Thus, loss occasioned by the conduct of the promisee, or accident, or an act of
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God is not covered.

• A contract of Fire Insurance or Marine Insurance is always a contract of indemnity.
But there is no contract of indemnity in case of contract of Life Insurance.
• Indemnity Contract is a contingent contract. But it is like any other contract may
be express or implied. A contract of indemnity is like any other contract and must,
therefore, fulfil all the essentials of a valid contract, e.g., consideration, free consent,
competency of parties, lawful object, etc.
• Example 1: Akshay contracts with his company Aarav Ltd, who funded his further
education, that after he returns India after completing his studies at University of
Cambridge, he will serve the Company for a period of 5 years. If Akshay fails to
return to India, he will have to reimburse the Company. It is a contract of indemnity.
Example 2 : Vivek , a shareholder of a company lost his share certificate. He applied
for the duplicate. The company agreed to issue the same on the term that Vivek will
compensate the company against the loss where any holder produces the original
certificate. Here, there is contract of indemnity between X and the company.
• Indemnifier cannot sue third person unless there is an assignment in his favour.
1.2 Rights of indemnity holder (Section 125)

• The promisee i.e., indemnity- holder acting within the scope of his authority is
entitled to recover from the promisor i.e., indemnifier the following rights:
(a) All damages which he may be compelled to pay in any suit
(b) All costs which he may have been compelled to pay in bringing/ defending the
suit and
(c) All sums which he may have paid under the terms of any compromise of suit.
• It may be understood that the rights contemplated under section 125 are not
exhaustive. The indemnity holder/ indemnified has other rights besides those
mentioned above. If he has incurred a liability and that liability is absolute, he is
entitled to call upon his indemnifier to save him from the liability and to pay it off.
• The Indian Contract Act, 1872, is silent on the time of commencement of liability of
indemnifier, however, on the basis of judicial pronouncements it can be stated that
the liability of an indemnifier commences as soon as the liability of the indemnity-
holder becomes absolute and certain.
• Please note that the Indian Contract Act is silent about the rights which the
Indemnifier has on carrying out his promise to indemnify. But they are similar to the
rights of a surety under section 141 of the Indian Contract Act.
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GUARANTEE
1.3 Meaning of Guarantee Contract (Section 126)

• ‘A contract of guarantee’ is a contract to perform the promise, or discharge the
liability, of a third person in case of his default.
• The person who gives the guarantee is called the ‘surety’, the person in respect of
whose default the guarantee is given is called ‘principal debtor’, and the person to
whom the guarantee is given is called ‘creditor’.
• From the above definition, it is clear that in a contract of guarantee there are, in
effect three contracts:
(i) A principal contract between the principal debtor and the creditor
(ii) A secondary contract between the creditor ad the surety.
(iii) An implied contract between the surety and the principal debtor whereby
principal debtor is under an obligation to indemnify the surety; if the surety is
made to pay or perform.
• Example: Where C requests A to lend 5,000 to B and guarantee that C will repay the
amount within the agreed and time and that on C failing to do so, he will himself
pay A, there is a contract of guarantee.
• Essentials of a valid Guarantee:
1. Existence of a principal debt.
2. Benefit to principal debtor is sufficient consideration, but past consideration is
no consideration for a contract of guarantee.
3. Existence of a liability: There must be an existing liability or a promise whose
performance is guaranteed. Such liability or promise must be enforceable by
law. The liability must be legally enforceable and not time barred.
4. Consent of surety should not be obtained by misrepresentation or concealment
of a material fact.
5. Can be oral or written.
6. If the co-surety does not join, the contract of guarantee is not valid
1.4 Consideration for Guarantee (Section 127)

• As per Section 127 of the Act, no actual consideration is required for contract of
guarantee. In other words, anything done, or any promise made, for the benefit of
the principal debtor, may be a sufficient consideration to the surety for giving the
guarantee.
• Example: B requests A to sell and deliver to him goods on credit. A agrees to do
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so, provided C will guarantee the payment of the price of the goods. C promises to
guarantee the payment in consideration of A’s promise to deliver the goods. This is
a sufficient consideration for C’s promise.
1.5 Nature of Surety’s Liability (Section 128)

• The liability of the surety is co-extensive with that of the principal debtor unless it
is otherwise provided by the contract.
• The term “co-extensive with that of principal debtor” means that the surety is liable
for what the principal debtor is liable. Where a debtor cannot be held liable on
account of any defect in the document, the liability of the surety also ceases.
• Liability of surety is of secondary nature as he is liable only on default of principal
debtor. His liability arises immediately on the default by the principal debtor.
• The Creditor has a right to sue the surety directly without first proceeding against
principal debtor if the agreement specifies.

1.6 Types of Guarantee (Section 129 to 131)
Specific guarantee Continuing guarantee
1. Specific guarantee
When a guarantee is given in respect of a single debt or specific transaction and is to
come to an end when the guaranteed debt is paid or the promise is duly performed,
it is called a specific guarantee.
A specific guarantee once given is irrevocable. Even the death of a surely does not
result in revocation or termination of guarantee. Surety’s legal successors shall
continue to remain liable up to the value of the assets inherited by them.
2. Continuing guarantee (Section 129)

A guarantee which extends to a series of transactions is called a continuing
guarantee.
Example: A guarantees payment to B, a spice dealer, to the amount Rs.25000 for
any spice he may supply to C. B supplies C with spice the value of Rs.25000, and C
pays B for it. Afterwards, B supplies spice to the value of Rs.5000. C fails to pay B.
The guarantee given by A was a continuing guarantee and accordingly he is liable B
to the extent of 5000.
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A continuing guarantee can be revoked as to future transactions in the following manner:

(1) By Notice to the creditor (Section 130): A continuing guarantee may at any time be
revoked by the surety, as to future transactions, by notice to the creditor.
Example: A guarantees payment to B, a trader, for goods sold to C up to 10,000
for one year. B supplies goods to C for 4000 in the first three months. A revokes his
guarantee by sending a notice. Here A shall not be liable for any goods supplied to
C after his revocation, but A is liable to B for 4,000 on default of C.
(2) By death of surety (Section 131): The death of the surety operates in the absence of
any contract to the contrary, as to revocation of a continuing guarantee so for as
regards future transactions.
The estate of deceased surety is, however, liable for those transactions which had
already taken place during the lifetime of the deceased. Surety’s estate will not be
liable for the transactions taking place after the death of surety even if the creditor
had no knowledge of surety’s death
(3) By novation [Section 62]: The surety under original contract is discharged if a fresh
contract is entered into either between the same parties or between the other
parties, the consideration being the mutual discharge of the old contract.
1.7 Discharge of Surety

A surety is said to be discharged when his liability comes to an end.
Section133 Section 134 Section 135 Section 139

Variation in terms of By release or Discharge If creditor fails
contract between the discharge of of surety to perform his
principal debtor and principal debtor when creditor duty, surety is
creditor without surety’s compounds with, discharged.
consent gives time to, or
agrees not to sue,
principal debtor
1. Variation in terms of contract between the principal debtor and creditor without
surety’s consent (Section 133):
• Where there is any variance in the terms of contract between the principal
debtor and creditor without surety’s consent, it would discharge the surety in
respect of all transactions taking place subsequent to such variance.
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Example: Ajit becomes surety to Chintan for Bhairav’s conduct as a manager

in Chiintan’s bank. Afterwards, Bhairav and Chintan contract, without Ajit’s
consent, that Bhairav’s salary shall be raised, and that he shall become
liable for one-fourth of the losses on overdrafts. Bhairav allows a customer
to overdraw, and the bank loses a sum of money. Ajit is discharged from his
surety ship by the variance made without his consent, and is not liable to make
good this loss.
• But if the variation is not substantial or material or which is beneficial to the
surety will not discharge him of his liability.

Case law: : M.S Anirudhan v Thomco’s Bank Ltd., the surety guaranteed the
repayment of loan provided by the bank to the principal debtor of only upto `25,000.
Subsequently, since the bank was willing to provide loan only upto `20,000, the
principal debtor reduced the amount to `20,000 in the guarantee form and without
intimation to the surety gave it to the bank which was then accepted. On default by
the principal debtor, the court held that the surety’s liability was not discharged as
the alteration was beneficial to him and not substantial.
2. By release or discharge of principal debtor (Section 134): The surety is discharged if

the creditor:
(i) Enters into a fresh/ new contract with principal debtor; by which the principal
debtor is released, or
(ii) Does any act or omission, the legal consequence of which is the discharge of
the principal debtor.
3. Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor (Sector 135): A contract between the creditor and the principal
debtor, by which the creditor makes a composition with, or promises to give time to,
or promises not to sue, the principal debtor, discharges the surety, unless the surety
assents to such contract.
(i) Composition: If the creditor makes a composition with the principal debtor,
without consulting the surety, the latter is discharged. Composition involves
variation of the original contract, and, therefore, the surety is discharged.
(ii) Promise to give time: It is one of the duties of the creditor towards the surety
not to allow the principal debtor more time for payment.
(iii) Promise not to sue: If the creditor under an agreement with the principal debtor
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promises not to sue him, the surety is discharged. But there is a difference
between promise not to sue and “forbearance to sue.” A promise not to sue
is an engagement which ties the hand of the creditor. Forbearance to sue is
explained in Section 137.
4. Creditor fails to perform his duty (Section 139): It is the plain duty of the creditor not
to do anything inconsistent with the rights of the surety. A surety has a right to his
indemnity from the principal debtor, after paying off the creditor. If the creditor’s act
or omission deprives the surety of the benefit of this right, the surety is discharged.
Example: Manoj contracts to build a bungalow for Nita for a given sum, to be paid by
instalments as the work reaches certain stages. Pramila becomes surety to Nita for
Manoj’s due performance of the contract. Nita, without informing Pramila, prepays
the last two instalments to Manoj. Pramila is discharged by this prepayment.
Case law: : In State bank of Saurashtra Vs Chitranjan Rangnath Raja, bank granted
a loan on the security of the stock in the godown. The loan was also guaranteed by the
surety. The goods were lost from the godown on account of the negligence of the bank
officials. The surety was discharged to the extent of the value of the stock so lost.
1.8 Non-Discharge of Surety

The surety is not discharged in the following cases:
Section136 Section 137 Section 138

Surety is not discharged Mere forbearance on the part of the Where there are co-
when agreement made creditor to sue the principal debtor sureties, a release
with third person to give does not in the absence of any by the creditor of
time to principal debtor. provision in the guarantee to the one of them does
contrary, discharge the surety. not discharge the
Example: Bhavin owes to Chirag other; neither does
a debt guaranteed by Ayan. The it free the surety so
debt becomes payable. Chirag does released from his
not sue Bhavin for a year after the responsibility to the
debt has become payable. A is not other sureties.
discharged from his surety ship.
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1.9 Rights of Surety
Rights against the Rights against the

Principal Debtor Creditor
A. Rights against the Principal Debtor

(a) Rights of subrogation (Section 140): Where, a
guaranteed debt has become due, or default of
the principal debtor to perform a guaranteed duty
has taken place, the surety, upon payment or
performance of all that he is liable for, gets all the
rights which the creditor had against the principal
debtor. This right is known as right of subrogation. It means that on payment
of the guaranteed debt, or performance of the guaranteed duty, the surety
steps into the shoes of the creditor.
(b) Implied promise to indemnify surety (Section 145): In every contract of

guarantee there is an implied promise by the principal debtor to indemnify the
surety. The surety is entitled to recover from the principal debtor whatever sum
he has rightfully paid under the guarantee, but no sums which he has paid
wrongfully.
Example: Paras is indebted to Shashank, and Suneet is surety for the debt.
Shashank demands payment from Suneet, and on his refusal sues him for the
amount. Suneet defends the suit, having reasonable grounds for doing so, but
is compelled to pay the amount of the debt with costs. He can recover from
Paras the amount paid by him for costs, as well as the principal debt.
B. Rights against the Creditor

(a) Surety’s right to benefit of creditor’s securities (Section 141): A surety is entitled
to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of surety ship is entered into, whether
the surety knows of the existence of such security or not; and, if the creditor
loses, or, without the consent of the surety, parts with such security, the surety
is discharged to the extent of the value of the security.
Example: Chinmay gives `500,000 loan to Priyam, on the guarantee of Arvind.
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Chinmay has also a further security for the `500,000 by a mortgage of Priyam’s
furniture. Chinmay cancels the mortgage. Priyam becomes insolvent, and
Chinmay sues Arvind on his guarantee. Arvind is discharged from liability to
the amount of the value of the furniture.
(b) Right to set off: If the creditor sues the surety, for payment of principal debtor’s
liability, the surety may have the benefit of the set off, if any, that the principal
debtor had against the creditor.
(c) Right to share reduction: The surety has right to claim proportionate reduction
in his liability if the principal debtor becomes insolvent.
1.10 Invalid Guarantee (Section 142 To 144)

(a) Guarantee obtained by misrepresentation invalid (Section 142):
Any guarantee which has been obtained by means of misrepresentation made by
the creditor, or with his knowledge and assent, concerning a material part of the
transaction, is invalid.
(b) Guarantee obtained by concealment invalid (Section 143) :
Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.
Example: John engages Tony as a clerk to collect money for him, Tony fails to account
for some of his receipts, and John in consequence calls upon him to furnish security
for his duly accounting. Anthony gives his guarantee for Tony’s duly accounting.
John does not inform Anthony about Tony’s previous conduct. Tony afterwards
makes default. The guarantee is invalid.
(c) Guarantee on contract that creditor shall not act on it until co¬-surety joins (Section
144): Where more than 1 surety is required, guarantee given by only 1 surety is
invalid until others join.
1.11 Contribution of Co-Sureties

When a debt is guaranteed by two or more sureties they are called as to co-sureties.
They are liable to contribute as agreed towards the payment of the guaranteed debt.
Rules for Co-Sureties: -

(1) Co- sureties liable to contribute equally (Section 146): Where there are two or more
co-sureties for the same debt or duty and the Principal debtor makes a default, the
co-sureties in absence of any contract to contrary are liable to contribute equally
13
to the extent of default. This principle applies, whether the liability arises under the
same or different contracts, with or without the knowledge of each other.
Example: S1, S2, S3 are co-sureties to C for a sum of Rs.3000 lent to P. P makes a
default and S1, S2, S3 are liable amongst themselves to contribute Rs.1000 each.
(2) Liability of co-sureties, bound in different sums (Section 147): Where the co-sureties
have agreed to guarantee different sums, they have to contribute in the agreed
ratio.
(3) Sureties’ liability towards other co-sureties (Section 138): Creditor may sue any
one of the co-sureties or he may release any of the co-sureties from the liability.
However, this does not free the surety so released from his liability towards the
other co-sureties.
(4) Mutual agreement between co-sureties (Section 132): Any understanding/mutual
agreement between debtors interse that one of them only shall be liable as a surety
will not affected the rights of the creditor in any way even if the creditor knew the
arrangement between the debtors.
1.12 Distinction between Indemnity and Guarantee
Point of distinction Contract of Indemnity Contract of Guarantee

Number of parties/ Parties There are only two parties There are three parties
to the contract namely the indemnifier creditor, principal debtor
(promisor) and the and surety.
indemnified (promisee).
Nature of liability The liability of the The liability of the surety is
indemnifier is primary and secondary as the primary
independent liability is that of the
principal debtor.
Time of liability The liability of the Liability is already in
indemnifier arises only existence but specifically
on the happening of a crystallizes when principal
contingency. debtor fails.
Time to Act The indemnifier need not Surety must act by extending
necessarily act at the guarantee at the request of
request of indemnified. debtor.
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Right to sue third party Indemnifier cannot sue a Surety can p r o c e e d

third party for loss in his own against principal debtor
name as there is no privity in his own right because
of contract. Such a right he gets all the right of a
would arise only if there is creditor after discharging
an assignment in his favour. the debts.
Purpose Reimbursement of loss For the security of the
creditor
Competency to contract All parties must be In the case of a contract of
competent guarantee, where a minor
to contract is a principal debtor, the
contract is still valid.
Number of Contracts Only one original and There are 3 contracts made
independent contract between-
between indemnifier and • Creditor and principal
indemnified. debtor
• Creditor and Surety
• Surety and Principal
debtor
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UNIT 2: BAILMENT AND PLEDGE

BAILMENT
1.13 Meaning of Bailment

The word “Bailment” has been derived from the French word “ballier” which means “to
deliver”.
• Definition under Section 148: Bailment is defined under
Section 148 as “A contract whereby goods are delivered by
one person to another for some purpose, that the goods
shall, when the purpose is over be returned or disposed
off according to directions of the person delivering the
goods.”
• The person delivering the goods is called the “bailor”. The
person to whom they are delivered is called the “bailee”
1.14 Essential elements of Bailment

The essential elements of a contract of bailment are—
1) Contract: Bailment is based upon a contract. The contract may be express or implied.
No consideration is necessary to create a valid contract of bailment. Bailment is an
exception to Section 25 No Consideration-No contract.
2) Delivery of goods: It involves the delivery of goods from one person to another for
some purposes. Bailment is only for moveable goods and never for immovable
goods or money. The delivery of the possession of goods is of the following kinds:
(i) Actual Delivery: When goods are physically handed over to the bailee by the
bailor. Example: Delivery of a mixer grinder for repair to repair shop.
(ii) Symbolic Delivery: When there is a delivery of a thing in token of a transfer of
something else. Example: Delivery of the key of a car to a workshop dealer for
repair of the car
(iii)
Constructive Delivery: Where delivery is made by doing anything that has
the effect of putting goods in the possession of the bailee or of any person
authorized to hold them on his behalf.
3) Purpose: The goods are delivered for some purpose. The purpose may be express or implied.
4) Possession:
• In bailment, possession of goods changes. Change of possession can happen
by physical delivery or by any action which has the effect of placing the goods
in the possession of bailee.
16
• The change of possession does not lead to change of ownership. In bailment,

bailor continues to be the owner of goods as there is no change of ownership.
• Where a person is in custody without possession he does not became a bailee.
For example, servants of a master who are in custody of goods of the master
do not become bailees. Similarly, depositing ornaments in a bank locker is not
bailment, because ornaments are kept in a locker whose key are still with the
owner and not with the bank. The ornaments are in possession of the owner
though kept in a locker at the bank.
5) Return of goods:
• Bailee is obliged to return the goods physically to the bailor. The goods should
be returned in the same form as given or may be altered as per bailor’s direction.
• Exchange of goods is not allowed. The bailee cannot deliver some other goods,
even not those of higher value.
• Deposit of money in a bank is not bailment since the money returned by the
bank would not be identical currency notes.
1.15 Forms and Classification of Bailment

• Forms of Bailment
1) Delivery of goods by one person to another to be held for the bailor’s purpose.
2) Gratuitous bailment: Where neither the bailor nor the bailee gets any
remuneration. For example, A lends his book to his friend.
3) Hiring of goods.
4) Delivering goods to a creditor to serve as security for a loan.
5) Delivering goods for repair with or without remuneration.
6) Delivering goods for carriage.
7) Finder of Goods.
• Classification of Bailment
Gratuitous Bailment Non-Gratuitous Bailment

The word ‘gratuitous’ means free of charge. So Non gratuitous bailment means for
a gratuitous bailment is one when the provider consideration.
of service does it gratuitously i.e. free of charge. Where both the parties get some
Such bailment would be either for the exclusive benefit i.e. bailment for the benefit of
benefits of bailor or bailee. both bailor & bailee
17
1.16 Duties and Rights of Bailor
Duties of Bailor Rights of Bailor

1. To disclose the faults (Section 150) 1. Right to terminate the bailment
2. Duty to pay necessary expenses (Section 153)
(Section 158) 2. Right to demand back the goods at
3. Duty to indemnify the Bailee for any time (Section 159)
premature termination (Section 3. Right to file a suit against a wrong
159) doer (Section 180 and section 181)
4. Bailor’s responsibility to bailee 4. Right to sue the bailee
(Section 164)
Duties of Bailor
1. Bailor’s duty to disclose faults in goods bailed [Section 150]:
• The bailor is bound to disclose to the bailee faults in the goods bailed, of which
the bailor is aware, and which materially interfere with the use of them, or expose
the bailee to extraordinary risks; and if he does not make such disclosure, he is
responsible for damage arising to the bailee directly from such faults.
• If the goods are bailed for hire, the bailor is responsible for such damage; whether
he was or was not aware of the existence of such faults in the goods bailed.
• If the goods bailed are of dangerous nature (e.g., explosives),it is the duty of the
bailor to disclose the nature of goods.
Case law: In Hyman & Wife v. Nye & Sons (1881), A hired from B a carriage along
with a pair of horses and a driver for a specific journey. During the journey a bolt
in the under-part of the carriage broke away. As a result of this, the carriage
collapsed and A was injured. It was held that B was liable to pay damages to A
for the injury sustained by him. The court observed that it was the bailor’s duty to
supply a carriage fit for the purpose for which it was hired.
2. Duty to pay necessary expenses [Section 158]:

• If the bailment is gratuitous, the bailor shall repay to the bailee the necessary
expenses incurred by him and any extraordinary expenses incurred by him for the
purpose of the bailment.
• However, in case of non-gratuitous bailment the bailor is liable to pay the
extraordinary expenses.
18
Example: Ashwin hired a taxi from Rohan for the purpose of going to Pune from Mumbai,
during the journey, a major defect occurred in the engine. A had to pay `10,000 as repair
charges. These are the extraordinary expenses and it is the bailor’s duty to bear such
expenses. However, the usual and ordinary expenses for petrol, toll taxes etc are to be
borne by the bailee itself.
3. Duty to indemnify the Bailee for premature termination (Section 159):

In case of gratuitous bailment, the bailor must compensate the bailee for the loss or
damage suffered by the bailee that is in excess of the benefit received, if he decides to
terminate the bailment before the expiry of the period of bailment.
4. Bailor’s responsibility to bailee (Section 164):

The bailor is responsible to the bailee for the following:
(i) If there was any defective title in the goods, then bailor has to compensate the
bailee.
(ii) It is the duty of the bailor to receive back the goods when the bailee returns
them after the time of bailment has expired or the purpose of bailment has been
accomplished. If the bailor refuses to take delivery of goods when it is offered
at the proper time the bailee can claim compensation for all necessary expenses
incurred for the safe custody.
Rights of Bailor
1. Right to terminate the bailment [Section 153]:
If bailee does any act with regards to the goods bailed, which is not permissible as per
the contract of bailment, the contract becomes voidable at the option of the bailor
Example: Aditya gave his car to mechanic for repairs but mechanic takes his wife in the
car for a long drive. The contract is voidable at the option of Aditya.
2. Right to demand back the goods at any time (Section 159):

When the goods are lent gratuitously, the bailor can demand back the goods at any
time even before the expiry of the time fixed or the achievement of the object.
But due to the premature return of the goods, if the bailee suffers any loss, which is
more than the benefit actually obtained by him from the use of the goods bailed, the
bailor has to compensate the bailee.
3. Right to file a suit against a wrong doer (Section 180 and section 181):
19
• Suit by bailor & bailee against wrong doers (Section 180): If a third person wrongfully
takes possession of the goods or disturbs the possession of goods, or does them
any injury, then the bailee will get same rights as owner and either the bailor or
the bailee may bring a suit against a third person for such deprivation or injury.
• Apportionment of relief or compensation obtained by such suits (Section181):
Whatever is obtained by way of relief or compensation in any such suit shall, as
between the bailor and the bailee, be dealt with according to their respective
interests
4. Right to sue the bailee:

The bailor has a right to sue the bailee for enforcing all the liabilities and duties of him.
It includes:
(i) Right to claim compensation for loss caused to the goods by the negligence of the
bailee.
(ii) Right to claim compensation for unauthorized mixing of goods.
(iii) Right to claim damages for unauthorized use of the goods.
(iv) Right to demand back goods.
(v) Right to any accretion to the goods bailed.
1.17 Duties and Rights of Bailee
Duties of Bailee Rights of a Bailee

1. Take reasonable Care of the goods 1. Right to Deliver the Goods to any
(Section 151 & 152) one of the Joint Bailors (Section
2. Not to make inconsistent use of 165)
goods (Section 153 & 154) 2. Right to indemnity (Section 166)
3. Not to mix the goods (Section 155, 3. Right to claim compensation in
156 and 157) case of faulty goods (Section 150)
4. Return the goods (Section 160 & 4. Right to claim extraordinary
161) expenses (Section 158)
5. Return an accretion from the Goods 5. Right to Apply to Court to Decide
(Section 163) the Title to the Goods [Section 167)
6. Not to setup Adverse Title 6. Right of particular lien for payment
of services (Section 170)
7. Right of general lien (Section 171)
20
Duties of Bailee
1. Take reasonable Care of the goods (Section 151 & 152)

• In all cases of bailment, the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances,
take of his own goods of the same bulk, quality and value as the goods bailed.
• Bailee when not liable for loss, etc., of thing bailed [Section 152]: The bailee, in
the absence of any special contract, is not responsible for the loss, destruction or
deterioration of the thing bailed, if he has taken the amount of care of it described
in section 151.
• Example: Abhishek deposited his goods in Rahul’s godown. On account of unexpected
floods, a part of the goods were damaged. It was held that, Rahul is not liable for
the loss
2. Not to make inconsistent use of goods (section 153 & 154): As per Section 154, if the
bailee makes any use of the goods bailed, which is not according to the conditions of the
bailment, he is liable to make compensation to the bailor for any damage arising to the
goods from or during such use of them. If bailee does any act with regards to the goods
bailed, which is not permissible as per the contract of bailment, the contract becomes
voidable at the option of the bailor
Example: Aditya gave his car to mechanic for repairs but mechanic takes his wife in the
car for a long drive. The contract is voidable at the option of Aditya and Aditya can also
claim damages.
3. Not to mix the goods (Section 155, 156 and 157):

• Bailee is not entitled to mix up the goods bailed with his own goods except with the
consent of the bailor. If he, with the consent of the bailor, mixes the goods bailed
with his own goods, both the parties shall have an interest in proportion to their
respective shares in the mixture thus produced (Section 155).
• If the bailee, without the consent of the bailor, mixes the goods bailed with his own
goods and the goods can be separated or divided, the property in the goods remains
in the parties respectively bailee is bound to bear the expenses of separation and
division and any damage arising from the mixture (Section 156).
• If the bailee, without the consent of the bailor mixes the goods of the bailor with his
own goods in such a manner that it is impossible to separate the goods bailed from
the other goods and to deliver them back, the bailor is entitled to compensation by
21
the bailee for loss of the goods (Section 157).
4. Return the goods (Section 160 & 161):

• It is the duty of bailee to return, or deliver according to the bailor’s directions,
the goods bailed without demand, as soon as the time for which they were
bailed, has expired, or the purpose for which they were bailed has been
accomplished (Section 160)
• If, by the default of the bailee, the goods are not returned, delivered or tendered
at the proper time, he is responsible to the bailor for any loss, destruction or
deterioration of the goods from that time. (Section 161)
Example: Vivek delivered car to Vikas to be bound. Vikas promised to return the
car within a reasonable time. Vivek asked for the return of the car. But Vikas,
failed to deliver car back even after the expiry of reasonable time. Subsequently
the car was burnt in an accidental fire at the premises of Vikas. Here, Vikas is
liable for the loss.
5. Return an accretion from the Goods (Section 163):

In the absence of any contract to the contrary, the bailee is bound to deliver to the
bailor, or according to his directions, any increase or profit which may have accrued
from the goods bailed.
Example: Sitaram leaves a cow in the custody of Baluram. The cow gives birth a
calf. Baluram is bound to deliver the calf as well as the cow to Sitaram.
6. Not to setup Adverse Title:

Bailee must not set up a title adverse to that of the bailor. In other words, bailee
should not sell the goods. He must hold the goods on behalf of and for the bailor.
Rights of a Bailee
1. Right to Deliver the Goods to any one of the Joint Bailors (Section 165):
If several joint owners bailed the goods, the bailee has a right to deliver them to
any one of the joint owners unless there was a contract to the contrary.
Example: Ravi, Sunil, Hari are the joint owners of a car. They delivered it on hire to
Shanaya for one month. After the expiry of one month, Shanaya may return the car
to any one of the joint owners namely Ravi, Sunil or Hari.
22
2. Right to indemnity (Section 166):

Bailee is entitled to be indemnified by the bailor for any loss arising to him by
reasons that the bailor’s title to goods was defective. If the bailor has no title to
the goods, and the bailee in good faith, delivers them back to, or according to the
directions of the bailor, the bailee shall not be responsible to the owner in respect
of such delivery. Bailee can also claim all the necessary expenses incurred by him
for the purpose of gratuitous bailment.
3. Right to claim compensation in case of faulty goods (Section 150):

A bailee is entitled to receive compensation from the bailor or any loss caused to
him due to the failure of the bailor to disclose any faults in the goods known to him.
If the bailment is for hire, the bailor will be liable to compensate even though he
was not aware of the existence of such faults.
4. Right to claim extraordinary expenses (Section 158):

A bailee is expected to take reasonable care of the gods bailed. In case he is required
to incur any extraordinary expenses, he can hold the bailor liable for such expenses.
5. Right to Apply to Court to decide the Title to the Goods (Section 167):
If the goods bailed are claimed by the person other than the bailor, the bailee may
apply to the court to stop its delivery and to decide the title to the goods.
6. Right of particular lien for payment of services (Section 170):

Where the bailee has
(a) in accordance with the purpose of bailment,
(b) rendered any service involving the exercise of labour of skill,
(c) in respect of the goods, he shall have
(d) in the absence of a contract to the contrary, right to retain such goods, until he
receives due remuneration for the services he has rendered in respect of them.
Bailee has, however, only a right to retain the goods and not to sell it. The
service must have entirely been formed within the time agreed or a reasonable
time and the remuneration must have become due.
This right of particular lien shall be available only against the property in
respect of which skill and labour has been used.
7. Right of general lien (Section 171): Bankers, factors, wharfingers, attorneys of a
23
High Court and policy brokers will be entitled to retain, as a security for a general
balance of amount, any goods bailed to them in the absence of a contract to
the contrary. By agreement other types of bailees excepting the above given five
(Bankers, factors, wharfingers, attorneys of a High Court and policy brokers) may
also be given this right of general lien.
1.18 Termination of Bailment
On expiry of • If the goods were given for a stipulated period, the

stipulated contract of bailment shall terminate after the expiry of
period: such period.
On • If the goods were delivered for a specific purpose, a

fulfillment of bailment shall terminate on the fulfillment of that
the purpose: purpose
• Where the bailee acts in a manner which is not permitted

as per the terms of the bailment, the bailor can always
terminate the contract of bailment by giving a notice
By Notice to the bailee.
• A gratuitous bailment can be terminated by the bailor
at any time by giving a notice to the bailee. However, if
the bailee suffers any loss then bailor must compensate
(Section 159).
• A gratuitous bailment terminates upon the death of

By death
either the bailor or the bailee.
Destruction • If the original condition of the bailed goods does

not exist or is destroyed, the contract of bailment is
of the subject
automatically terminated, because of impossibility of
matter performance.
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1.19 Finder of Goods

• The term ‘finder of goods’ means a person who has found some goods belonging
to an¬other. When a person comes across some article he is under no duty to pick
them up, but if he picks them up, he becomes a finder of goods and is subject to the
same responsibil¬ity as a bailee.
• The obligations of a finder of goods:

1) He must take reasonable care of the goods: By reasonable care we mean
that much care as a man of ordinary prudence would take of his own goods
under similar circumstances. If he takes that much care, the finder shall not be
responsible for any loss, destruction or deterioration of the thing found.
2) He must not use the goods for his own purpose.
3) He must not mix them with his own goods.
4) He must make appropriate efforts to find the true owner of the goods.
• Rights of finder of goods

1) Right to retain goods: The finder can retain the goods against the true owner
until he receives compensation for trouble and expenses incurred by him in
preserving the goods and finding out the owner. This right is known as the
finder’s lien on the goods. But the finder cannot file a suit against the true
owner for the recovery of such expense.
2) Right to sue for reward (Section 168): If the owner has offered some reward for
the return of goods and the finder has the knowledge of such reward, he can
file a suit for the recovery of the award.
3) Right to claim expenses incurred: If the finder of goods has incurred any
expenses on the lost goods, he has a right to recover it from the real owner of
goods.
4) Right of sale: Section 169 permits the finder to sell the goods in the following
cases:
a) If the owner cannot be found after reasonable search; or
b) If found, the owner refuses to pay the lawful charges to the finder; or
c) If the thing is in danger of perishing or losing the greater part of their
value; or
d) If the lawful charges of the finder amount to two - thirds of their value.
A finder of goods has a right to keep the goods with him against the
whole world except the true owner.
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1.20 Types of Lien

1) Particular Lien (Section 170):
• If in accordance with the purpose of the bailment, any service requiring labour
or skill is rendered by the bailee in respect of the goods bailed, he is entitled
to remuneration. If the bailor refuses to pay for the service, the bailee has the
right to retain the goods bailed until he receives his remuneration. This right of
the bailee to retain the goods is known as the particular lien of the bailee.
• In entitles the bailee to retain the goods but ordinarily he has no right to sell
the goods to realize his dues. A right to sell may, however, will be given to the
bailee by special agreement.
• Example: Archana delivers a rough diamond to Kapil, a jeweller, to be cut and
polished, which is accordingly done. Kapil is entitled to retain the stone till he
is paid for the services he has rendered.
2) General Lien (Section 171):

• A general lien is the right to retain the property of another for a general balance
of account.
• Bankers, factors, wharfingers, attorney of a High Court and policy - brokers
have general lien on goods coming into their possession in the course of their
trade.
• No other persons have a right to retain, as a security for such balance, goods
bailed to them, unless there is an express contract to the effect.
• Example: Uday borrows `50,000 from the bank without security and
subsequently again borrows another `100,000 but with security of say certain
jewellery. Here, even if Uday has returned `100,000 being the second loan, the
banker can retain the jewellery given as security to the second loan towards
the first loan which is yet to be repaid.
Difference between General lien and Particular lien
General lien Particular lien

1. General lien means the right to keep 1. Particular lien implies a right of the
possession of goods belonging to bailee to retain specific goods bailed
other against general balance of for non-payment of amount.
account.
26
2. A general lien is not automatic but 2. It is automatic i.e. implied

is recognized through on agreement.
It is exercised by the bailee only by
name
3. Only such persons as are specified 3. Bailee, finder of goods, pledgee,
under Section 171, example: Bankers, unpaid seller, agent, partner etc are
factors, wharfingers, policy brokers entitled to particular lien
etc. are entitled to general lien.
4. It can be exercised against goods 4. It comes into play only when some
even without involvement of labour labour or skill is involved has been
or skill. expended on the goods, resulting in
an increase in value of goods.
PLEDGE
1.21 Meaning and Characteristics of Pledge

• Meaning: Pledge is defined under Section 172 as
the bailment of goods as security for a payment
of a debt or performance of a promise is called
pledge/pawn.
• The person who makes such a bailment is called
a pledger or pawnor and the bailee is known as
pawnee.
• Example: Pyarelal lends money to Ananya against the security of jewellery deposited
by Ananya with him. This bailment of jewellery is a pledge as security for lending
the money. Ananya is a pawnor and Pyarelal is a pawnee.
• Essentials of a valid pledge:
1) Delivery of goods: Delivery of the goods may be actual or constructive or
symbolic.
2) Goods must be the subject matter of the contract of pledge. The goods pledged
must be in existence
3) Purpose of pledge is security for payment of debt.
4) Pledge is specie of bailment.
27
1.22 Duties and Rights of Pawnee
Duties of Pawnee Rights of Pawnee

1) Duty to take reasonable care of the 1) Right of retain the goods pledged
pledged goods (Section 173)
2) Duty not to make unauthorized use 2) Right to retention of pledged goods
of pledged goods. for subsequent debts (Section 174)
3) Duty to return the goods when 3) Pawnee’s right as to extraordinary
the debt has been repaid or the expenses Incurred (Section 175)
promise has been performed. 4) Pawnee’s right where pawnor
4) Duty not to mix his own goods with makes default (Section 176): If the
goods pledged. pawnor makes default in payment
5) Duty not to do any act which is of the debt, or performance,
inconsistent with the terms of the pawnee may retain the goods or
pledge. sell the goods.
6) Duty to return accretion to the If the proceeds of such sale are less
goods, if any. than the amount due, the pawnor
is still liable to pay the balance.
If the proceeds of the sale are greater
than the amount so due, the
pawnee shall pay over the surplus
to the pawnor.
28
1.23 Duties and Rights of Pawnor
Duties of Pawnor Rights of Pawnor

1) The pawnor is liable to pay the 1) Right to redeem (Section 177):
debt or perform the promise as the If a time is fixed for the payment
case may be. of the debt, or performance of
2) It is the duty of the pawnor to the promise, for which the pledge
compensate the pawnee for any is made, and the pawnor makes
extraordinary expenses incurred default in payment of the debt or
by him for preserving the goods performance of the promise at the
pawned. stipulated time, he may redeem the
3) It is the duty of the pawnor to goods pledged at any subsequent
disclose all the faults which may time before the actual sale of them;
put the pawnee under extraordinary but he must, in that case, pay, in
risks. addition, any expenses which have
4) If loss occurs to the pawnee due arisen from his default.
to defect in pawnor’s title to the
goods, the pawnor must indemnify
the pawnee.
5) If the pawnee sells the good due to
default by the pawnor, the pawnor
must pay the deficit.
1.24 Pledge by Non-Owners

1) Pledge by mercantile agent [ Section 178]:
Generally only an owner of goods can pledge, but the Act recognizes the right of
certain mercantile agents to pledge it provided following conditions are satisfied:
(i) The person pledging the goods must be a mercantile agent,
(ii) Mercantile agent must be in possession either of the goods or the documents
of title to goods,
(iii) Such possession must be with the consent of the owner. If possession has been
obtained dishonestly or by a trick, a valid pledge cannot be effected.
(iv) Pledge must have been made by the mercantile agent, when acting in the
ordinary course of business of a mercantile agent,
(v) The pledgee must act in good faith;
29
(vi) The pledgee should have no notice of the pledger’s defect of title. If the pledgee
knows that the pledger has a defective title, the pledge will not be valid.
(vii) In this section, the expressions ‘mercantile agent and documents of title’ shall
have the meanings assigned to them in the Sale of Goods Act, 1930.
2) Pledge by person in possession under voidable contract (Section 178A): When the
pawnor has obtained possession of the goods pledged by him under a contract
voidable under section 19 or section 19A, but the contract has not been rescinded
at the time of the pledge, the pawnee acquires a good title to the goods, provided
he acts in good faith and without notice of the pawnor’s defect of title.
3) Pledge where pawnor has only a limited interest [Section 179]: Where a person
pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest.
4) Pledge by a co-owner in possession: Where the goods are owned by many persons
and with the consent of other owners, the goods are left in the possession of one
of the co-owners. Such a co-owner may make a valid pledge of the goods in his
possession.
1.25 Distinction between Bailment and Pledge
Aspects Pledge Bailment

Purpose A pledge is made for a specific A bailment can be for any purpose.
purpose as security for payment of
debt or performance of a promise.
Parties The person who delivers the good The person delivering the goods
as security is called the “Pawnor”. under a contract of bailment is
The person to whom the goods are called as “Bailor”.
delivered as security is called the
pawnee.
Use of A pawnee does not have the right to The bailee may use the goods bailed
Goods use the goods. as per the terms of the contract.
Lien Lien can be exercised even for non- A bailee can exercise lien on the
payment of interest. goods bailed only for his labour and
skill employed
Sale of The pawnee can sell the goods after The bailee has no right of sale.
Goods due notice to the pawnor.
30
Nature of The pledgee gets a special property The bailee has only right of
Intrest in in the goods. The general property possession of the goods bailed.
Property remains with the pawnor.
31
UNIT 3: AGENCY
1.26 Meaning of Agency

• Meaning: The Indian Contract Act does not define ‘Agency’ but it defines an agent
as a person employed to do any act for another or to represent another in dealings
with third person. The person for whom such act is done, or who is so represented
is called the principal(Section 182).
• ‘Agency’ is a comprehensive word which is used to describe the relationship that
arises where one person is employed by another in order to bring the latter into
legal relations with a third person.
• The Rule of Agency is based on the maxim “Quit facit per alium, facitper se” i.e., he
who acts through an agent is himself acting.
• Test of Agency:
(a) Whether the person has the capacity to bind the principal and make him
answerable to the third party.
(b) Whether he can establish Privity of Contract between the principal and third
parties.
If the answer to these questions is yes, then there is a relationship of agency.
1.27 Essentials of Agency

1) Basis of the agreement:
• According to the definition under Section 182, an agent never acts on his own,
behalf but always on behalf on behalf of another.
• He either represents his principal in any transactions or dealings with a third
person, or performs an act for the principal. In either case the act of the agent
will be deemed in law to be not his own but of the principal.
2) Consideration not necessary:
• The peculiarity in the law of agency lies in the fact that unlike other forms of
contract the existence of consideration in not at all necessary for its validity
(Section 185).
• Thus, a contract of agency constitutes an exception to the general rule
contained in Section 25 that no contract can be valid unless it is entered into
for consideration
3) Capacity to employ agent:
Only a person who has contractual capacity can lawfully employ an agent. Thus a
minor or a person of unsound mind cannot appoint an agent (Section 183).
32
4) Capacity to be employed as agent:

• Between the principal and the third person, any person can become an agent,
irrespective of whether he has contractual capacity or not. But a person who
is not of the age of majority and of sound mind cannot be agent so as to be
responsible to his principal.
• Even a minor can become an agent and the principal can be bound by his acts
(Section 184).
• Thus, if the agent happens to be a person incapable of contracting, then the
principal cannot hold the agent liable, in case of his misconduct or where the
agent has been negligent in performance of his duties.
1.28 Modes of Agency
Modes of
Agencey
Agency by Agency by
Express Inplied Necessity Estoppel / Ratification
Agreement Agreement Holding Out (Section 196
(Section 237) to 200)
Section 186 & 187
Definitions of express and implied authority (Section 186 &187)

(1) Express Authority:
• The authority of an agent may be expressed or implied (Section 186). An
authority is said to be express when it is given by words, spoken or written
(Section 187).
• Example: Anil is residing in Delhi and he has a house in Kolkata. Anil appoints
Soham by a deed called the power of attorney, as a caretaker of his house.
Agency is created by express agreement.
(2) Implied Authority:

• An authority is said to be implied when it is to be inferred from the circumstances of
33
the case; and things spoken or written, or the ordinary course of dealing, may
be accounted circumstances of the case.
• Example: Abhijit owns a shop in Mumbai, living himself in Kolkata and visiting
the shop occasionally. The shop is managed by Sudhir, and he is in the habit of
ordering goods from Chirag in the name of Abhijit for the purposes of the shop,
and of paying for them out of Abhijit’s funds with Abhijit’s knowledge. Sudhir
has an implied authority from Abhijit to order goods from Chirag in the name
of Abhijit for the purposes of the shop.
(3) Agency by Estoppel [Section 237]:

• An agency by estoppel is based on the principle of estoppel. According to
section 237 of the Contract Act, an agency by estoppel may be created when
following essentials are fulfilled:
1. The principal must have made a representation;
2. The representation may be express or implied;
3. The representation must state that the agent has an authority to do
certain act although really he has no authority;
4. The principal must have induced the third person by such representation;
and
5. The third person must have believed the representation and made the
contract on the belief of such representation.
• Example: If Varun (the principal) has for several moths permitted Arjun to buy
goods on credit from Prasad and has paid for the goods bought by Arjun, Varun
cannot later refuse to pay Prasad who had supplied goods on credit to Arjun
in the belief that he was Varun’s agent and was buying the goods on behalf of
Varun. Varun is stopped from now asserting that Arjun is not his agent because
on earlier occasions he permitted Prasad to believe that Arjun was his agent
and Prasad had acted in that belief.
(4) Necessity:
• An agency of necessity arises due to some emergent circumstances. In emergency
a person is authorised to do what he cannot do in ordinary circumstances.
Thus, where an agent is authorised to do certain act, and while doing such an
act, an emergency arises, he acquires an extra-ordinary or special authority to
prevent his principal from loss.
• Example: Raman has a large farm on which Chaman is the caretaker. When
34
Raman is in Canada, there is a huge fire on the farm. Chaman becomes an

agent of necessity for Raman so as to save the property from being destroyed
by fire. Raman (the principal) will be liable for any expenses, Chaman (his agent
of necessity) incurred to put out the fire and save the farm from destruction
during Raman’s absence from the country.
(5) Agency by Ratification

• Rights of person as to acts done for him without his authority, Effect of
ratification (Section 196): Where acts are done by one person on behalf of
another, but without his knowledge or authority, he may elect to ratify or to
disown such acts. If he ratifies them, the same effects will follow as if they had
been performed by his authority.
Essentials of a valid Ratification
1. Ratification may be expressed or Implied (Section 197): Ratification may
be expressed or may be implied in the conduct of the person on whose
behalf the acts are done.
Example:
A, without authority, buys goods for B. Afterwards B sells them to C on
his own account; B’s conduct implies a ratification of the purchase made
for him by A.
2. Knowledge requisite for valid ratification (Section 198): No valid ratification
can be made by a person whose knowledge of the facts of the case is
materially defective.
Example: A has an authority from P to buy certain goods at the market
rate. He buys at a higher rate but P accepts the purchase. Afterwards P
comes to know that the goods purchased by A for P belonged to A himself.
The ratification is not binding on P.
If however the alleged principal is prepared to take the risk of what the
purported agent has done, he can choose to ratify without full knowledge
of facts.
3. Effect of ratifying unauthorized act forming part of a transaction (Section
199): There can be ratification of an act in entirely or its rejection in entirely.
The principal cannot ratify a part of the transaction which is beneficial to
him and reject the rest.
4. Ratification of unauthorized act cannot injure third person (Section 200):
An act done by one person on behalf of another, without such other
35
person’s authority, which, if done with authority, would have the effect
of subjecting a third person to damages, or of terminating any right or
interest of a third person, cannot, by ratification, be made to have such
effect.
Example: A holds a lease from B, terminable on three days’ notice. C, an
unauthorized person, gives notice of termination to A. The notice cannot
be ratified by B, so as to be binding on A.
5. Ratification within reasonable time: Ratification must be made within a
reasonable period of time.
6. Communication of Ratification: Ratification must be communicated to the
other party.
7. Act to be ratified must be valid: Act to be ratified should not be void or
illegal, for e.g. payment of dividend out of capital is void and cannot be
ratified.
1.29 Extent of Agent’s Authority

• The authority of an agent means his capacity to bind the principal to third parties.
The agent can bind the principal only if he acts within the scope of his authority.
• The extent of an agent’s authority, whether expressed or implied is determined by:
(a) The nature of the act or the business he is appointed to do
(b) Things which are incidental to the business or are usually done in the course of
such business,
(c) The usage of trade or business.
• Whatever be the nature or extent of the agent’s authority, it will always include the
authority to do:
(1) Every lawful thing necessary for the purpose of carrying it out,
(2) Every lawful thing justified by various customs of trades,
(3) In an emergency, all such acts for the purpose of protecting the principal from
loss as will be done by a person of ordinary prudence in his own case under
similar circumstances.
36
• The agent’s authority is governed by two principles
(a) Agent’s authority in normal (b) In case of emergency (Section 189):

circumstances (Section 188): • He has an authority in an emergency
• An agent having an authority to to do all such acts for the purpose of
do an act has authority to do every protecting his principal from loss as
lawful thing which is necessary in would be done by a prudent person, in his
order to do such act. own case under similar circumstances.
• Example: A is employed by B, • To constitute a valid agency in an
residing in London, to recover at emergency, following conditions must
Mumbai a debt due to B. A may be satisfied.
adopt any legal process necessary (a) Agent should not be a in a
for the purpose of recovering position or have any opportunity
the debt, and may give a valid to communicate with his principal
discharge for the same. within the time available.
(b) There should have been actual
and definite commercial necessity
for the agent to act promptly.
(c) The agent should have acted
bonafide and for the benefit of the
principal.
(d) The agent should have adopted the
most reasonable and practicable
course under the circumstances,
and
(e) The agent must have been in
possession of the goods belonging
to his principal and which are the
subject of contract.
• Example: A consigns provisions to B at
Kolkata, with directions to send them
immediately to C at Cuttack. B may sell
the provisions at Kolkata, if they will
not bear the journey to Cuttack without
spoiling.
37
1.30 Sub-Agent and Substituted Agent

Sub-Agent (Section 190 to 193)
• The term sub-agent is defined in Section 191 as, “a sub-agent is a person employed
by and acting under the control of the original agent in the business of agency.”
• Thus a sub-agent is an agent appointed by the agent. The relation of the sub-agent
to the original agent is that of the agent and the principal.
• The general rule of law is that an agent cannot delegate his powers to another
without the consent of the principal (Section 190). This general principal is based
upon the Latin Maxim “delegatus non Protest delegate” which means a delegatee
cannot further delegate.
• The contract of agency is of a fiduciary nature. It is based on the confidence reposed
by the principal in the agent. Therefore, agent has no authority to further delegate
his authority to another person.
• The agent is responsible to the principal for the acts of the sub-agents. The sub-
agent is responsible for his acts to the agent and not the principal. The agent is
responsible to the principal as well as to third parties for the acts of the sub-
agents. The sub-agent is not responsible to the principal at all. He is answerable
only to the agent (Section 193).
• However, in the following cases, however, the agent may appoint a sub-agent:
a. Where the principal has expressly allowed the appointment of a sub-agent.
b. Where the principal knows that the agent intends to appoint a sub-agent but
he does not object to it.
c. Where the custom of trade permits the appointment of a sub-agent.
d. Where the act to be done is purely ministerial and does not involve exercise of
discretion or any skill.
e. Where unforeseen emergencies arise which makes the appointment of sub-
agent necessary.
Where a sub-agent is properly appointed (as mentioned in above cases), the
prin¬cipal is bound and is liable to third parties for his act, as if he were an
agent origi¬nally appointed by the principal (Section 192). Where sub-agent is
not properly appointed, the principal is not bound by the acts of sub-agent.
Substituted Agent (Section 194 & 195)

• Substituted Agent is a person appointed by the agent to act for the principal, in the
business of agency, with the knowledge and consent of the principal.
• Substituted agents are not sub agents. They are agents of the principal. Where the
38
principal appoints an agent and if that agent identifies another person to carry out
the acts ordered by principal, than the second person is not to be treated as a sub
agent but only as an agent of the original principal (Section 194).
• While selecting a “substituted agent” the agent is bound to exercise same amount of
diligence as a man of ordinary prudence and if he does so he will not be responsible
for acts or negligence of the substituted agent (Section 195).
• Example: X consigns goods to ‘Y’ a merchant for sale on auction. ‘Y’ in due course
employs an auctioneer in goods to sell goods of X and also allows him to receive
the proceeds of sale. The auctioneer becomes insolvent afterwards without handing
over the proceeds. Here ‘Y’ will not be responsible to X as he has discharged his
duties as a man of ordinary prudence and diligence.
Difference between Sub-Agent and Substituted Agent
Sub-Agent Substituted Agent

1. A sub-agent works under, the control A substituted agent works under
and directions of the agent. the control and directions of the
principal.
2. The agent delegates to the sub- The agent does not delegate any
agent a part of his own duties. part of his duties to the substituted
agent.
3. There is no privity of contract between There is privity of contract between
the principal and the sub-agent. principal and substituted agent.
4. The sub-agent is responsible to the The substituted agent is responsible

agent alone. to the principal
5. The agent is responsible to the The agent is not responsible to

principal for the acts of the sub- the principal for the acts of the
agent. substituted agent.
6. The sub-agent has no right of The substituted agent can sue the
action against the principal for principal for remuneration due to hi
remuneration due to him. m.
7. Sub-agents may be improperly Substituted agents can never be
appointed improperly appointed.
8. The agent remains liable for the acts The agent’s duty ends once he has
of the sub-agent as long as the sub- named the substituted agent
agency continues.
39
1.31 Duties and Rights of Agent
Duties of Agent Rights of Agent

1. Duty to execute Mandate 1. Right of retain out of sums received
2. Conduct business in accordance on principal’s account (Section 217)
with the directions given by the 2. Right to remuneration (Section 219
principal (Section 211) & 220)
3. Duty of reasonable care and skill 3. Agent’s lien on principal’s property
(Section 212) (Section 221)
4. Duty to communicate with the 4. Right of indemnification (Section
principal (Section 214) 222 to 224)
5. Duty to avoid conflict of interest 5. Right to compensation for injury
(Section 215 & 216) caused by principal’s neglect
6. Duty not to make secret profit (Section 225)
7. Duty to render proper accounts
(Section 213)
8. Duty not to delegate
9. Agent’s duty to pay sums received
for principal (Section 218)
10. Duty not to use any confidential
information received in the course
of agency against the principal.
Duties of Agent
1. Duty to execute mandate:
• He should perform the work which he has been appointed to do. Any failure
in this respect would make the agent absolutely responsible for the principal’s
loss.
Case law: In Pannalal Jankidas Vs Mohanlal, a commission agent purchased
goods for his principal and stored them in a godown pending their dispatch.
The agent was under instruction to insure them. He actually charged the
premium for insurance but failed to insure the goods. The goods were lost in
an explosion in Bombay harbor. The agent was held liable to compensate the
principal for his loss minus the amount received under the Bombay explosion
(compensation) ordinance, 1944.
40
2. Duty to follow instructions or customs:

• According to Section 211 an agent is bound to conduct the business of his
principal according to the direction given by the principal, or, in the absence of
any such directions, according to the custom which prevails in doing business
of the same kind at the place where the agent conducts such business.
• When the agent acts otherwise, if any loss be sustained, he must make it good
to his principal, and, if any profit accrues, he must account for it.
• Example: A, an agent engaged in carrying on for B a business, in which it is
the custom to invest from time to time, at interest, the moneys which may be
in hand, omits to make such investment. A must make good to B the interest
usually obtained by such investment.
3. Duty of Reasonable care and skill:

• According to Section 212, an agent is bound to conduct the business of the
agency with as much skill as is generally possessed by persons engaged in
similar business, unless the principal has notice of his want of skill.
• If the agent acts negligently, he has to compensate the principal in respect of
the direct consequences of his own neglect, want of skill or misconduct, but
not in respect of loss of damage which are indirectly or remotely caused by
such neglect, want of skill or misconduct.
• Example : A, an agent for the sale of goods, having authority to sell on credit,
sells to B on credit, without making the proper and usual enquiries as to the
solvency of B. B, at the time of such sale is insolvent. A must make compensation
to his principal in respect of any loss thereby sustained.
4. Agent’ duty to communicate with principal [Section 214]: It is the duty of an agent,
in cases of difficulty, to use all reasonable diligence in communicating with his
principal, and in seeking to obtain his instructions.
5. Duty to Avoid Conflict of interest (Section 215 & 216)

• According to Section 215, If an agent deals on his own account in the business
of the agency, without first obtaining the consent of his principal and informing
him with all material circumstances which have come to his own knowledge on
the subject, the principal may cancel the transaction, if the case shows either
that any material fact has been dishonestly concealed from him by the agent,
or that the dealings of the agent have been disadvantageous to him.
41
• According to section 216 if an agent, without the knowledge of his principal

deals in the business of the agency on his own account instead of on account of
his principal, the principal is entitled to claim from the agent any benefit which
may have resulted to him from the transaction.
• Example: Arvind directs Balwant to sell Arvind’s estate. Balwant, on looking
over the estate before selling it, finds a mine on the estate which is unknown to
Arvind. Balwant informs Arvind that he wishes to buy the estate for himself, but
conceals the discovery of the mine. Arvind allows Balwant to buy, in ignorance
of the existence of the mine. Arvind, on discovering that Balwant knew the
mine at the time he bought the estate may either repudiate or adopt the sale
at his option and can claim compensation.
6. Duty not to make secret profits:

• It is the duty of an agent not to make any secret profit in the business of
agency. His relationship with the principal is of fiduciary nature and this requires
absolute good faith in the conduct of agency.
• Secret Profit means any advantage obtained by the agent over and above his
agreed remuneration and which he would not have been able to make but for
his position as agent.
7. Duty to render proper accounts (Section 213): An agent is bound to render proper
accounts to his principal on demand. Rendering accounts does not mean showing
the accounts but the accounts supported by vouchers.
8. Duty not to Delegate: According to section 190, an agent cannot lawfully employ to
perform acts which he has expressly or impliedly undertaken to perform personally,
unless by the ordinary custom of trade a sub-agent may, or, from the nature of
agency, a sub- agent must be employed.
9. Agent’s duty to pay sums received for principal (Section 218): Subject to such
deductions, the agent is bound to pay to his principal all sums received on his
account.
10. Duty not to use any confidential information received in the course of agency against
the principal.
42
Rights of Agent
1. Right of retain out of sums received on principal’s account [Section 217]: The agent
can retain, out of any sums received on account of the principal in the business of
the agency for the following payments:
(a) All moneys due to him in respect of advances made
(b) In respect of expenses properly incurred by him in conducting such business
(c) Such remuneration as may be payable to him for acting as agent.
The right can be exercised on any sums received on account of the principal in the
business of agency.
2. Right to remuneration [Section 219]:

• The agent in the normal course is entitled for remuneration as per the contract.
• In the absence of any agreed amount of remuneration, he is entitled for usual
remuneration which is customary in the business.
• However an agent who is guilty of misconduct in the business of the agency is
not entitled to any remuneration in respect of that part of the business which
he has committed misconduct (Section 220).
3. Agent’s lien on principal’s property [Section 221]:

• The conditions of this right are:
(i) The agent should be lawfully entitled to receive from the principal a sum
of money by way of commission earned or disbursement made or services
rendered in the proper execution of the business of agency.
(ii) The property over which the lien is to be exercised should belong to the
principal and it should have been received by the agent in his capacity
and during the course of his ordinary duties as agent.
(iii) The agent has only a particular lien.
• However, the agent’s right to lien is lost in the following cases:
(i) When the possession of the property is lost.
(ii) When the agent waives his right. Waiver may arise out of agreement
express or implied.
(iii) The agent’s lien is subject to a contract to the contrary.
43
4. Right to indemnity (Section 222 to 224):
Right of indemnification Right of indemnification Non-liability of employer

for lawful acts (Section against acts done in good of agent to do a criminal
222) faith (Section 223) act (Section 224)
The principal is bound Where the agent acts Where one person employs
to indemnify the agent in good faith on the another to do an act which
against all consequences instruction of principal, is criminal, the employer
of lawful acts done in agent is entitled for is not liable to the agent,
exercise of his authority. indemnification of any either upon an express
The right to indemnity loss or damage from the or an implied promise, to
extends to all losses and principal. indemnify him against the
expenses incurred by the However, the agent cannot consequences of that act.
agent in the conduct of the claim any reimbursement Example: A employs B
business. or indemnification for any to beat C, and agrees to
Example: ‘A’ of Delhi loss etc. arising out of acts indemnify him against all
appoints ‘B’ of Mumbai done by him in violation consequences of the act.
as agent to sell his of any penal laws of the B thereupon beats C, and
merchandise. As a result country. has to pay damages to C
‘B’ contracts to deliver the for so doing. A is not liable
merchandise to various to indemnify B for those
parties. But A fails to send damages.
the merchandise to B and
B faces litigations for non-
performance. Here, A is
bound to protect B against
the litigations and all
costs, expenses arising of
that.
5. Right to compensation for injury caused by principal’s neglect [Section 225]: The
principal must make compensation to his agent in respect of injury caused to such
agent by the principal’s neglect or want of skill. Thus, every principal owes to
his agent the duty of care not to expose him to unreasonable risks. Example: A
employs B as a bricklayer in building a house, and puts up the scaffolding himself.
44
The scaffolding is unskilfully put up, and B is in consequence hurt. A must make
compensation to B.
1.32 Liability to Third Parties

An agent does all acts on behalf of the principal but incurs no personal liability. The
liability remains that of the principal. But in some cases agent is personally liable.
In following cases principal liable for agent’s act:
1. Principal liable for the acts of agents which are within the scope of his authority
(Section 226)
2. When agent exceeds authority and when the part of what he does, which is within
his authority, can be separated from the part which is beyond his authority, then
principal is liable only for the part which is within authority (Section 227)
3. Principal is bound by the notice given to agent provided notice is in course of business
(Section 229)
4. Liability for Misrepresentation or fraud by an agent when agent is acting within his
authority (Section 238).
5. When an agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by such acts or obligations,
if he has by his words or conduct induced such third persons to believe that such
acts and obligations were within the scope of the agent’s authority (Section 237).
Example: A consigns goods to B for sale, and gives him instructions not to sell under
a fixed price. C, being ignorant of B’s instructions, enters into a contract with B to
buy the goods at a price lower than the reserved price. A is bound by the contract.
In following cases agent is personally liable:

1. When agent exceeds authority and when the part of what he does, which is within
his authority, cannot be separated from the part which is beyond his authority, then
agent is liable (Section 228)
2. When he is working for a foreign principal (Section 230)
3. Where he is acting for a principal who cannot be sued on account of his being a
foreign sovereign, ambassador etc. (Section 230)
4. Where the agent does not disclose the name of his principal or existence of principal.
• If an agent makes a contract with a person who neither knows, nor has reason
to suspect, that he is an agent, agent is personally liable
• If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfil the contract, if he can show that, if he
45
had known who was the principal in the contract, or if he had known that
the agent was not a principal, he would not have entered into the contract
(Section 231)
• Where one man makes a contract with another, neither knowing nor having
reasonable ground to suspect that the other is an agent, the principal, if he
requires the performance of the contract, can only obtain such performance
subject to the rights and obligations subsisting between the agent and the
other party to the contract (Section 232)
• Example: A, who owes `50,000 to B, sells `1,00,000 worth of rice to B. A
is acting as agent for C in the transaction, but B has neither knowledge nor
reasonable ground of suspicion that such is the case. C cannot compel B to
take the rice without allowing him to set off A’s debt.
5. In cases where the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable (Section 233).
• Example: A enters into a contract with B to sell him 100 bales of cotton, and
afterwards discovers that B was acting as agent for C. A may sue either B or C,
or both, for the price of the cotton.
• When a person who has made a contract with an agent induces the agent
to act upon the belief that the principal only will be held liable, or induces
the principal to act upon the belief that the agent only will be held liable, he
cannot afterwards hold liable the agent or principal respectively (Section 234).
6. Liability of pretended agent [Section 235]: A pretended agent is a person who
represents himself to be an agent of another, when in fact he has no authority from
him, whatsoever if the principal ratifies his acts as agent, he has no liability. But if
the principal refuses to ratify his acts, he becomes personally liable to third party for
any loss or damage caused to him. It is to be noted that where agent is personally
liable, the third party can sue the principal or the agent or both the principal and
the agent, as the liability of the principal and agent is joint and several.
7. Person falsely contracting agent not entitled to performance [Section 236]: A person
with whom a contract has been entered into in the character of agent, is not entitled
to require the performance of it if he was in reality acting, not as agent, but on his
own account.
8. Liability for Misrepresentation or fraud by an agent when agent is acting beyond his
authority (Section 238)
46
1.33 Termination of Agency

(A) Act of the Parties:
1) Mutual agreement: The relationship between principal & agent may be
terminated at any stage by a mutual agreement between them.
2) Revocation by Principal (Section 203 to 207):
• Principal may revoke the authority given to an agent at any point of time
and the agency would come to an end. The only exception would be in
case of IRREVOCABLE agency (Section 203 & 204).
3) Renunciation by Agent: Agency may also be terminated by expressed
re¬nunciation of the agent, provided the agent gives the principal a reasonable
notice.
• Compensation for revocation by principal, or renunciation by agent
[Section 205]: Where there is an express or implied contract that the
agency should be continued for any period of time, the principal must
make compensation to the agent, or the agent to the principal, as the
case may be, for any previous revocation or renunciation of the agency
without sufficient cause.
• Notice of revocation or renunciation [Section 206]: Reasonable notice
must be given of such revocation or renunciation; otherwise the damage
thereby resulting to the principal or the agent, as the case may be, must
be made good to the one by the other.
• Revocation and renunciation may be expressed or implied [Section 207]:
Revocation and renunciation may be expressed or may be implied in the
conduct of the principal or agent respectively.
• When termination of agent’s authority takes effect as to agent, and as to
third persons (Section 208): The termination of the authority of an agent
does not, so far as regards the agent, take effect before it becomes known
to him, or, so far as regards third persons, before it becomes known to
them.
Example: A directs B to sell goods for him, and agrees to give B five
per cent commission on the price fetched by the goods. A afterwards,
by letter, revokes B’s authority. B, after the letter is sent, but before he
receives it sells the goods for `1,00,000. The sale is binding on A, and B is
entitled to `5,000 as his commission.
47
(B) Operation of Law:

1) Performance of contract: The most obvious mode of putting on end of the
agency is to do what the agent had undertaken to perform. Thus if the con¬tract
is performed the agency gets terminated.
2) Expiry of time: When an agent is appointed for a fixed period the agency comes
to an end after the expiry of time even if work is not complete.
3) Death / Insanity (Section 209): Death or Insanity of the Principal or the agent
amounts to termination of agency if it is not coupled with interest.
4) Insolvency: Insolvency of the Principal puts an end to the relationship of agency
there is nothing mentioned in the contract act regarding insolvency of agent.
However courts have accepted that insolvency of agent also termi¬nates
agency.
5) Destruction of subject matter: An agency created to deal with a subject matter
comes to an end by destruction of that subject matter.
6) Parties becoming alien enemies: When the agent and principal become alien
enemies of each other, both of them become incompetent to contract and
agency is terminated.
1.34 Irrevocable Agency

As per Section 202, where the agency cannot be terminated, it is irrevocable agency. An
irrevocable agency may be in the following cases:
(a) Where the agent has incurred personal liability: When an agent incurs personal
liability the agency becomes irrevocable. The principal in such case cannot revoke
the agency so as to leave the agent to bear the liability and the losses in the
contract.
(b) Where the agent has partly exercised the authority: The agency cannot be revoked if
the agent has himself, exercised-his action for performance of agency function and
obligations have arisen.
48
SUMMARY
UNIT1: CONTRACT OF INDEMNITY AND GUARANTEE
INDEMNITY
1.1: Meaning of Indemnity Contract [Section 124]

• As per Section 124, indemnity contract is a contract, by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or by
the conduct of any other person, is called a contract of indemnity.
• The person who promises to make good the loss is called ‘indemnifier’ and the
person whose loss is to be made good is called the ‘indemnified’ or ‘indemnity-
holder.
1.2 Rights of indemnity holder [Section 125]

• The promisee i.e., indemnity- holder acting within the scope of his authority is
entitled to recover from the promisor i.e., indemnifier the following rights:
(a) All damages which he may be compelled to pay in any suit
(b) All costs which he may have been compelled to pay in bringing/ defending the
suit and
(c) All sums which he may have paid under the terms of any compromise of suit.
GUARANTEE
1.3 Meaning of Guarantee Contract (Section 126)

• ‘A contract of guarantee’ is a contract to perform the promise, or discharge the
liability, of a third person in case of his default.
• The person who gives the guarantee is called the ‘surety’, the person in respect of
whose default the guarantee is given is called ‘principal debtor’, and the person to
whom the guarantee is given is called ‘creditor’.
1.4 Consideration for Guarantee (Section 127)

• As per Section 127 of the Act, no actual consideration is required for contract of
guarantee. In other words, anything done, or any promise made, for the benefit of
the principal debtor, may be a sufficient consideration to the surety for giving the
guarantee.
49
1.5 Nature of Surety’s Liability (Section 128)

• The liability of the surety is co-extensive with that of the principal debtor unless it
is otherwise provided by the contract.
1.6 Types of Guarantee (Section 129 to 131)
Specific guarantee Continuing guarantee
3. Specific guarantee
When a guarantee is given in respect of a single debt or specific transaction and is to
come to an end when the guaranteed debt is paid or the promise is duly performed,
it is called a specific guarantee.
4. Continuing guarantee (Section 129)

A guarantee which extends to a series of transactions is called a continuing
guarantee.
1.7 Discharge of Surety

Section133 Section 134 Section 135 Section 139

Variation in terms of By release or Discharge If creditor fails
contract between the discharge of of surety to perform his
principal debtor and principal debtor when creditor duty, surety is
creditor without surety’s compounds with, discharged.
consent gives time to, or
agrees not to sue,
principal debtor
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1.8 Non-Discharge of Surety

The surety is not discharged in the following cases:
Section136 Section 137 Section 138

Surety is not discharged Mere forbearance on the Where there are co-
when agreement made part of the creditor to sue sureties, a release by
with third person to give the principal debtor does the creditor of one
time to principal debtor. not in the absence of any of them does not
provision in the guarantee discharge the other;
to the contrary, discharge neither does it free the
the surety. surety so released from
his responsibility to the
other sureties.
1.9 Rights of Surety
Rights against the Principal Debtor Rights against the Creditor

1) Rights of subrogation (Section 140) 1) Surety’s right to benefit of creditor’s
2) Implied promise to indemnify securities (Section 141)
surety (Section 145) 2) Right to set off
3) Right to share reduction
1.10 Invalid Guarantee (Section 142 to 144)

1) Guarantee obtained by misrepresentation invalid (Section 142)
2) Guarantee obtained by concealment invalid (Section 143)
3) Guarantee on contract that creditor shall not act on it until co¬-surety joins (Section
144)
1.11 Contribution of Co-Sureties

Rules for Co-Sureties:
1) Co- sureties liable to contribute equally (Section 146)
2) Liability of co-sureties, bound in different sums (Section 147)
3) Sureties’ liability towards other co-sureties (Section 138)
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4) Mutual agreement between co-sureties (Section 132)
1.12 Distinction between Indemnity and Guarantee
BAILMENT
1.13 Meaning of Bailment

• Definition under Section 148: Bailment is defined under Section 148 as “A contract
whereby goods are delivered by one person to another for some purpose, that the
goods shall, when the purpose is over be returned or disposed off according to
directions of the person delivering the goods.”
• The person delivering the goods is called the “bailor”. The person to whom they are
delivered is called the “bailee”
1.14 Essential elements of Bailment

1) Contract
2) Delivery of goods
3) Purpose
4) Possession
6) Return of goods
1.15 Forms and Classification of Bailment

• Forms of Bailment
1) Delivery of goods by one person to another to be held for the bailor’s purpose.
2) Gratuitous bailment: Where neither the bailor nor the bailee gets any
remuneration. For example A lends his book to his friend.
3) Hiring of goods.
4) Delivering goods to a creditor to serve as security for a loan.
5) Delivering goods for repair with or without remuneration.
6) Delivering goods for carriage.
7) Finder of Goods.
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1.16 Duties and Rights of Bailor
Duties of Bailor Rights of Bailor

1. To disclose the faults (Section 150) 1. Right to terminate the bailment
2. Duty to pay necessary expenses (Section 153)
(Section 158) 2. Right to demand back the goods at
3. Duty to indemnify the Bailee for any time (Section 159)
premature termination (Section 3. Right to file a suit against a wrong
159) doer (Section 180 and section 181)
4. Bailor’s responsibility to bailee 4. Right to sue the bailee
(Section 164)
1.17 Duties and Rights of Bailee
Duties of Bailee Rights of a Bailee

1. Take reasonable Care of the goods 1. Right to Deliver the Goods to any
(Section 151 & 152) one of the Joint Bailors (Section
2. Not to make inconsistent use of 165)
goods (Section 153 & 154) 2. Right to indemnity (Section 166)
3. Not to mix the goods (Section 155, 3. Right to claim compensation in
156 and 157) case of faulty goods (Section 150)
4. Return the goods (Section 160 & 4. Right to claim extraordinary
161) expenses (Section 158)
5. Return an accretion from the Goods 5. Right to Apply to Court to Decide
(Section 163) the Title to the Goods (Section 167)
6. Not to setup Adverse Title 6. Right of particular lien for payment
of services (Section 170)
7. Right of general lien (Section 171)
1.18 Termination of Bailment

1) On expiry of stipulated period
2) On fulfilment of the purpose:
3) By Notice
4) By death
5) Destruction of the subject matter
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1.19 Finder of Goods

• The obligations of a finder of goods:
1) He must take reasonable care of the goods
2) He must not use the goods for his own purpose.
3) He must not mix them with his own goods.
4) He must make appropriate efforts to find the true owner of the goods.
• Rights of finder of goods

1) Right to retain goods
2) Right to sue for reward (Section 168)
3) Right to claim expenses incurred
4) Right of sale: Section 169 permits the finder to sell the goods in the certain cases
1.20 Types of Lien

1) Particular Lien (Section 170):
If in accordance with the purpose of the bailment, any service requiring labour
or skill is rendered by the bailee in respect of the goods bailed, he is entitled to
remuneration. If the bailor refuses to pay for the service, the bailee has the right to
retain the goods bailed until he receives his remuneration.
2) General Lien (Section 171):
• A general lien is the right to retain the property of another for a general balance
of account.
• Bankers, factors, wharfingers, attorney of a High Court and policy - brokers have
general lien on goods coming into their possession in the course of their trade.
PLEDGE
1.21 Meaning and Essentials of Pledge

• Meaning: Pledge is defined under Section 172 as the bailment of goods as security
for a payment of a debt or performance of a promise is called pledge/pawn.
• Essentials of a valid pledge:
1) Delivery of goods
2) Goods must be the subject matter of the contract of pledge. The goods pledged
must be in existence
3) Purpose of pledge is security for payment of debt.
4) Pledge is specie of bailment.
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1.22 Duties and Rights of Pawnee
Duties of Pawnee Rights of Pawnee

1) Duty to take reasonable care of 1) Right of retain the goods pledged
the pledged goods (Section 173)
2) Duty not to make unauthorized 2) Right to retention of pledged goods
use of pledged goods. for subsequent debts (Section 174)
3) Duty to return the goods when 3) Pawnee’s right as to extraordinary
the debt has been repaid or the expenses Incurred (Section 175)
promise has been performed. 4) Pawnee’s right where pawnor
4) Duty not to mix his own goods with makes default (Section 176)
goods pledged.
5) Duty not to do any act which is
inconsistent with the terms of the
pledge.
6) Duty to return accretion to the
goods, if any.
1.23 Duties and Rights of Pawnor
Duties of Pawnor Rights of Pawnor

1) The pawnor is liable to pay the 1) Right to redeem (Section 177)
debt or perform the promise as the
case may be.
2) It is the duty of the pawnor to
compensate the pawnee for any
extraordinary expenses incurred
by him for preserving the goods
pawned.
3) It is the duty of the pawnor to
disclose all the faults which
may put the pawnee under
extraordinary risks.
4) If loss occurs to the pawnee due
to defect in pawnor’s title to the
goods, the pawnor must indemnify
the pawnee.
5) If the pawnee sells the good due to
default by the pawnor, the pawnor
must pay the deficit.
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1.24 Pledge by Non-Owners

1) Pledge by mercantile agent (Section 178)
2) Pledge by person in possession under voidable contract (Section 178A)
3) Pledge where pawnor has only a limited interest (Section 179)
4) Pledge by a co-owner in possession
1.25 Distinction between Bailment and Pledge
UNIT 3: AGENCY
1.26 Meaning of Agency
• Meaning: The Indian Contract Act does not define ‘Agency’ but it defines an agent
as a person employed to do any act for another or to represent another in dealings
with third person. The person for whom such act is done, or who is so represented
is called the principal (Section 182).
• The Rule of Agency is based on the maxim “Quit facit per alium, facitper se” i.e., he
who acts through an agent is himself acting.
1.27 Essentials of Agency

1) Basis of the agreement
2) Consideration not necessary
3) Capacity to employ agent
4) Capacity to be employed as agent
1.28 Modes of Agency
Modes of
Agencey
Agency by Agency by
Express Inplied Necessity Estoppel / Ratification
Agreement Agreement Holding Out (Section 196
(Section 237) to 200)
Section 186 & 187
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1.29 Extent of Agent’s Authority

The agent’s authority is governed by two principles
(a) Agent’s authority in normal (b) In case of emergency (Section 189):

circumstances (Section 188) He has an authority in an emergency
to do all such acts for the purpose of
protecting his principal from loss as
would be done by a prudent person, in his
own case under similar circumstances.
1.30 Sub-Agent and Substituted Agent

Sub-Agent (Section 190 to 193)
• The term sub-agent is defined in Section 191 as, “a sub-agent is a person employed
by and acting under the control of the original agent in the business of agency.”
• The general rule of law is that an agent cannot delegate his powers to another
without the consent of the principal (Section 190). This general principal is based
upon the Latin Maxim “delegatus non Protest delegate” which means a delegatee
cannot further delegate.
Substituted Agent (Section 194 & 195)
• Substituted agents are not sub agents. They are agents of the principal. Where the
principal appoints an agent and if that agent identifies another person to carry out
the acts ordered by principal, than the second person is not to be treated as a sub
agent but only as an agent of the original principal (Section 194).
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1.31 Duties and Rights of Agent
Duties of Agent Rights of Agent

1. Duty to execute Mandate 1. Right of retain out of sums received
2. Conduct business in accordance on principal’s account (Section
with the directions given by the 217)
principal (Section 211) 2. Right to remuneration (Section 219
3. Duty of reasonable care and skill & 220)
(Section 212) 3. Agent’s lien on principal’s property
4. Duty to communicate with the (Section 221)
principal (Section 214) 4. Right of indemnification (Section
5. Duty to avoid conflict of interest 222 to 224)
(Section 215 & 216) 5. Right to compensation for injury
6. Duty not to make secret profit caused by principal’s neglect
7. Duty to render proper accounts (Section 225)
(Section 213)
8. Duty not to delegate
9. Agent’s duty to pay sums received
for principal (Section 218)
10. Duty not to use any confidential
information received in the course
of agency against the principal.
1.32 Liability to Third Parties

An agent does all acts on behalf of the principal but incurs no personal liability. The
liability remains that of the principal. But in some cases agent is personally liable.
1.33 Termination of Agency
(A) Act of the Parties:

1) Mutual agreement
2) Revocation by Principal (Section 203 & 204)
3) Renunciation by Agent (Section 205 to 208)
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(B) Operation of Law:

1) Performance of contract
2) Expiry of time
3) Death / Insanity (Section 209)
4) Insolvency
5) Destruction of subject matter
6) Parties becoming alien enemies
1.34 Irrevocable Agency

As per Section 202, where the agency cannot be terminated, it is irrevocable agency. An
irrevocable agency may be in the following cases:
(a) Where the agent has incurred personal liability
(b) Where the agent has partly exercised the authority
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LIST OF LEGAL TERMS
SR. LEGAL WORD MEANING PAGE

NO. NUMBER
(This column is to be
filled by students)
1. Judicial Judgements by court

pronouncements
2. Forbearance Here it means delay
3. Interse Internally
4. Accretion Addition
5. Man of ordinary Normal human being
prudence
LIST OF LATIN TERMS
SR. NO. LATIN TERM MEANING PAGE

NUMBER
filled by students)
1. Quit facit per He who acts through an agent is himself
alium, facitper se acting
2. delegatus non A delegatee cannot further delegate
Protest delegate
LIST OF CASE LAWS
SR. NO. CASE LAW PAGE

NUMBER
filled by students)
1. M.S Anirudhan v Thomco’s Bank Ltd
2. State bank of Saurashtra Vs Chitranjan Rangnath Raja
3. Hyman & Wife v. Nye & Sons (1881)
4. Pannalal Jankidas V Mohanlal
60
QUESTIONS
UNIT 1: CONTRACTS OF INDEMNITY & GUARANTEES
1. Mr. X, is employed as a cashier on a monthly salary of `2,000 by ABC bank for a

period of three years. Y gave surety for X’s good conduct. After nine months, the
financial position of the bank deteriorates. Then X agrees to accept a lower salary
of ` 1,500/- per month from Bank. Two months later, it was found that X has
misappropriated cash since the time of his appointment. What is the liability of Y?
(ICAI Module)
2. A contracts with B for a fixed price to construct a house for B within a stipulated
time. B would supply the necessary material to be used in the construction. C
guarantees A’s performance of the contract. B does not supply the material as per
the agreement. Is C discharged from his liability?
(ICAI Module, Nov’18 RTP, May’19 Mock Test, May’20 Mock Test)
3. Mr. D was in urgent need of money amounting `5,00,000. He asked Mr. K for the
money. Mr. K lent the money on the sureties of A, B and N without any contract
between them in case of default in repayment of money by D to K. D makes default
in payment. B refused to contribute, examine whether B can escape liability?
(ICAI Module, May’18- 4 Marks, May’19 Mock Test, Nov’20 Mock Test, May’21 Mock Test)
4. ‘A’ gives to ‘M’ a continuing guarantee to the extent of `8,000 for the fruits to be
supplied by ‘M’ to ‘S’ from time to time on credit. Afterwards ‘S’ became embarrassed
and without the knowledge of ‘A’, ‘M’ and ‘S’ contract that ‘M’ shall continue to supply
‘S’ with fruits for ready money and that payments shall be applied to the then existing
debts between ‘S’ and ‘M’. Examining the provision of the Indian Contract Act, 1872,
decide whether ‘A’ is liable on his guarantee given to M.
(May’19 RTP)
5. Manoj guarantees for Ranjan, a retail textile merchant, for an amount of `1,00,000,
for which Sharma, the supplier may from time to time supply goods on credit basis
to Ranjan during the next 3 months.
After 1 month, Manoj revokes the guarantee, when Sharma had supplied goods on
credit for `40,000. Referring to the provisions of the Indian Contract Act, 1872, decide
61
whether Manoj is discharged from all the liabilities to Sharma for any subsequent
credit supply. What would be your answer in case Ranjan makes default in paying
back Sharma for the goods already supplied on credit i.e. `40,000?
(May’19- 4 Marks, Nov’20 RTP)
6. C’ advances to ‘B’, `2,00,000 on the guarantee of ‘A’. ‘C’ has also taken a further
security for the same borrowing by mortgage of B’s furniture worth `2,00,000 without
knowledge of ‘A’. C’ cancels the mortgage. After 6 months ‘B’ becomes insolvent and
‘C’ ‘sues ‘A’ his guarantee. Decide the liability of ‘A’ if the market value of furniture is
worth `80,000, under the Indian Contract Act, 1872. (Nov’19- 4 Marks)
7. (i) Mr. CB was invited to guarantee an employee Mr. BD who was previously
dismissed for dishonesty by the same employer. This fact was not told to Mr. CB.
Later on, the employee embezzled funds. Whether CB is liable for the financial
loss as surety under the provisions of the Indian Contract Act, 1872?
(ii) Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave
guarantee against the loan. Actually Mr. X gave a loan of smaller amount on
the security of three properties. Whether Mr. A is liable as surety in case Mr. Y
failed to repay the loan?
(Nov’20- 4 Marks)
1. Examine whether the following constitute a contract of ‘Bailment’ under the

provisions of the Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities. (ICAI Module)
2. A hires a carriage from B and agrees to pay ` 500 as hire charges. The carriage is
unsafe, though B is unaware of it. A is injured and claims compensation for injuries
suffered by him. B refuses to pay. Discuss the liability of B. (ICAI Module)
3. A bails his jewellery with B on the condition to safeguard it in a bank’s safe locker.
However, B kept it in safe locker at his residence, where he usually keeps his own
jewellery. After a month all jewellery was lost in a religious riot. A filed a suit
against B for recovery. Referring to provisions of the Indian Contract Act, 1872, state
62
whether A will succeed. (ICAI Module)
4. Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop, promising
to give ` 200 at the time of taking back the bailed goods. Srijith’s employee, unaware
of this, mixed the 50 kg of sugar belonging to Amar with the sugar in the shop and
packaged it for sale when Srijith was away. This came to light only when Amar came
asking for the sugar he had bailed with Srijith, as the price of the specific quality of
sugar had trebled. What is the remedy available to Amar?
(ICAI Module, Nov’20 Mock Test, May’21 Mock test)
5. Mrs. A delivered her old silver jewellery to Mr. Y a Goldsmith, for the purpose of
making new a silver bowl out of it. Every evening she used to receive the unfinished
good (silver bowl) to put it into box kept at Mr. Y’s Shop. She kept the key of that
box with herself. One night, the silver bowl was stolen from that box. Was there a
contract of bailment? Whether the possession of the goods (actual or constructive)
delivered, constitute contract of bailment or not? (ICAI Module, May’20 Mock Test)
6. Radheshyam borrowed a sum of ` 50,000 from a Bank on the security of gold on

1.07.2019 under an agreement which contains a clause that the bank shall have
a right of particular lien on the gold pledged with it. Radheshyam thereafter took
an unsecured loan of ` 20,000 from the same bank on 1.08.2019 for three months.
On 30.09.2019 he repaid entire secured loan of ` 50,000 and requested the bank to
release the gold pledged with it. The Bank decided to continue the lien on the gold
until the unsecured loan is fully repaid by Radheshyam. Decide whether the decision
of the Bank is valid within the provisions of the Indian Contract Act, 1872 ?
(Jan’21- 4 Marks)
UNIT 3: AGENCY
1. Rahul, a transporter was entrusted with the duty of transporting tomatoes from a
rural farm to a city by Aswin. Due to heavy rains, Rahul was stranded for more than
two days. Rahul sold the tomatoes below the market rate in the nearby market
where he was stranded fearing that the tomatoes may perish. Can Aswin recover
the loss from Rahul on the ground that Rahul had acted beyond his authority?
(ICAI Module, May’18 RTP, Nov’19 Mock Test, May’18- 3 Marks)
63
2. Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension
area. Mr. Singh bought a house for `20 lakhs in the name of a nominee and then
purchased it himself for `24 lakhs. He then sold the same house to Mr. Ahuja for `26
lakhs. Mr. Ahuja later comes to know the mischief of Mr. Singh and tries to recover
the excess amount paid to Mr. Singh. Is he entitled to recover any amount from Mr.
Singh? If so, how much? Explain.
(ICAI Module, May’18 RTP, May’19 Mock Test, Nov’20 Mock Test, May’21 Mock Test)
3. ABC Ltd. sells its products through some agents and it is not the custom in their
business to sell the products on credit. Mr. Pintu, one of the agents sold goods of
ABC Ltd. to M/s. Parul Pvt. Ltd. (on credit) which was insolvent at the time of such
sale. ABC Ltd. sued Mr. Pintu for compensation towards the loss caused due to sale
of products to M/s. Parul Pvt. Ltd. Will ABC Ltd. succeed in its claim?
(ICAI Module, May’18-4 Marks)
4. Azar consigned electronic goods for sale to Aziz. Aziz employed Rahim a reputed
auctioneer to sell the goods consigned to him through auction. Aziz authorized
Rahim to receive the proceeds and transfer those proceeds once in 45 days. Rahim
sold goods on auction for `2,00,000 but before transferring the proceeds of the
auction, became insolvent. Assess the liability of Aziz according to the provisions of
the Indian Contract Act, 1872. (ICAI Module, Nov’18- 3 Marks)
5. R is the wife of P. She purchased sarees on credit from Nalli. Nalli demanded the
amount from P. P refused. Nalli filed a suit against P for the said amount. Decide
in the light of provisions of the Indian Contract Act, 1872, whether Nalli would
succeed. (ICAI Module, May’19- 4 Marks)
6. Explain whether the agency shall be terminated in the following cases under the
(i) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds,
the debts due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A’s agent to sell A’s land. B, under the authority of A, appoints
C as agent of B. Afterwards, A revokes the authority of B but not of C. What is
the status of agency of C ? (Jan’21- 4 Marks)
64
7. Akash is a famous manufacturer of leather goods. He appoints Prashant as his

agent. Prashant is entrusted with the work of recovering money from various traders
to whom Akash sells leather goods. Prashant is paid a monthly remuneration of
` 15,000. Prashant during a particular month recovers ` 40,000 from traders on
account of Akash. Prashant gives back ` 25,000 to Akash, after deducting his salary.
Examine with reference to relevant provisions of the Indian Contract Act, 1872,
whether act of Prashant is valid. (May’21 RTP)
65
MULTIPLE CHOICE QUESTIONS (Homework)
1. A contract of indemnity is a
(a) Contingent Contract
(b) Wagering contract
(c) Quasi Contract
(d) Void agreement (ICAI Module, ICAI Sample Question)
2. A contracts to save B against the consequences of any proceedings, which C may

take against B in respect of a certain sum of 500 rupees. This is a:
(a) Contract of guarantee
(b) Quasi contract
(c) Contract of indemnity
(d) Void contract (ICAI Module)
3. ln a Contract of Guarantee there is/are :

(a) One contract
(b) Two contracts
(c) Three contracts
(d) Four contracts. (ICAI Module)
4. S and P go into a shop. S says to the shopkeeper, C, “Let P have the goods, and if he
does not pay you, I will.“ This is a
(a) Contract of Guarantee
(b) Contract of Indemnity
(c) Wagering agreement
(d) Quasi-contract (ICAI Module, ICAI Sample Question)
5. A guarantee obtained by a creditor by keeping silence as to material circumstances

is :
(a) valid
(b) voidable
(c) unenforceable
(d) invalid (ICAI Module, Nov’19 Mock Test, ICAI Sample Question)
66
6. In a contract of guarantee, a person, who promises to discharge another’s liability

is called:
(a) Principal debtor
(b) Creditor
(c) Indemnifier
(d) Surety (ICAI Module)
7. A bailee has
(a) a right of particular lien over the goods bailed
(b) a right of generation
(c) a right of both particular and general lien
(d) no lien at all over the goods bailed. (ICAI Module)
8. The delivery of goods by one person to another as security for the payment of a
debt is called
(a) Bailment
(b) Pledge
(c) Mortgage
(d) Hypothecation (ICAI Module)
9. The position of a finder of lost goods is that of a

(a) bailor
(b) bailee
(c) surety
(d) principal debtor (ICAI Module)
10. The delivery of goods by one person to another for some specific purpose and time
is known as:
(a) Mortgage
(b) Pledge
(c) Bailment
(d) Charge (ICAI Module)
11. ______________ is one who represents to be an agent of another when in reality

he has no such authority from the other agent at all.
(a) Substituted agent
67
(b) Subordinate agent

(c) Pretended agent
(d) Both (a) & (b) (ICAI Module)
12. Out of the following, who can appoint an Agent?

(a) Minor
(b) Person of sound mind
(c) Person of unsound mind
(d) None of the above (ICAI Module)
13. When an authority of agent is said to be implied:

(a) given by words
(b) spoken
(c) inferred from the circumstances of the case
(d) written (ICAI Module)
14. Substituted Agent is agent of the ___:

(a) Agent
(b) Principal
(c) Sub-agent
(d) Third party (ICAI Module)
15. L made an offer to MD of a company. MD accepted the offer though he had no

authority to do so. Subsequently L withdrew the offer but the company ratified the
MD’s acceptance. State which of the statement given hereunder is correct:
(a) L was bound with the offer
(b) An offer once accepted cannot be withdrawn
(c) Both option (a) & (b) is correct
(d) L is not bound to an offer.
(ICAI Module, May’19, Nov’19 Mock Test, ICAI Module)
16. A is residing in Delhi and has a house in Mumbai. A appoints B by a power of

attorney to take care of his house. State the nature of agency created between A
and B:
(a) Implied agency
(b) Agency by ratification
68
(c) Agency by necessity

(d) Express agency (ICAI Module, Nov’20 RTP)
17. An agent is not liable to the principal if

(a) He is a minor
(b) He is of unsound mind
(c) a and b
(d) None of these (ICAI Module)
18. Aman contracts to indemnify Megha against the consequences of any proceedings
which Chandar may take against Megha in respect of a sum of Rs. 15000/- advanced
by Chandar to Megha. Now, Megha who is called upon to pay the sum of money to
Chandar but she fails to do so. Now, as per the provisions of the Indian Contract Act,
1872, advise the future course of action to be taken by Chandar.
(a) Chandar can recover the amount only from Megha
(b) Chandar can recover the full amount from Aman
(c) Chandar cannot recover the amount from Aman
(d) Chandar can recover at least 10% of the total amount from Megha
(May’19 Mock Test & May’19 RTP, May’20 Mock Test)
19. Anand is a goldsmith, who makes gold jewellery as per customer’s requirement. Brijesh
along with his friend Ramesh, who was also a friend of Anand, approached Anand for
making bangles for his wife. Anand agreed to give delivery within 7 days from the day
Brijesh gives him gold for making bangles. Brijesh gave him bangles on 2nd February
2018. The bangle making charges were Rs. 5000/-, which Brijesh agreed to pay at the
time of delivery of the bangles. Anand delivered the bangles on 6th February 2018,
but Brijesh said that he will pay the making charges after some time. Anand agreed
to that. In spite of repeated reminders Brijesh did not pay his making charges. In this
situation from the following what remedy is available to Anand—
(a) He can sue Ramesh for his making charges because Anand was accompanied
by him
(b) He can sue Anand for his overdue making charges.
(c) He can visit Anand’s place and can take away anything, which is similar in
value to the bangle making charges.
(d) He can retain the goods, as he has the right of particular lien.
(May’19 Mock Test)
69
20. A good friend of Mr. A, Mr. D is a property dealer in Delhi and works for many
renowned registered real estate developers. As Mr. D is doing very well in his work,
Mr. A also wanted to work as a property dealer or property agent. Mr. X, a real estate
developer of Delhi, appointed Mr. D as his agent for selling flats in his upcoming
project, and asked him to name some other person to work for him, for his another
project. At this time he introduced Mr. A to Mr. X, saying that he is also in the same
field for last 10 years, although Mr. A did not had any experience in this field.
Going by his words, Mr. X instructed to appoint Mr. A also for his other ventures.
From the following, Mr. A will be treated as -
(a) Agent of Mr. X
(b) Sub-agent of Mr. D
(c) Substituted agent of Mr. X
(d) Sub- agent of Mr. X (May’19 Mock Test)
21. Mr. Vishal parks his car at a parking lot, locks it, and keeps the keys with himself.
Which of the following statement is correct in this regard?
(a) This is a case of bailment
(b) The parking people has possession of the car of Mr. Vishal
(c) The parking people has custody of car of Mr. Vishal
(d) This is the case of mortgage (May’20 Mock Test, May’21 RTP)

22. A guarantee which extend to a series of transactions is called
(a) Special Guarantee
(b) Continuing Guarantee
(c) Specific Guarantee
(d) None of the above (Nov’20 RTP)
23. Prince delivers his car to Manoj, a garage owner for repair. Who is the bailor in this
case?
(a) Manoj
(b) Prince
(c) None of the above
(d) Both Manoj and Prince (ICAI Sample Question)
24. A had to travel to a different town for 5 days. He left his cow in the custody of B so
that she can be taken care of. After two days the cow delivers a calf. Now, B has to
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return to A:
(a) Only the cow
(b) Only the calf
(c) Both the cow and the calf
(d) Either the cow or the calf (ICAI Sample Question)
25. A, B and C, as sureties for D, enter into three bonds, each in a different penalty,
namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that
of 4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the
extent of 3,00,000 rupees. According to the Indian Contract Act, 1872:
(a) Only A is liable
(b) A and B are each liable to pay 1,00,000 and 2,00,000 rupees respectively.
(c) AandBareeachliabletopay1,00,000rupees.
(d) A, B and C are each liable to pay 1,00,000 rupees. (ICAI Sample Question)
26. Mr. A, puts ‘M’ as the cashier under Mr. B and agrees to stand as surety provided ‘B’
checks the cash every month. ‘M’ embezzles cash. According to the Indian Contract
Act, 1872:
(a) A and B shall equally share the loss.
(b) No one is liable to pay penalty.
(c) ‘A’ is not responsible, if B failed to verify the cash every month.
(d) ‘A’ is responsible, even if B failed to verify the cash every month
(ICAI Sample Question)
27. A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to be supplied
by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but obtains
from A payment of the sum of 2,00,000 rupees in respect of the rice supplied. As per
the provisions of the Indian Contract Act, 1872:
(a) A can recover from B more than the price of the rice actually supplied.
(b) A cannot recover from B more than the price of the rice actually supplied.
(c) A can recover from C the price of the rice actually supplied.
(d) C can recover from A the price of the rice actually supplied
(ICAI Sample Question)
28. A contracts with B for a fixed price to construct a house for B within a stipulated
time. B would supply the necessary material to be used in the construction. C
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guarantees A’s performance of the contract. B does not supply the material as per
the agreement. As per the provisions of the Indian Contract Act, 1872:
(a) C is liable to A
(b) C is liable to B
(c) C is liable to A for the cost material not supplied.
(d) C is discharged from his liability (ICAI Sample Question)
29. Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC
Housing in the event of ‘A’ failing to repay, it is a __________
(a) Contract of Indemnity
(b) Contract of Guarantee.
(c) Quasi Contract
(d) Contingent Contract (Nov’20 Mock Test, May’21 Mock Test)
30. A hires a carriage of B. The carriage is unsafe though B is not aware of it and A is
injured
(a) B is responsible to A for the injury
(b) B is not responsible to A for the injury
(c) No one is responsible to each other
(d) None of the above (Nov’20 Mock Test, May’21 Mock Test)
31. If X bails his ornaments to Y and specifically instructs Y to keep them in a bank,
but Y keeps these ornaments in his own locker at his house along with his own
ornaments. After two days, all the ornaments are lost/stolen in a riot then who
will be responsible for the loss? With regards to the contract of agency, which of the
following statement is incorrect?
(a) X would be responsible for his loss
(b) Y would be responsible for the loss to X
(c) Both X and Y will share the loss equally
(d) Y will not be responsible for the loss to X (Nov’20 Mock Test, May’21 Mock test)
32. With regards to the contract of agency, which of the following statement is incorrect?
(a) A person who is a major can appoint minor as an agent
(b) If an agent happens to be a person incapable of contracting, the principal
cannot hold the agent liable.
(c) No consideration is necessary to create an agency.
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(d) The acceptance of the office by an agent is not a sufficient consideration for the
appointment. (Nov’20 Mock Test, May’21 Mock Test)
33. As per the Indian Contract Act, 1872, any guarantee which has been obtained by the
means of misrepresentation made by the creditor concerning a material part of the
transaction, is:
(a) Valid
(b) Invalid
(c) outside the ambit of the Indian Contract Act, 1872
(d) not revocable if the damage sustained is less than 10% of the amount for which
the guarantee is given (May’21 RTP)
34. Ronak and Bhowmik are brothers and they are engaged in the business of dairy.
Ronak is having 10 cows. The monthly revenue and expenses of the cows is tabulated
as under:
S. Particulars (`)
No.
1. Revenue: 3,00,000
(25 litres per cow per day) *(10 cows) Sale Price Z 40 per
litre)* (30 days in a month) = 3 00000.
2. Expenses: (1,30,000)
i. For feeding: (300 per cow per day) *(10 cows) * (30 days
in a month) = 90,000
ii. Medical Expenses (Salary to a Veterinary Doctor per
month:10,000
iii. Labour’s Salary: (2 person *10,000) = 20,000
iv. Petrol exp for milk delivery van: Lump sum = 10,000
Total Exp 90,000+10,000+20,000+10,000 =1,30,000
3. Savings per month 1,70,000
4. Yearly savings = 1,70,000*12 months 20,40,000
5. Salary to Bhowmik for looking after Ronak’s Diary business: (1,20,000)
10,000*12 = 1,20,000
6. Less: Contingency Expenditure (20,000)
7. Net Revenue to be collected (after a year) 19,00,000
Ronak’s son Chirag is doing Engineering in Dairy Science from Denmark and is in
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Final Year. He learnt a lot by his engineering education and want to invite his father
to know the technical aspects of dairy business. Chirag insisted his parents to come
to Denmark and stay for a year to learn the nitty gritty of the dairy business and
also enjoy the life in travelling nearby places.
Ronak, talked to his brother Bhowmik and explained his plan to visit to Denmark
for a year and requested to take care of his cows. The labourers are engaged for
the maintenance of cows and delivery of the milk, and Bhowmik is just to have a
watch over it, collect the revenues etc. and take care of the cows, till he returns
back from Denmark. Ronak also offered Bhowmik that for taking care of his dairy
business, he will pay to him Rs 10000 per month. Ronak also told Bhowmik that the
cows are covered under the Insurance Policy, for which he has already paid advance
premium and also shared the Insurance Policy with Bhowmik. However, Ronak did
not disclosed that one cow is under sickness, it very often falls sick and needs to be
taken care. Bhowmik agreed and the cows were shifted to Bhowmik’s Dairy Farm
House.
Ronak and his wife went to Denmark to stay with their son and to understand the
dairy business there and to visit the near places.
Bhowmik was now looking after the dairy business of Ronak along with his dairy
business. During the year, 2 cows gave the birth to 2 calves. One cow, which often
used to fall ill, had also influenced the other cows, as a result, one cow of Bhowmik,
and one cow of Ronak which remained in close contact with this sick cow, also fell
sick. All the three cows (2 of Ronak and 1 of Bhowmik) died.
When the insurance claim was lodged, the insurance company refused to pass on
the claim on the following reasons:
• One cow of Ronak which was running sick was not insured.
• Post mortem Report of another two cows (one of Ronak and another of
Bhowmik) revealed that these two cows were in close touch of the sick cow
and due to infections, these two cows also died.
When Ronak returned back to India, he demanded his cows back. Bhowmik returned
8 cows (10-2) but did not returned calves. Bhowmik informed Ronak that due to one
sick cow (of Ronak) his cow also became sick and died and no insurance claim was
admitted. (Nov’21 RTP)
Based on the above facts, answer the following MCQs:
1. What was the fault on the part of Ronak (bailor) in this case?
(a) Ronak has not taken the Insurance Policy of the sick cow.
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(b) Ronak have not informed the continuous sickness of his cow, to Bhowmik
(c) Ronak has left the cows to his brothers and went to Denmark to enjoy the
travelling and tourism.
(d) Ronak, before going to Denmark, should have sold this sick cow.
2. Can Bhowmik claim damages for loss of his cow, which died, since this cow,
remained in the close contact of the sick cow of Ronak:
(a) Ronak is not liable for such loss.
(b) Bhowmik should himself take care of his cow.
(c) Ronak is liable to pay the price of the deceased cow of Bhowmik, since
this cow died on account close contact of sick cow of Ronak.
(d) Bhowmik should be vigilant in taking care of the cows.
3. Whether Bhowmik is responsible to give delivery of two calves which took birth
during the year, when Ronak was on his tour to Denmark:
(a) Bhowmik is not bound to give delivery of two calves, since he has already
lost his own cow due to mistake of not disclosing the sickness of Ronak’s
cow by him (Ronak).
(b) Bhowmik is duty bound to hand over the delivery of two calves.
(c) Ronak should not insist for delivery of the calves.
(d) Bhowmik can keep the calves with him as the calves were born when the
cows were in Bhowmik’s custody.
4. Bhowmik returns only 8 cows, since 2 cows of Ronak died. Whether Ronak is
entitled to claim damages for 2 cows:
(a) Ronak is not entitled to claim damages.
(b) Ronak is entitled to claim damages only, if he can prove that Bhowmik
has not taken care of the cows as a prudent person, not taken the medical
help of the doctor etc.
(c) Bhowmik should morally paid the loss of cows to his brother Ronak
(d) Bhowmik should not claim his salary, since Ronak has already suffered
the loss of two cows.
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ANSWERS
1: If the creditor makes any variance (i.e. change in terms) without the consent of
the surety, then surety is discharged as to the transactions subsequent to the
change. In the instant case Y is liable as a surety for the loss suffered by the
bank due to misappropriation of cash by X during the first nine months but not
for misappropriations committed after the reduction in salary. [Section 133, Indian
Contract Act, 1872].
2: According to Section 134 of the Indian Contract Act, 1872, the surety is discharged
by any contract between the creditor and the principal debtor, by which the principal
debtor is released or by any act or omission for the creditor, the legal consequence
of which is the discharge of the principal debtor. In the given case the B omits to
supply the necessary construction material. Hence C is discharged from his liability.
3: Co-sureties liable to contribute equally (Section 146 of the Indian Contract act,
1872): Equality of burden is the basis of Co-surety ship. This is contained in section
146 which states that “when two or more persons are co-sureties for the same
debt, or duty, either jointly, or severally and whether under the same or different
contracts and whether with or without the knowledge of each other, the co-sureties
in the absence of any contract to the contrary, are liable, as between themselves,
to pay each an equal share of the whole debt, or of that part of it which remains
unpaid by the principal debtor”.
Accordingly, on the default of D in payment, B cannot escape from his liability. All
the three sureties A, B and N are liable to pay equally, in absence of any contract
between them.
4: Discharge of surety by variance in terms of contract: The problem asked in the

question is based on the provisions of the Indian Contract Act, 1872 as contained
in Section 133. The section provides that any variance made without the surety’s
consent in the terms of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the variance.
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In the given problem, ‘M’ and ‘S’ entered into arrangement by entering into a new
contract without knowledge of the Surety ‘A’. Since, the variance made in the
contract is without the surety’s consent in the existing contract, as per the provision,
‘A’ is not liable on his guarantee for the fruits supplied after this new arrangement.
The reason for such a discharge is that the surety agreed to be liable for a contract
which is no more there now and he is not liable on the altered contract because it
is different from the contract made by him.
5: Discharge of Surety by Revocation: As per section 130 of the Indian Contract Act,
1872 a specific guarantee cannot be revoked by the surety if the liability has already
accrued. A continuing guarantee may, at any time, be revoked by the surety, as
to future transactions, by notice to the creditor, but the surety remains liable for
transactions already entered into.
As per the above provisions, liability of Manoj is discharged with relation to all
subsequent credit supplies made by Sharma after revocation of guarantee, because
it is a case of continuing guarantee.
However, liability of Manoj for previous transactions (before revocation) i.e. for
`40,000 remains. He is liable for payment of `40,000 to Sharma because the
transaction was already entered into before revocation of guarantee.
6: Surety’s right to benefit of creditor’s securities: According to section 141 of the

Indian Contract Act, 1872, a surety is entitled to the benefit of every security which
the creditor has against the principal debtor at the time when the contract of surety
ship is entered into, whether the surety knows of the existence of such security or
not; and, if the creditor loses, or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.
In the instant case, C advances to B, `2,00,000 rupees on the guarantee of A. C has
also taken a further security for `2,00,000 by mortgage of B’s furniture without
knowledge of A. C cancels the mortgage. B becomes insolvent, and C sues A on his
guarantee. A is discharged from liability to the amount of the value of the furniture
i.e. `80,000 and will remain liable for balance `1,20,000.
7. (i) As per section 143 of the Indian Contract Act, 1872, any guarantee which the
creditor has obtained by means of keeping silence as to material circumstances,
is invalid. In the given instance, Mr. CB was invited to give guarantee of an
employee Mr. BD to the same employer who previously dismissed Mr. BD
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for dishonesty. This fact was not told to Mr. CB. Here, keeping silence as to
previous dismissal of Mr. BD for dishonesty is a material fact and if Mr. BD later
embezzled the funds of the employer, Mr. CB will not be held liable for the
financial loss as surety since such a contract of guarantee entered is invalid in
terms of the above provisions.
(ii) As per the provisions of section 133 of the Indian Contract Act, 1872, any
variance, made without the surety’s consent, in the terms of the contract
between the principal [debtor] and the creditor, discharges the surety as to
transactions subsequent to the variance.
In the given instance, the actual transaction was not in terms of the guarantee
given by Mr. A. The loan amount as well as the securities were reduced without
the knowledge of the surety.
So, accordingly, Mr. A is not liable as a surety in case Y failed to repay the loan.
1 (i) No. Mere custody of goods does not mean possession. For a bailment to exist
the bailor must give possession of the bailed property and the bailee must
accept it, Section 148, of the Indian Contract Act, 1872 is not applicable.
(ii) Yes, the possession of the goods is transferred to the custom authorities.
Therefore, bailment exists and section 148 is applicable.
2. Problem asked in the question is based on the provisions of the Indian Contract Act,
1872 as contained in Section 150. The section provides that if the goods are bailed
for hire, the bailor is responsible for such damage, whether he was or was not
aware of the existence of such faults in the goods bailed. Accordingly, applying the
above provisions in the given case B is responsible to compensate A for the injuries
sustained even if he was not aware of the defect in the carriage.
3. Referring to the Section 152 of the Indian Contract Act, 1872, B is liable to compensate
A for his negligence to keep jewellery at his resident. Here, A and B agreed to keep
the jewellery at the Bank’s safe locker and not at the latter’s residence.
4. According to section 157 of the Contract Act, 1872, if the bailee, without the consent
of the bailor, mixes the goods of the bailor with his own goods, in such a manner
that it is impossible to separate the goods bailed from the other goods and deliver
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them back, the bailor is entitled to be compensated by the bailee for the loss of the
goods.
In the given question, Srijith’s employee mixed high quality sugar bailed by Amar
and then packaged it for sale. The sugars when mixed cannot be separated. As
Srijith’s employee has mixed the two kinds of sugar, he (Srijith) must compensate
Amar for the loss of his sugar.
5. Section 148 of Indian Contract Act 1872 defines ‘Bailment’ as the delivery of goods
by one person to another for some purpose, upon a contract that they shall, when
the purpose is accomplished, be returned or otherwise disposed of according to the
direction of the person delivering them.
According to Section 149 of the Indian Contract Act, 1872, the delivery to the bailee
may be made by doing anything which has the effect of putting the goods in the
possession of the intended bailee or of any person authorised to hold them on his
behalf. Thus, delivery is necessary to constitute bailment.
Thus, the mere keeping of the box at Y’s shop, when A herself took away the key
cannot amount to delivery as per the meaning of delivery given in the provision in
section 149. Therefore, in this case there is no contract of bailment as Mrs. A did not
deliver the complete possession of the good by keeping the keys with herself.
6. General lien of bankers: According to section 171 of the Indian Contract Act, 1872,
bankers, factors, wharfingers, attorneys of a High Court and policy brokers may, in
the absence of a contract to the contrary, retain, as a security for a general balance
of account any goods bailed to them; but no other persons have a right to retain,
as a security for such balance, goods bailed to them, unless there is an express
contract to the effect.
Section 171 empowers the banker with general right of lien in absence of a contract
whereby it is entitled to retain the goods belonging to other party, until all dues
are discharged. Here in first instance the banker under an agreement has a right
of particular lien on the gold pledged with it against the first secured loan of `
50,000/-, which has already been fully repaid by Radheshyam. Accordingly, Bank’s
decision to continue the lien on the gold until the unsecured loan of ` 20,000/-
(which is the second loan) is not valid.
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UNIT 3: AGENCY
1 Agent’s authority in an emergency (Section 189 of the Indian Contract Act, 1872):
An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary prudence,
in his own case, under similar circumstances.
In the instant case, Rahul, the agent, was handling perishable goods like ‘tomatoes’
and can decide the time, date and place of sale, not necessarily as per instructions
of the Aswin, the principal, with the intention of protecting Aswin from losses.
Here, Rahul acts in an emergency as a man of ordinary prudence, so Aswin will not
succeed against him for recovering the loss.
2 The problem in this case, is based on the provisions of the Indian Contract Act, 1872
as contained in Section 215 read with Section 216. The two sections provide that
where an agent without the knowledge of the principal, deals in the business of
agency on his own account, the principal may:
(1) Repudiate the transaction; if the case shows, either that the agent has
dishonestly concealed any material fact from him, or that the dealings of the
agent have been disadvantageous to him.
(2) Claim from the agent any benefit, which may have resulted to him from the
transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover `6
lakhs from Mr. Singh being the amount of profit earned by Mr. Singh out of the
transaction.
3 To conduct the business of agency according to the principal’s directions (Section

211 of the Indian Contract Act, 1872): An agent is bound to conduct the business of
his principal according to the direction given by the principal, or, in the absence of
any such directions, according to the custom which prevails in doing business of the
same kind at the place where the agent conducts such business. When the agent
acts otherwise, if any loss be sustained, he must make it good to his principal, and,
if any profit accrues, he must account for it.
In the present case, Mr. Pintu, one of the agents, sold goods of ABC Ltd. to M/s Parul
Pvt. Ltd. (on credit) which was insolvent at the time of such sale. Also, it is not the
custom in ABC Ltd. to sell the products on credit.
Hence, Mr. Pintu must make good the loss to ABC Ltd.
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4 According to section 195 of the Contract Act, 1872, in selecting an agent (substituted)
for his principal, an agent is bound to exercise the same amount of discretion as a
man of ordinary prudence would exercise in his own case; and, if he does this, he is
not responsible to the principal for the acts or negligence of the agent so selected.
Thus, while selecting a “substituted agent” the agent is bound to exercise same
amount of diligence as a man of ordinary prudence and if he does so he will not be
responsible for acts or negligence of the substituted agent.
Hence, if Aziz has exercised same amount of diligence as a man of ordinary prudence
would, he shall not be responsible to Azar for the proceeds of the auction.
5. The position of husband and wife is special and significant case of implied authority.
According to the Indian contract Act 1872, where the husband and wife are living
together in a domestic establishment of their own, the wife shall have an implied
authority to pledge the credit of her husband for necessaries. However, the implied
authority can be challenged by the husband only in the following circumstances.
(1) The husband has expressly forbidden the wife from borrowing money or buying
goods on credit
(2) The articles purchased did not constitute necessities.
(3) Husband had given sufficient funds to the wife for purchasing the articles she
needed to the knowledge of the seller
(4) The creditor had been expressly told not to give credit to the wife
Further, where the wife lives apart from husband without any of her fault, she
shall have an implied authority to bind the husband for necessaries, if he does not
provide for her maintenance.
Since, none of the above criteria is being fulfilled; Nalli would be successful in
recovering its money.
6. (i) According to section 202 of the Indian Contract Act, 1872, where the agent has
himself an interest in the property which forms the subject matter of the agency,
the agency cannot, in the absence of an express contract, be terminated to the
prejudice of such interest.
In other words, when the agent is personally interested in the subject matter
of agency, the agency becomes irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself,
out of the proceeds, the debts due to him from A.
As per the facts of the question and provision of law, A cannot revoke this
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authority, nor it can be terminated by his insanity.

(ii) According to section 191 of the Indian Contract Act, 1872, a “Sub-agent” is a
person employed by, and acting under the control of, the original agent in the
business of the agency.
Section 210 provides that, the termination of the authority of an agent causes
the termination (subject to the rules regarding the termination of an agent’s
authority) of the authority of all sub-agents appointed by him.
In the given question, B is the agent of A, and C is the agent of B. Hence, C
becomes a sub- agent.
Thus, when A revokes the authority of B (agent), it results in termination of
authority of sub-agent appointed by B i.e. C (sub-agent).
7. The given problem is based on the provision related to ‘agency coupled with interest’.
According to Section 202 of the Indian Contract Act, 1872 an agency becomes
irrevocable where the agent has himself an interest in the property which forms
the subject-matter of the agency, and such an agency cannot, in the absence of an
express provision in the contract, be terminated to the prejudice of such interest.
In the given instance, Akash appointed Prashant as his agent to recover money from
various traders to whom Akash sold his leather goods, on a monthly remuneration
of ` 15,000. Prashant during a month recovers ` 40,000 from traders on account
of Akash. Prashant after deducting his salary give the rest amount to Akash. In the
said case, interest was created in favour of Prashant and the said agency is not
revocable, therefore, the act of Prashant is valid.
ANSWER TO MCQs
1 A 2 C 3 C 4 A 5 D
6 D 7 C 8 B 9 B 10 C
11 C 12 B 13 C 14 B 15 C
16 D 17 C 18 A 19 D 20 A
21 C 22 B 23 B 24 C 25 D
26 C 27 B 28 D 29 B 30 A
31 B 32 D 33 B 34-1 B 34-2 C
34-3 B 34-4 B
82
The Negotiable Instruments Act, 1881
Chapter 2
The Negotiable Instruments Act,
1881
SECTION-A: CONCEPTS
Introduction
• The Act was introduced on 1st March, 1882.
• The main objective of the Act is to legalise the system by which instruments
contemplated by it could pass from hand to hand by negotiation like any other go
ods.
• The Law in India relating to negotiable
instruments is contained in the Negotiable
Instruments Act, 1881. It deals with
(i) Promissory Notes
(ii) Bills of Exchange
(iii) Cheque.
But Section 21 of The Reserve Bank of India
Act, 1934, provides that Bank has the right
to transact Government business in India,
or affect any local usage relating to any instrument in an oriental language.
• The provisions of this Act are also applicable to Hundis, unless there is a local
usage to the contrary.
• Recent developments: The Act was amended several times.
Recent three amendments made in the N.I. Act:
1) The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002
2) The Negotiable Instruments (Amendment) Act, 2015
3) Negotiable Instruments (Amendment) Act, 2018.
The Negotiable Instruments (Amendment) Act, 2018 received the assent of
the President and was notified in the official gazette on 2nd August, 2018 and
came into effect from September 1, 2018.
The Amendment Act 2018 contains two significant changes – the introduction
of Section 143A and Section 148. These sections provide interim compensation
83
during the pendency of the criminal complaint and the criminal appeal.
2.1: Applicability
It extends to:
(1) Whole of India
(2) Including Jammu & Kashmir.
2.2: Meaning and Characteristics of Negotiable Instrument

• Meaning: The Act does not define the term ‘Negotiable Instruments’. However, Section
13 of the Act provides for only three kinds of negotiable instruments namely, bills of
exchange, promissory notes and cheques, payable either to order or bearer.
But it can be interpreted as a transferrable written piece of paper creating a right of
a person to receive money and a corresponding liability of a person to pay money.
• Essential Characteristics of Negotiable Instrument:

(1) It is necessarily in writing
(2) It should be signed
(3) It is free transferable from one person to another
(4) Holder’s title is free from defects:
A holder in due course acquires a good title irrespective of any defect in a
previous holder’s title. A holder in due course is one who receives the instrument:
(i) For consideration
(ii) Without notice as to the defect in the title of the transferor; i.e. in good
faith and
(iii) Before maturity
(5) It can be transferred any number of times till its satisfaction.
(6) Every negotiable instrument must contain either a promise or order to pay
money. Also, the promise or order must be unconditional.
(7) The promise or order to pay must consist of money only. Nothing should be
payable, whether in addition or in substitution of money. Also, the sum payable
must be certain.
(8) A negotiable instrument is subject to certain presumptions (Section 118).
(i) Consideration: Every negotiable instrument was made or drawn for
consideration.
(ii) Date: Every negotiable instrument bearing a date was made or drawn on
such date.
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(iii) Time of acceptance: Every accepted bill of exchange was accepted within
a reasonable time after its date and before its maturity.
(iv) Time of transfer: Every transfer of a negotiable instrument was made
before its maturity.
(v) Order of endorsements: Endorsements appearing upon a negotiable
instrument were made in the order in which they appear thereon.
(vi) Stamp: Promissory note, bill of exchange or cheque was duly stamped.
(vii) Holder: The holder of a negotiable instrument is a holder in due course
The above presumptions are rebuttable by evidence to the contrary.
2.3: Promissory Note

• Meaning: As per Section 4,
An instrument in writing
(not being bank note or a currency note)
containing an unconditional undertaking,
signed by the maker,
to pay a certain sum of money
to a certain person or to the order of a certain person, or to the bearer of the
instrument.
• Parties to Promissory Note:

(1) Maker: The person who makes the promissory Note. He is Debtor who is liable
to pay.
(2) Payee: The person to whom amount is payable. He is creditor who has a right
to receive money.
• Essential characteristics of a Promissory Note.

(1) In writing- An oral promise to pay is not sufficient.
(2) There must be an express promise to pay. Mere acknowledgment of debt is
insufficient.
Example: Mr.Ramesh, I owe you `2000. Not a valid promissory note as there is
no promise to pay.
Example: I acknowledge myself to be indebted to Rhea for `1,000, to be paid
on demand, for value received. (Valid promissory note as the promise to pay is
definite)
(3) The promise to pay should be definite and unconditional. Therefore, instruments
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payable on performance or non-performance of a particular act or on the

happening or non-happening of an event, are not promissory notes. However,
the promise to pay may be subject to a condition, which according to the
ordinary experience of mankind, is bound to happen (i.e. natural event)
Example: I promise to pay Anil `500 seven days after my marriage with Sonam.
The promissory note is invalid as marriage with Sonam may or may not happen.
Example: I promise to pay Rohan `500 on Tarun’s death- as the death of Tarun
is certain, promise in unconditional. Thus, the promissory note is valid.
Example: I promise to pay Rohan `500 on Tarun’s death, provided Tarun leaves
me enough to pay that sum. It is an invalid promissory note as promise is
dependent on Tarun leaving behind money which is not certain.
(4) A promissory note must be signed by the maker otherwise it in incomplete and
ineffective.
(5) Promise to pay money only.
Example: I promise to pay Raj `500 and a black horse on 1st January next. – It
is not a valid promissory note, as the promisor needs to deliver its black horse
which is not money.
(6) Promise to pay a certain sum
Example: “I promise to pay Nidhi `500 and all other sums which shall be due
to him.”- Promissory note invalid as the amount payable is not certain.
(7) The maker and payee must be certain, definite and different persons. A
promissory note cannot be made payable to the bearer (Sec. 31 of RBI Act).
Only the Reserve Bank or the Central Government can make or issue a promissory
note ‘payable to bearer’ as bearer promissory notes are currency notes.
(8)
Stamping: A promissory note must be properly stamped in accordance with the
provisions of the Indian Stamp Act and such stamp must be duly cancelled by
maker’s signatures.
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• Specimen of a Promissory Note.

Mumbai
March 8th, 2019
`5,000/-
I promise to pay Rahul or his order a sum of Rupees five thousand, for value
received, three months after date.
Stamp
Sd/-
Simran
To,
Mr.Rahul Maker
A-503, Falcon Park
Payee
Mumbai
2.4: Bill of Exchange

• Meaning: As per Section 5,
An instrument in writing
containing an uncon¬ditional order,
signed by the maker,
directing a certain person
to pay a certain sum of money
to a certain person or to the order of a certain person or to the bearer of
the instrument.
• Parties to Bill of Exchange:

(1) Drawer: The maker of a bill of exchange.
(2) Drawee: The person directed by the drawer to pay is called the ‘drawee’. He is
the person on whom the bill is drawn. On acceptance of the bill he is called an
acceptor and is liable for the payment of the bill. His liability is primary and
unconditional.
(3) Payee: The person named in the instrument, to whom or to whose order the
money is, by the instrument, directed to be paid.
• Essential characteristics of bill of exchange

(1) It must be in writing.
(2) Must contain an express order to pay.
(3) The order to pay must be definite and unconditional
(4) The drawer must sign the instrument
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(5) Drawer, drawee and payee must be certain. All these three parties may not
necessarily be three different persons. One can play the role of two. But there
must be two distinct persons in any case.
(6) The sum must be certain.
(7) The order must be to pay money only.
(8) It must be stamped.
• Process of Bill Of Exchange
Prem sells goods on credit to Nisha
In return, since Nisha does not have money.

Prem draws a bill on Nisha and sends it to
her for acceptance
Nisha gives acceptance on the bill
On the maturity date, Nisha pays money

in full.
Prem Nisha
Drawer (Seller) Drawee (Buyer)
In above image, firstly seller sells goods to the buyer /customer and then draws a
bill on him. Buyer/customer received a bill and accepts it. On maturity of bill, buyer
will pay a sum of amount to the payee. (Payee may be drawer himself or any other
person if the bill is indorsed.)
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• Specimen of a Bill of Exchange
Mr. Prem
21, Tilak Nagar, Mumbai
Payee
April 25, 2019
`8,000/-
Three months after date, pay Mr.Ravi a sum of Rupees Eight Thousand, for
value received.
To, Drawee
Ms. Nisha
55, Seacrest Colony, Signature
Drawer
Mumbai Mr. Prem

2.5: Cheque
• Meaning: Section 6 defines a cheque as a bill of exchange
drawn on a specified banker and
not expressed to be payable otherwise than on demand
and includes the electronic image of a truncated cheque and a cheque
in the electronic form.
 Payable on demand means- It should be payable whenever the holder chooses

to present it to the drawee (the banker).
 The expression “Banker” includes any person acting as a bank and any post
office saving bank [Section 3]
 Cheque in the electronic form”-means a cheque drawn in electronic form by
using any computer resource, and signed in a secure system with a digital
signature;
 “A truncated cheque” means a cheque which is truncated during the course of
a clearing cycle, either by the clearing house or by the bank whether paying
or receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in
writing.
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• Parties to Cheque:
(1) Drawer: The person who draws a cheque i.e. makes the cheque. (Debtor)
(2) Drawee: The specific bank on whom cheque is drawn.
(3) Payee: The person named in the instrument, to whom or to whose order the
money is, by the instrument, directed to be paid, is called the payee.
• Essential Characteristics of a cheque

According to the definition of cheque under section 6, a cheque is a species of bill of
exchange. Thus, it should fulfil:
(1) All the essential characteristics of a bill of exchange
(2) Must be drawn on a specified banker Note: These two additional
(3) It must be payable on demand features distinguish a cheque
from bill. Thus, all cheques
are bills while all bills are not
cheques.
• Specimen of a Cheque
Drawee bank
Drawer
2.6: Difference between Promissory Note / Bill of Exchange / Cheque
Sr.No Points of Promissory Note Bill of Exchange Cheque

Distinction
1. Intention It contains a It contains an It contains an order
promise to pay. order to pay. to pay on bank.
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2. Liability of Maker The liability of The liability of The liability

the maker of a the drawer is of maker (A/c
note is primary secondary. He holder) is
and absolute. would be liable secondary when
if the drawee bank fails to pay
fails to pay the the dues.
money.
3. Payment to Self It cannot be The drawer The person can
made payable may order the draw cheque
to the maker payment to be on bank which
himself, that made to him can be made
is the maker also. Thus, the payable to self.
and the payee drawer and So drawer of
cannot be the payee may be cheque & payee
same person. the same person. may be same
person.
4. Parties to There are only In the case of a In the case of
Instrument two parties, bill of exchange a cheque of
viz., the maker there are three exchange there
(debtor) and the parties, viz., are three parties,
payee (creditor). drawer, drawee viz., drawer,
and payee. drawee bank
and payee.
5. Notice of In case of Notice of Notice of
dishonour dishonour of dishonour of a dishonour of
note, notice is bill is required a cheque is
not required to to be given to all required to be
be given to its the parties. given to all the
maker. parties.
6. Noting & There must There must There is no
Protesting be Noting and be Noting and system of Noting
Protest to Protest to or Protest.
prove that the prove that the
note has been bill has been
dishonoured. dishonoured.
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7. Involvement of The banker may The banker may The drawee of

banker or may not be or may not be the cheque is
involved. involved. compulsorily
banker.
8. Grace days 3 days’ grace is 3 days’ grace is No grace is
allowed allowed allowed in the case
of a cheque, as it is
as a rule, payable
immediately on
demand.
9. Stamping PN must be Bills must Cheques do
s t a m p e d be stamped not require to
according to law. according to the be stamped in
law. India.
10. Crossing The PN is not The bill is not A cheque may be
crossed. crossed. crossed.
2.7: Crossing of Cheque (Section 123 to 131)

• There are two types of cheques, open cheques and crossed cheques. A cheque which
can be presented to the banker and can be paid at the counter of the bank (i.e.
money will be given in cash instead of crediting to a bank account) is called an open
cheque.
• Meaning of crossing: Crossing of a cheque means an instruction to the drawee i.e.

the paying bank that the payment is not to be made at the counter but through a
bank.
• Objects of Crossing: A crossing is a warning to the bank not to make payment of

the crosses cheque over the counter. Crossing operates as a caution to the paying
banker.
• Types of crossing:
(1) General Crossing
(2) Account Payee Crossing
(3) Special Crossing
(4) Not Negotiable Crossing
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(1) General Crossing (Section 126)
How general crossing By drawing two parallel transverse lines on the face of the
will be done? cheque. The lines are usually drawn on the left hand top
corner, but may be drawn anywhere.
Effect of such If the cheque is not crossed like this, then the payee or any
crossing? person can claim the amount of cheque over the counter
i.e. in cash from the drawee bank.
However, if the cheque is crossed generally then the payee
or any person thereof cannot claim the amount in cash, the
cheque has to be credited only to an Account.
Instruction? By drawing these 2 lines, the instruction is given
To: His own bank i.e Drawee Bank
What: Don’t give the amount of cheque in cash, only credit
to his account
• If a generally crossed cheque is bearer, it can be negotiated by mere delivery
but the bearer cannot receive the amount in cash. If the cheque is order
i.e. the words ‘or bearer’ have been cancelled, then it can be negotiated by
Indorsement + delivery but, the person cannot receive the amount in cash.
(2) Account Payee Crossing

It is not a type of crossing as per Negotiable Instruments Act, 1881. But it has come
into existence by banking usage.
How Account Payee By writing the words “A/c Payee” on the face of the cheque.
crossing will be The two parallel transverse lines may or may not be present.
done?
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Effect of such Because of such crossing, only Payee’s account can be

crossing? credited.
• If the A/c payee crossed cheque is order, then it cannot
be negotiated further. If banker collects this cheque
from an Indorsee (i.e. person other than named payee),
he can be held responsible.
• However, if it is bearer, it can be negotiated further by
mere delivery because if the words “or bearer” are not
cancelled, then in the eyes of bank, payee is also the
bearer. Hence, amount can be collected by the bearer.
Instruction? By writing the words “A/c Payee”, the instruction is given
To: Collecting Bank
What: Credit only Payee’s A/c. If the bank credits someone
else’s account, then bank shall be liable.
(3) Special Crossing (Section 127)
How special crossing By writing the name of bank on the face of the cheque. The
will be done? two parallel transverse lines may or may not be present.
Effect of such Because of such crossing, only the bank specified in the
crossing? crossing Account can be credited.
By such crossing, the drawer restricts the depositing of
cheque, i.e. the cheque can be deposited only to bank
specified in the crossing
Instruction? By writing the name of the bank, the instruction is given
To: His own bank i.e. Drawee Bank
What: Give the amount of cheque only to bank specified in
the crossing.
• Whether the cheque is bearer or order, it can be negotiated further, but only
the bank specified can be credited.
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(4) Not Negotiable Crossing
How not negotiable By writing the words “Not Negotiable” on the face of the
crossing will be cheque generally between the two parallel transverse lines.
done?
Effect of such Normally in a negotiable instrument, if the title of the

crossing? transferor is defective, the transferee, if he is a HIDC, will
have a good title. But when the words “not negotiable”
are written, even a HIDC will get the same title as that of
transferor. Thus, if the title of the transferor is defective,
the title of transferee will also be defective. The title of the
transferor becomes dependent on the transferee even if he
is a holder in due course.
Hence, even if the crossing is “Not Negotiable”, still it can be
negotiated further whether the cheque is bearer or order,
but it will be negotiated along with the above instruction.
Instruction? By writing the words “Not Negotiation”, the instruction is
given
To: Holder
What: That his title is dependent on title of transferor even
if he is holder in due course. That means if the transferor’s
title is bad, he will also get a bad title.
• Who may cross? [Section 125]

A cheque may be crossed by the following parties:
(1) Drawer: A drawer may cross it generally or specially.
(2) Holder: A holder may cross an uncrossed cheque generally or specially. If the
cheque is crossed generally, the holder may cross specially. If cheque crossed
generally or specially, he may add words “not negotiable”.
(3) Banker: A banker may cross an uncrossed cheque, or if a cheque is crossed
generally he may cross it specially to himself. Where a cheque is crossed
specially, the banker to whom it is crossed may again cross it specially to
another banker, his agent, for collection.
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2.8: Payment in Due Course (Section 10)

• Payment in due course means payment in accordance with the apparent tenor of
the instrument,
in good faith and without negligence to any person in possession thereof under
circum¬stances,
which do not afford a reasonable ground for believing that he is not entitled to
receive payment of the amount therein mentioned.
• Example: Kavin issues a cheque for `10 without writing the word ‘only’ and gives
it to David. David adds the words ‘thousand only’ after ten and adds three zeros
after figure 10 as there is sufficient space for making these additions. The bank pays
`10,000 to David who absconds. Here bank is discharged by payment in due course
and hence not liable to Kavin for excess payment.
2.9: Protection of Liability of the Banker

• Protection of Liability of the Paying Banker
The banker who makes the payment of a crossed cheque is called the paying banker.
(1) Cheque payable to order [Section 85(1)]: Where a cheque payable to order
intends to be indorsed by or on behalf of the payee, the banker is discharged by
payment in due course. The banker can debit his customers account even though
the Indorsement by the payee might turn out to be forgery or the Indorsement
might have been placed by the payee’s agent without his authority.
But if any drawee bank made the payment on a cheque on which drawer
signatures were forged then such bank shall be liable to the true owner. Thus,
the paying banker shall be liable if it makes the payment of the cheque on
which drawer’s signature was forged.
(2) Cheque payable to bearer [Section 85(2)]: As regards bearer cheque the rule is
“once a bearer always a bearer”. A banker gets a good discharge by payment
in due course of the amount on a bearer cheque to the holder of the cheque. It
does not matter whether the apparent holder is the owner of the cheque or not.
(3) Payment of cheque crossed generally: Where a cheque is crossed generally, the
banker on whom it is drawn shall pay it only to a banker.
(4) Payment of cheque crossed specially: Where a cheque is crossed specially, the
banker on whom it is drawn shall pay it only to the banker to whom it is
crossed or his agent for collection.
(5) Payment in due course of crossed cheque [Section 128]: Where the drawee bank
paid the cheque in due course, the drawee bank and the drawer thereof, shall
96
respectively be entitled to the same rights, and be placed in the same position
in all respects, as they would respectively be entitled to and placed in if the
amount of the cheque had been paid to and received by the true owner thereof
(6) Payment of crossed cheque out of due course [Section 129]: Any drawee bank
paying a cheque out of due course, shall be liable to the true owner of the
cheque for any loss he may sustain owing to the cheque having been so paid.
• Protection of Liability of the Collecting Banker

 The bank which receives the payment of a crossed cheque on behalf of its
customer is known as the collecting banker.
 Section 131- Non liability of banker receiving payment of cheque: A banker who
has in good faith and without negligence received payment for a customer of a
cheque crossed generally or specially to himself shall not incur any liability to
the true owner of the cheque by reason only of having received such payment,
in case the title of the cheque proves defective
 In order to avail such a protection, the banker needs to prove the following:
(1) That the banker had received the payment of crossed cheque
(2) That the collection was made by the bank on behalf of the customer
(3) That the collecting bank must have acted in good faith and without
negligence.
2.10: Acceptance (Section 7)

• Meaning: Section 7 states that an acceptance is the signature
of the drawee of a bill who has signed his assent upon the bill
and delivered it.
• Essentials of valid acceptance

1. In writing,
2. Signed by the drawee or his agent,
3. On bill of exchange,
4. Completed by delivery to the holder
 Writing the word ‘Accepted’ is immaterial.
 An oral acceptance or writing of the word ‘Accepted’ without the drawee’s
signature is not an acceptance.
• Acceptor: An acceptor is the drawee who has signed his assent upon the bill and
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delivered it to the holder.
• Types of Acceptance:
General acceptance: Conditional/ Qualified acceptance:

An acceptance without It means an acceptance with a change in amount,
any condition. period, place or subjecting with any condition.
Holder may
Object to it OR Consent to it
If holder objects to it, the bill will be If the holder consents to it, the bill
treated as dishonoured and holder can is valid but all prior parties without
immediately claim the amount from whose consent he agrees to such
the prior party without waiting for the acceptance will be discharged.
due date.
• Who can accept the bill of exchange?

(1) Drawee, i.e., the person directed to pay.
(2) Where more than 1 drawees are specified, then any or all can accept it. Only
those who accept are liable to pay.
(3) Drawee in case of need: When in the bill, the name of any person is given in
addition to the drawee to be resorted to in case of need; such person is called
a ‘drawee in case of need’.
(4) An acceptor for honour:
 Meaning: When a bill of exchange has been dishonoured by non-
acceptance and any person accepts it for honour of the drawer or of any
indorser; such person is called “an Acceptor for honour”. The payment
which he makes is known as “payment for honour”
It is an undertaking by a third party to accept and pay a bill of exchange
that was dishonoured by the party on whom it was drawn. It is also
called acceptance supra protest.
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 How acceptance for honor must be made: A person desiring to accept for
honor must, by writing on the bill under his hand, declare that he accepts
for the honor of the drawer or of a particular Indorser whom he names,
or generally for honor.
 Essentials of valid acceptance for honor
a) The holder must consent to acceptance for honor. The holder cannot
be compelled to assent to acceptance for honor.
b) The bill must have been noted or protested for the non-acceptance
or for better security.
c) Acceptance for honor can be made by a person who is not already
liable on the bill.
d) It must be made by writing on the bill.
e) It must be for the whole amount due on the bill
f) Acceptance must be for the honor of any party already liable on the bill.
g) Acceptance for honor must be made before bill is overdue.
h) Stranger paying for honor must, before payment, declare before a
Notary Public the party for whose honor he pays and the Notary
Public must have recorded such a declaration.
 A specimen of Acceptance for Honor
The acceptor for honor writes as below, across the bill as given under
specimens of bills of exchange above: Accepted Supra Protest or Accepted
for XX person.
 Rights and liabilities of an acceptor for honour (Sec 111& 112)
a) Acceptor for honor binds himself to all the subsequent parties to pay
the amount of the bill if the drawee does not pay.
b) The party for whose honor he accepts to pay the amount is liable to
compensate the acceptor for honor for all loss or damage sustained
by him in consequence of such acceptance. The liability of an acceptor
or honor is conditional he is liable only if the drawee fails to pay the
bill.
For the bill to get accepted for honor, the bill of exchange should be
presented at its maturity to the drawer for payment and it must be
dishonoured by the drawee and noted or protested for non-payment
to charge an acceptor for honor (Sec 112). The bill must be presented
or forwarded for presentment to the drawee next after the day of its
maturity.
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(5) Agent of any of the persons mentioned above.

(6) Acceptor by estoppels: When no drawee has been named in a bill but a person
accepts it, he may be estopped from denying his liability as an acceptor.
2.11: Holder (Section 8)

• The “holder” of a promissory note, bill of exchange or cheque means—
 any person
 entitled in his own name to the possession thereof, and
 to receive or recover the amount due thereon from the parties thereto.
• In other words, holder is not a person who holds the instrument but he is a person
who has a right to hold and who is entitled to receive or recover the amount due
thereon from the parties thereto.
• His rights and title are dependent on the transferor
• Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled
at the time of such loss or destruction.
• A holder means the owner of a negotiable instrument. A person in possession of an
instrument without having a right to possess can’t be called a holder.
Example: Any person who finds or steals a bearer instrument or takes an instrument
under forged Indorsement is not holder as holder of a negotiable instrument must
have right to receive or recover the money thereon from the parties thereto.
Example: An agent holding an instrument for his principal is not a holder as
although agent can receive payment of the instrument, he has no right to sue on
the instrument in his own name.
2.12: Holder in Due Course (Section 9)

• ”Holder in due course” means any person
 who for consideration
 before the amount mentioned in it became payable, and
 without having sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title i.e. good faith,
 became the possessor of a promissory note, bill of exchange or cheque (if
payable to bearer), or the payee or Indorsee thereof, (if payable to order),
• Example: A draws a cheque for `5,000 and hands it over to B by way of gift. B is a
holder but not a holder in due course as he does not get the cheque for value and
consideration. As a holder he is entitled to receive `5000 from the bank on whom
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the cheque is drawn.
• Essentials To become Holder In Due Course (HIDC):

(1) The holder must have paid lawful & valuable consideration:
(2) A holder must acquire the instrument before its maturity in order to attain the
status of holder in due course.
(3) The holder must have obtained the instrument in good faith.
(4) The instrument must be complete and regular on the face of it.
(5) He must have received the instrument as a holder- ie. A HIDC may be either
payee, or the possessor (if the instrument is payable to bearer), or the indorsee
(if the instrument is payable to order).
• Privileges of being a Holder In Due Course:

(1) In case of Inchoate Instrument: A person signing and delivering to another
a stamped but otherwise inchoate instrument (Inchoate instrument is an
instrument where a person executes an incomplete but duly signed negotiable
instrument) is liable to a holder in due course even if the instrument has not
been filled in accordance with the authority given by him, provided the amount
is covered by the value of stamp (Section 20).
Example: Manoj signs his name on a blank but stamped instrument which he
gives to Samir with an authority to fill up for a sum of `30,000 only. But Samir
fills it for `50,000. Samir then transfers it to Ashish for a consideration of
`50,000 who takes it in good faith. Here, Ashish is entitled to recover the full
amount of the instrument because he is a holder in due course whereas Samir,
being a holder cannot recover the amount because he filled in the amount in
excess of his authority.
(2) In case of fictitious bill: In case a bill of exchange is drawn payable to the
drawer’s order in a fictitious name and is indorsed by the same hand as the
drawer’s signature, the acceptor is liable to pay the holder in due course
(Section 42).
Example: Hiren is the holder in due course of a bill of which Arun is the acceptor.
Kavil, the drawer of the bill, is fictitious. Since Hiren is holder in due course,
Arun cannot escape liability. However, Hiren shall have to establish that the
bill was endorsed by the same hand as drawer’s signature (i.e the person who
wrote fictitious Kavil’s name has indorsed it to Hiren)
(3) In case of conditional instrument or ‘escrow’: If the delivery of the instrument
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was conditional or for a special purpose (Sections 46 and 47) and if such
instrument is negotiated to a holder in due course, the other parties to the bill
are liable to pay.
Example: If Raman gives a cheque to a shopkeeper with a condition that he
should not deposit the cheque till he supplies the goods, anybody depositing
the cheque prior to fulfilment of the condition is liable to return the money
unless he is holder in due course.
(4) In case of instrument obtained by unlawful means or for unlawful consideration:
The person liable in a negotiable instrument is liable to holder in due course
even if the instrument was obtained from the former by means of an offence
or fraud or for an unlawful consideration (Section 58). Thus, a holder in due
course acquires a title free from all defects.
(5) Estoppel against denying original validity of instrument without consideration:
Even if instrument was originally made or drawn without consideration, a
holder in due course, still can claim the whole amount on the instrument.
(6) In case Payee’s capacity to indorse is denied: No maker of a promissory note
and no acceptor of a bill payable to order shall, in a suit thereon by a holder in
due course, be permitted to deny the payee’s capacity, at the date of the note
or bill, to Indorse the same (Section 121).
(7) Liability of prior parties: Section 36 of the Negotiable Instruments Act makes
every prior party to a negotiable instrument, liable to a holder in due course
until the instrument is duly satisfied.
Example: A draws and B accepts a bill of exchange payable to C or order. C
endorses the bill to D and D to E, who is holder in due course. E can recover the
amount from A, B, C and D.
(8) Instrument free from all defects: Not only that the title of the holder in due
course is not subject to the defect in previous holder’s title but once the
instrument passes through the hands of a holder in due course, it is free from
all defects. Any person acquiring it takes it free from all defects, unless he was
himself a party to the fraud [Sec. 33].
• Effect of Forgery:
 Where a signature on the negotiable instrument is forged, it becomes a nullity.
The holder of a forged instrument cannot enforce payment thereon. In the
event of the holder being able to obtain payment in spite of forgery, he cannot
retain the money. The true owner may sue on tort the person who had received.
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 This principle is universal in character; by reason where of even a holder in due

course is not exempt from it. A holder in due course is protected when there is
defect in the title. But he derives no title when there is entire absence of title
as in the case of forgery.
 Example: Alex is the payee in the bill and John is the acceptor. Hiten stole the
bill from Alex and forges his signature and indorses it to his own self. Hiten,
later indorses the bill to Ashwin, who is holder in due course. Here, Ashwin
does not get any title as Hiten did not have any title.
• Difference between Holder & Holder in due course:
Basis of Holder Holder in due course

difference
1. Meaning The “holder” of a promissory ”Holder in due course” means
note, bill of exchange or cheque any person who for consideration
means any person entitled in before the amount mentioned in
his own name to the possession it became payable, and without
thereof, and to receive or recover having sufficient cause to believe
the amount due thereon from the that any defect existed in the
parties thereto title of the person from whom
he derived his title became the
possessor of a promissory note,
bill of exchange or cheque (if
payable to bearer), or the payee
or Indorsee thereof, (if payable to
order)
2. Right to sue A holder cannot sue all prior A holder in due course can sue all
parties prior parties.
3. Consideration Not necessary Necessary
4. Good faith The instrument may or may not . The instrument must be obtained
be obtained in good faith in good faith.
5. Maturity A person can become holder, A person can become holder in due
before or after the maturity of course, only before the maturity
the negotiable instrument. of negotiable instrument.
6. Privileges Less Privileges More Privileges
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2.13: Classification of Instruments

(1) Bearer and Order Instruments:
• Bearer Instrument: It is an instrument where
the name of the payee is blank or
where the name of payee is specified with the words “or bearer” or
where the last indorsement is blank.
Such instrument can be negotiated by mere delivery.
• Order Instrument: It is an instrument which is payable to a person or

Payable to a person or his order or
Payable to order of a person or
Where the last indorsement is full
Such instrument can be negotiated by indorsement and delivery.
(2) Inland and Foreign Instruments (Section 11 & 12)

• Inland Instrument: Any instrument drawn or made in India and
Either payable in or drawn upon any person resident in India shall be deemed
to be an inland instrument.
Example:
(i) A promissory note made in Chennai and payable in Delhi.
(ii) A bill drawn in Pune on a person resident in Jaipur, although it is stated to
be payable in London.
The Negotiable Instruments Act is applicable.
• Foreign Instruments: Instrument which is not an inland instrument.
In the absence of a contract to the contrary,
the liability of the maker or drawer of a foreign promissory note or bill of
exchange or cheque is regulated in all essential matters by the law of the
place where he made the instrument, and
the respective liabilities of the acceptor and Indorser by the law of the place
where the instrument is made payable (Section 134).
Example: A bill of exchange is drawn by John in New York where the rate of
interest is 13% and accepted by David payable in Sydney where the rate of
interest is 7%. The bill is indorsed in India and is dishonoured. An action on the
bill is brought against David in India. He is liable to pay interest at the rate of
7% only. But if John is charged as drawer, he is liable to pay interest at 13%.
104
(3) Inchoate and Ambiguous Instruments:

• Inchoate Instrument (Section 20):
It means an Instrument that is incomplete in certain respects.
(i) The person gives a blank instrument with authority to the holder to
complete it with appropriate amount up to the stamp value of the
instrument.
(ii) Delivery of such a paper is essential. The words “when one person signs
and delivers to another” are important.
(iii) The person signing and delivering the inchoate instrument is liable both
to a holder and holder in due course. However, there is a difference in
their respective rights. The holder of such an instrument cannot recover
the amount in excess of the amount intended to be paid by the signor.
The holder in due course can, how¬ever, recover any amount on such
instrument provided it is covered by the stamp affixed on the instrument
(privileges of holder in due course).
Example: A bill of exchange upto the value of `1,000, say, requires stamps
worth 50 paise. A bill with a stamp of 50 paise on it is duly signed but the
amount is not filled in It is agreed that the payee will not fill in more than
`500. Suppos¬ing, the payee fills in `900, the person so signing shall be liable
to any holder in due course for the full amount of the bill, i.e., `900, being
the amount covered by the stamp. However, a mere holder cannot claim more
than `500 the amount intended.
Example: A person signed a blank acceptance on a bill of exchange and kept
it in his drawer. The bill was stolen by X and he filled it up for ` 20,000 and
negotiated it to an innocent person for value. It was held that the signer to the
blank acceptance was not liable to the holder in due course because he never
delivered the instrument intending it to be used as a negotiable instrument.
• Ambiguous Instrument:
An instrument which is vague and cannot be clearly iden¬tified either as a bill
of exchange, or as a promissory note, is an Ambiguous instrument. In other
words, such an instrument may be construed either as prom¬issory note, or as
a bill of exchange.
Regarding such instruments, Section 17 provides that the holder may, at his
discretion, treat it as either and the instru¬ment shall thereafter be treated
accordingly. Thus, after exercising his option, the holder cannot change that it
105
is the other kind of instrument.

Example: A is the drawer as well as the drawee of an instrument. He negotiates
it to B. B, the holder, may treat the bill as a promissory note made by A.
Where amount is stated differently in figures and words [Section 18] If the amount
undertaken or ordered to be paid is stated differently in figures and in words, the
amount stated in words shall be the amount undertaken or ordered to be paid.
(4) Demand and Time Instruments:

• Demand Instruments (Section 19): A promissory note or bill of exchange in
which no time for payment is mentioned is payable on demand. Bills and notes
are payable either on de¬mand or at a fixed future time. Cheques are always
payable on demand.
A bill or promissory note is also payable on demand when it is expressed to be
payable on demand, or “at sight” or “pre¬sentment” (Section 21). The expression
“after sight” means, in a promissory note, after presentment for sight, and, in
a bill of exchange after acceptance, or noting for non-acceptance, or protest
for non-acceptance.
• Time instrument:
1) Meaning (Section 22): A bill or note which is payable:
a) After a fixed period or
b) After sight or
c) On a specified day or
d) On the happening of an event which is certain to happen is known as
time instrument.
Days of grace: A note or bill, which is not expressed to be payable on
demand, at sight or on presentment; is at maturity on the third day after
the day on which it is expressed to be payable. Three days are allowed as
days of grace
2) Calculation of maturity [Section 23]:
Time at which instrument is payable Maturity period

1. When a note or bill is made payable, When the period stated terminates
a stated number of months after on the day of the month which
date. corresponds with the day on which
the instrument is dated.
106
Example: Bill is dated 27th June and payable after 3 months. The date
of maturity will be 27th September.
2. If the month in which the The period shall be held to
period would terminate has no terminate on the last day of such
corresponding day month
Example: Bill is dated 31st May and payable after 1 month. The date of
maturity will be 30th June.
3. When it is made payable after a The period terminates on the day of
stated number of months after the month which corresponds with
sight/ after a certain event the day on which it is presented for
acceptance or sight.
4. When the instrument is a bill of Maturity will be with the day on
exchange made payable at stated which it was so accepted.
number of months after sight and
has been accepted for honor.

3) Calculating maturity of bill or note payable so many days after date or
sight [Section 24]: In calculating the date at which a promissory note or
bill of exchange made payable at certain number of days, the day of the
date, or of presentment for acceptance or sight, or of protest for non-
acceptance, or on which the event happens, shall be excluded.
4) When day of maturity is a holiday [Section 25]: When the day on which a
promissory note or bill of exchange is at maturity is a public holiday, the
instrument shall be deemed to be due on the next preceding business day.
The expression “Public Holiday” includes Sundays and any other day
declared by the Central Government, by notification in the Official Gazette,
to be a public holiday.
2.14: Transfer of Instrument

• One of the essential characteristics of a negotiable instrument is that it is freely
transferable from one person to another. The rights in a negotiable instrument can
be transferred from one person to another by
1. Assignment under Transfer of Property Act
2. Negotiation under the Negotiable Instruments Act
• Assignment: Assignment of a negotiable instrument means transfer of ownership

of the instrument from one person (assignor) to another (assignee), whereby the
107
assignee becomes en¬titled to recover the amount due on the instrument from the
parties liable to pay.
• Negotiation: According to section 14, when a negotiable instrument is transferred
to any person with a view to constitute the person holder thereof, the instrument is
deemed to have been negotiated.
• Modes of negotiation of instrument?

(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable
by the delivery thereof (Section 47).
(ii) A promissory note, bill of exchange or cheque payable to order is negotiable
by the holder by indorsement and delivery thereof (Section 48).
• Delivery [Section 46]:

 Delivery of an instrument is essential whether the instrument is payable to
bearer or order for effecting the negotiation.
 The delivery must be voluntary and the object of delivery should be to pass the
property in the instrument to the person to whom it is delivered.
 The delivery can be, actual or constructive. Actual delivery takes place when
the instrument changes hand physically, constructive delivery take place when
the instrument is delivered to the agent, clerk or servant of the Indorsee on
his behalf or when the Indorser, after Indorsement, holds the instrument as an
agent of the Indorsee.
 The delivery is essential not only at the time of negotiation but also at the time
of making or drawing of negotiable instrument.
 The rights in the instrument are transferred to the indorsee only after the
indorsement the same has been delivered.
 If a person makes the indorsement of instrument but before the same could
be delivered to the indorsee the indorser dies, the legal representatives of the
deceased person can’t negotiate the same by mere delivery thereof (Section
57).
2.15: Indorsement of Instrument (Section 15)

• Meaning:
When the maker or holder of a negotiable instrument signs the same otherwise
than as such maker,
for the purpose of negotiation, on the back or face thereof or on a slip of paper
108
annexed thereto known as allonge-

he is said to indorse the same and as called the indorser.
The person to whom the instrument is indorsed is called the indorsee.
• Essentials of a valid indorsement:

(1) Signature of indorser: The indorsement must be signed. Indorser may or may
not add the indorsee’s name in indorsement (blank indorsement), but the
signature is compulsory.
(2) Who may negotiate? [Section 51] Every sole maker, drawer, payee or indorsee
unless the indorsement is restricted, or all of several joint makers, drawers,
payees or indorsees, of a negotiable instrument may, indorse and negotiate
the same.
It is however, necessary that such maker or drawer who wants to indorse is in
lawful possession of the instrument.
(3) Effect of indorsement [Section 50]: The indorsement of a negotiable instrument
followed by delivery transfers to the indorsee the property therein with the
right of further negotiation unless it is a restrictive indorsement.
(4) Indorser who excludes his own liability or makes it conditional [Section 52] The
indorser of a negotiable instrument may,
 by express words in the indorsement,
 exclude his own liability thereon (Indorsement Sans Recourse), or
 make such liability or the right of the indorsee to receive the amount due
thereon depend upon the happening of a specified event, although such
event may never happen (Conditional Indorsement).
 Where an indorser so excludes his liability and afterwards becomes the
holder of the instrument all intermediates indorser are liable to him
(Negotiation Back).
• Kinds of Indorsements:
(1) Indorsement in Blank/General Indorsement: Where the Indorser just puts his
signature without specifying the Indorsee, the Indorsement is said to be in blank
(Section 16). The effect of such an Indorsement is to render the instrument
payable to bearer even though originally pay¬able to order (Section 54). No
further Indorsement is needed for its negotiation.
Example: If a bill of exchange is payable to ‘X or order’ and X merely signs on
the back of it, it will constitute Indorsement in blank.
109
(2) Indorsement in Full/Special Indorsement: Where along with Indorser’s signature,

the name of the Indorsee is specified, the Indorsement is called ‘Indorsement in
full’ (Section 16).
According to Section 55, if a negotiable instrument, after having been indorsed
in bank, is indorsed in full, the amount of it can be claimed by the person to
whom it has been indorsed in full, or by one who derives title through such
person.
Example: ‘Pay X or order’ and is signed by A, the payee, it constitutes ‘Indorsement
in full’.
For example, if a bill of exchange is bearer but is signed and Indorsed but the
payee, it shall become order.
However, it is not possible to convert a bearer cheque into an order in the above
way as the rule “Once a bearer, always a bearer, till the words ‘or bearer’ are
cancelled”.
(3) Restrictive Indorsement: An Indorsement is restrictive which prohibits the further

negotiation of a negotiable instrument. Section 50 gives power to indorser to
restrict the indorsement.
Example: B signs the following indorsements on different negotiable instruments
payable to order,—
(a) “Pay the contents to Kunal only”.
(b) “Pay Kunal for my use”.
(c) “Pay Kunal on order for the account to Rahul”.
(d) “the within must be credited to Kunal”.
(4) Partial indorsement: An indorsement which transfers only a part of amount

of the instrument is called as partial indorsement. However as per Section 56
such an indorsement is invalid under law.
But, as per Section 56, if a bill has been paid in part, the fact of the part
payment may be indorsed on the instrument and it may then be negotiated for
the remaining part.
Example: Yash is a holder of a bill for `15,000 out of which `10,000 is paid.
Here, Yash can indorse it for the remaining amount.
(5) Conditional Indorsement: A conditional Indorsement is one, which makes

the transfer of the property in a negotiable instrument from the Indorser to
110
the Indorsee, dependent upon the fulfillment of a stated condition. Thus,

according to Section 52, where an Indorser makes his liability on the instrument
conditional on the happening of a particular event, it is called conditional
Indorsement, though such event may never happen. Simi¬larly, the right of the
Indorsee may be made conditional on the happening of a particular event.
Example: Where the Indorsement states “Pay Atul if he reaches Indore’. In such
a case, Atul can claim payment on the instrument only if he reaches Delhi.
Conditional delivery: Bill may be delivered along with a condition. The
transferee does not become holder until he fulfills the condition. A bill which
is conditionally deliv¬ered is called an escrow.
However, the holder in due course can claim the entire amount, irrespective of
the condition (privileges of holder in due course).
(6) Facultative Indorsement: Where such words are added to an Indorsement

whereby the Indorser waives his right on the instrument, say right to receive notice
of dishonor waived, the Indorsement is termed as ‘Facultative Indorsement’.
Example: An indorsement, ‘Pay Sudeep or order. Notice of dishonor waived’ is
a facultative indorsement.
(7) Indorsement ‘Sans Recourse’: An Indorser of a negotiable instrument may, by

express words in the Indorsement, exclude his own liability thereon (Section
52). Such Indorsement is called ‘Indorsement Sans Recourse’.
Example: The holder of a bill may indorse it thus: ‘Pay A or order without
recourse to me, or Pay A or order sans recourse, or Pay A or order at his own
risk’.
(8) Indorsement ‘Sans Frais’: Where the indorser does not want the indorsee or any
subsequent holder to incur any expenses on his account on the instrument, the
indorsement is ‘sans Frais’.
• Negotiation Back:
 When an endorser, after he has negotiated an instrument, again becomes its
holder before its maturity, the instrument is said to be negotiated back to
that holder. In such a case, none of the intermediate holders is liable to him.
The general rule, that a holder in due course may sue all prior parties to the
111
instrument does not apply.

Example: X is the acceptor and a bill is drawn payable to A or order. A endorses
it to B, B to C, C to D and D again to A. The endorsement by D to A is called
‘negotiation back’, A having again become the holder thereof. A in such a case,
cannot sue other parties be¬cause that would only lead to circuitry of action.
Hence B,C,D are discharged.
 However, where prior party has excluded its liability on the instrument and
the in¬strument is negotiated back to him, he may sue all those intermediate
parties whom he was not liable as a prior party.
Example: In the preceding example, if A, at the time of the first endorsement,
ex¬pressly excluded his liability, say by endorsing ‘Sans recourse’ or ‘without
recourse to me’, he will not be liable to B, C or D. B, C & D shall, however, be
liable to him and he may recover the amount from all or any of them. Hence,
B,C,D are not discharged.
2.16: Rights and Obligations of Parties to an Instrument obtained illegally
• Instrument obtained by unlawful means or for unlawful consideration [Section 58]

 When a negotiable instrument has been lost, or
 has been obtained from any maker, acceptor or holder thereof by means of an
offence or fraud, or for an unlawful consideration,
 possessor or indorsee is not entitled to receive the amount due thereon from
such maker, acceptor or holder, or from any party prior to such holder.
 However if the possessor or indorsee is a holder in due course, he is entitled to
receive the amount (privileges of holder in due course).
112
• Instrument acquired after dishonour or when overdue [Section 59]: The negotiable
instrument can be transferred even after dishonour or maturity but the person
obtaining it can never become holder in due course. Hence the person who obtains
it has rights only against the transferor and not the other prior parties.
• Instrument negotiable till payment or satisfaction [Section 60]: A negotiable

instrument may be negotiated (except by the maker, drawee or acceptor after
maturity) infinitely until payment or satisfaction thereof by the maker, drawee or
accepter at or after maturity.
• Accommodation note or bill: If any person has become a holder in good faith and
for consideration, after maturity, of a promissory note or bill of exchange made,
drawn or accepted without consideration, for the purpose of enabling some party
thereto to raise money thereon, he can recover the amount of the note or bill from
any prior party.
Example: The acceptor of a bill of exchange, when he accepted it, deposited with
the drawer certain goods as a collateral security for the payment of the bill, with
power to the drawer to sell the goods and apply the proceeds in discharge of the
bill if it were not paid at maturity. The bill not having been paid at maturity, the
drawer sold the goods and retained the proceeds, but indorsed the bill to A. A’s title
is subject to the same objection as the drawer’s title.
2.17: Discharge from Liabilty (Section 82 to 90)
Discharge of Instrument Discharge of Party

When the rights against all the parties When only some of the parties to an
on an instrument come to an end, the instrument are discharged from liability
instrument is discharged. That is, when but others continue to be liable thereon,
the liability of primary party ceases, the it is only discharge of some of the parties
instrument is discharged. from liability.
Modes of discharge:
(1) By cancellation, Release or Payment (Section 82):
• By cancellation [Section 82(a)]: The maker, acceptor or indorser respectively of
a negotiable instrument is discharged from liability thereon to a holder who
113
cancels such acceptor’s or indorser’s name with intent to discharge him, and to
all parties claiming under such holder.
• By release [Section 82(b)]: The maker, acceptor or indorser respectively of a
negotiable instrument may be discharged from liability thereon by a holder by
an agreement between the parties, and includes waiver, release etc. The effect
of release is the same as that of cancelling a party’s name.
• By payment [Section 82(c)]: When payment on an instrument is made in due
course, both the instrument and the parties to it are discharged.
(2) By allowing drawee more than 48 hours (Section 83):

If the holder of a bill of exchange allows the drawee more than 48 hours exclusive of
public holiday(s) for acceptance, exclusive of public holiday(s), all previous parties
not consenting to such allowance are discharged from liability to such holder.
(3) By delay in presenting cheques (Section 84):

Where a cheque is not presented for payment within a reasonable time of its issue,
and the drawer on whose account it is drawn had the right to have the cheque
paid, at the time when presentment ought to have been made, has suffered actual
damage through the delay, he is discharged to the extent of such damage.
Example: Suresh draws a cheque for `5000 and, when the cheque ought to be
presented, has funds at the bank to meet it. The bank is declared insolvent before
the cheque is presented. The drawer is discharged, but the holder can prove against
the bank for the amount of the cheque.
(4) Forgery of Indorser’s signature in case of Cheque (Section 85):

The Bank is discharged by payment in due course even if the signature of indorser is
forged (It is already explained in the concept of Protection of Liability of the Paying
Bank).The logic being, bank’s responsibility is to verify only drawer’s signature as
they have drawer’s signature in their records. It is not the bank’s responsibility to
verify indorser’s signature.
(5) By qualified acceptance (Section 86):

If the holder of a bill of exchange agrees to accept qualified acceptance, all the
previous parties whose consent is not obtained to such acceptance are discharged
from liability, unless the holder gives notice thereof and the parties give their assent
to such qualified acceptance (It is already explained in the concept of Types of
114
Acceptance).
(6) By material alteration (Section 87):
• If the holder of a bill of exchange does any material alteration, all the previous
parties whose consent is not obtained to such material alteration acceptance
are discharged from liability, unless the holder gives notice thereof and the
parties give their assent to such material alteration.
• Alteration must be material: An alteration is material which in any way alters
the operation of the instrument and affects the liability of parties thereto.
• Examples of material alteration are: Alteration regarding:
(i) Alteration of date e.g. time of payment accelerated or postponed.
(ii) Alteration of rate of interest (if specified).
(iii) Alteration of the sum payable, e.g. a bill for ` 10,000 altered into a bill
for `15000.
(iv) Alteration in the time of payment, e.g. a bill payable 3 months after date
is altered to be payable 1 month after date.
(v) Alteration of the place of payment. Likewise, alteration by addition of
place for payment e.g. where a place of payment is not given but is
subsequently added without the acceptor’s consent
(vi) Alteration by addition of parties (from one maker/payee to two makers/
payees).
(vii) Alteration by tearing material part of the instrument.
(viii) Alteration by increasing or affixing stamps
(ix) Alteration by erasure of an “account payee” crossing
(x) Alteration of an order cheque to a bearer cheque, except by or with consent
of the drawer.
• The following alterations do not affect the liability of parties:
(i) If the alteration is unintentional and due to pure accident (e.g. accidental
disfigurement of document).
(ii) Alteration made by a stranger without the consent of holder and without
any fraud and negligence on his part
(iii) An alteration made to correct a clerical error or a mistake, thus, if instead
of 1990, the date entered was 1909, the agent of drawer held entitled
to correct mistake. Such correction is deemed to be giving effect to the
original intention of the parties.
(iv) Alteration with the consent of the parties liable thereto.
(v) A material alteration doesn’t affect the liability of those parties who
115
become liable after the alteration is made.

Section 88 provides that the acceptor or indorser is bound by his acceptance
or indorsement if the alteration was done before they accepted or received
the instrument.
(vi) Sec. 20-inchoate instrument (e.g. column of sum left blank) can be filled
up by the holder.
(vii) Sec. 49 – It enables the holder of an instrument indorsed in blank to
convert it into indorsement in full.
(viii) Sec. 125- the holder of an uncrossed cheque may cross it, or may convert
general into special crossing or may make it ‘not negotiable’.
(7) Discharge of Bank: As per Section 89, bank is discharged by payment in due course
in case of alteration not apparent from records.
Example: Kavin issues a cheque for`10 without writing the word ‘only’ and gives
it to David. David adds the words ‘thousand only’ after ten and adds three zeros
after figure 10 as there is sufficient space for making these additions. The bank
pays `10,000 to David who absconds. Here the addition of zeroes and word is not
apparent (visible) from records. Hence, bank is discharged by payment in due course
and hence not liable to Kavin for excess payment.
(8) As per Section 90, when the acceptor of bill of exchange or maker of promissory
note becomes holder on or after maturity, the instrument is discharged.
2.18 : Dishonour of Bill of Exchange/ Promissory Note (Section 92 to 98):
Bill of • Dishonour by non-acceptance (Section 92)

Exchange • Dishonour by non-payment (Section 93)
Promissory
• Dishonour by non-payment (Section 93)
Note
• Dishonour of bill of exchange by non-acceptance (Section 91):

In the following circumstances bill shall be considered as dishonoured by non-
116
acceptance:
(1) When the bill is presented for acceptance and drawee or one or more of the
several drawees (not being partners) refuse to accept the bill within 48 hours
from the time of pre¬sentment for acceptance.
(2) When presentment for acceptance is excused and it remains unaccepted.
Presentment for acceptance is excused under the following circumstances:
(i) Where the drawee cannot be found after reasonable search.
(ii) Where the drawee is a fictitious person.
(3) Where drawee is incompetent to contract, e.g., minor or lunatic.
(4) Where the acceptance is qualified.
• Dishonour of bill of exchange/ promissory note by non-payment (Section 92):

(1) An instrument is dishonoured by non- payment when the party primarily liable
(maker in a promissory note or acceptor in a bill of exchange), makes default in
payment.
(2) A negotiable instrument is dishonoured by non-payment when presentment
for payment is excused and the instrument when overdue remains unpaid (As
explained in Section 76).

• Notice of dishonour (Section 93 to 98):
Notice by whom: (i) Holder

(ii) Agent
(iii) Legal Representative (If the holder is dead)
(iv) Official Receiver/Official Assignee (If the holder is declared
as insolvent)
Notice to whom: (i) All parties whom holder wants to make liable
(ii) Agent
(iii) Legal Representative (If the prior party is dead)
(iv) Official Receiver/Official Assignee (If the prior party is
declared as insolvent)
Requirements of The holder must specify the fact of dishonour and the intention to
valid notice: make prior party liable. Also he must give an exact description of
the instrument dishonoured.
117
Mode of service of Notice may be oral or written; may, if written, be sent by post;
notice and may be in any form. It must be given within reasonable time
after dishonour, at the place of business or (in case such party has
no place of business) at the residence of the party for whom it is
intended.
If the notice is duly directed and sent by post and miscarries, such
miscarriage does not render the notice invalid
Effect of non- If a notice of dishonour is not sent to any prior party who is entitled
service of notice: to such notice, within a reasonable time, he is dis¬charged from
liability
Transmission of If any party receiving notice of dishonour wants to hold his prior
notice of dishonour party liable, he should transmit the notice within reasonable time
by party receiving to that prior party. But if that prior party has already received
it: notice from any other party, then such communication is not
necessary.
When notice of (1) When there is no intention to make prior party liable.
dishonour is not (2) When prior party is discharged.
required: (3) When drawer and drawee are same (Ambiguous Instrument)
(4) When drawer is fictitious.
(5) When the prior party has signed the indorsement ‘without
recourse’.
(6) When the party entitled to notice cannot, after reasonable
search, be found.
(7) Where the party liable to give notice is unable, without any
fault of its own to give it, e.g., serious illness of the holder or
his agent or any other accident.
(8) When the prior party is incompetent.
(9) When the party entitled to notice, knowing the facts, promises
unconditionally to pay the amount due on the instrument
i.e when he waives his right to receive notice (Facultative
Indorsement)
118
What is reasonable (1) Reasonable time of giving notice of dishonour (Section 106)
time (Section 106 &
107)
If the holder and the party If the holder and the party to
to whom notice of dishonour whom notice of dishonour is
is given carry on business or given carry on business or live
live (as the case may be) in (as the case may be) in same
different place place
 
Notice should be dispatched Notice should be dispatched
by the next post or on the in time to reach its destination
day next after the day of on the date next after the day
dishonour. of dishonour.
2.19: Dishonour of Cheque
• Dishonour of cheque for insufficiency, etc., of funds in the account (Section 138)
 Where any cheque drawn by a person on an account maintained by him with a
banker-
For payment of any amount of money
to another person from out of that account
for the discharge, in whole or in part, of any legal debt or other liability,
is returned by the bank unpaid,
either because of amount of money standing to the credit of that account is
insufficient to honor the cheque, or the amount of cheque exceeds the amount
119
arranged to be paid from that account by an agreement made with that bank,
Then such person shall be deemed to have committed an offence and shall, be
punished with:
Imprisonment: Upto two years
Or
Fine: Upto twice the amount of the cheque,
Or
Both
 However, in order to attract the aforesaid penalty, following conditions must
be satisfied:
(1) The cheque should have been presented within 3 months from the date on
which it is drawn.
(2) The cheque should have been dishonoured due to insufficiency of funds in
the account maintained by him with a banker for payment of any amount
of money to another person from out of that account.
(i) In case of stop-payment, it shall be deemed to have been so
dishonoured for in¬sufficiency of funds unless stop-payment can be
justified.
(ii) Dishonour due to closure of account has also been held to be
dishonoured for insufficiency of funds
(iii) Directing the payee not to present will be deemed to have the same
effect
(3) The payment for which the cheque was issued should have been in
discharge of a legally enforceable debt or liability in whole or part of it.
Hence, a cheque given as gift or donation, or as a security or in discharge
of a mere moral obligation, or for an illegal consideration, will not be
covered under this section.
 Following procedure is to be followed before applying the aforesaid penalty:
Procedure Example with

date
(1) Cheque is issued by drawer 28th June, 2019
(2) The payee/holder presents it for payment. 1st July,2019
(3) The collecting bank informs payee/holder about 4th July,2019
dishonour of cheque.
120
(4) The payee or the holder in due course of the cheque + 30 days
should have given no¬tice demanding payment within 3rd August,2019
30 days from the drawer in receipt of infor¬mation (Last day for
of dishonour of cheque from the bank. Notice can be sending the
served by ordi¬nary post or even telegram. notice)
(5) The drawer is liable only if he fails to make the + 15 days

payment within 15 days of such notice period. 18th August,2019
(Last date for
payment)
(6) The payee or holder in due course of the cheque + 1 month
dishonoured should file a complaint within one 18th Sept,2019
month under Sec. 138. (Last date for
filing a suit)
 Additional points in dishonour of cheque:

(1) Whether the payee or the holder of a cheque can initiate prosecution for
an offence under the N. I. Act, for its dishonour for the second time if he
had not initiated any prosecution on the first occasion?
No, as by not initiating prosecution for the first time, he has waived his
right to sue.
(2) Whether ‘giving of notice of dishonour itself constitute ‘receipt of notice’

for consti¬tuting offence under Section 138 of the Negotiable Instruments
Act, 1881 ?
No, as payee/holder’s responsibility is just to give the notice and it is not
his responsibility to make sure drawer receives the notice. Hence, even if
drawer fails to make payment as a consequence of non-receipt of notice
still gives a right to payee/holder to initiate prosecution under Section
138.
(3) What is the starting point for 30 days’ notice?

The 30 days are to be counted from the receipt of information regarding
the return of the cheque as unpaid.
(4) Where an owner of company, who is neither a director nor a person-in-
121
charge, sent a cheque from the companies account to discharge its legal
liability. Subsequently the cheque was dishonoured and the compliant
was lodged against him. Is he li¬able for an offence under section 138?
The amount can be recovered but since he is not the drawer of the cheque,
which was dishonoured, and the cheque was also not drawn on an
account maintained by him but was drawn on an account maintained by
the company. Hence, it was held that the owner couldn’t be said to have
committed the offence under Section 138 of the Act.
• Presumption in favour of holder [Section 139]:

It shall be presumed that the holder of a cheque received the cheque of the nature
referred to in section 138 for the discharge, in whole or in part, or any debt or other
liability unless proved otherwise.
• Defense which may not be allowed in any prosecution under section 138 [Section
140]:
The drawer cannot defend himself for the offence under section 138 by stating that
he had no reason to believe when he issued the cheque, it would be dishonoured on
presentment due to insufficiency of funds.
• Offences by Companies (Section 141)

(1) If the person committing an offence under section 138 is a company (i.e. drawer
of the cheque is company),
 every person who, at the time the offence was committed was in charge
of, and
 the company, both shall be deemed to be guilty of the offence and shall
be liable to be proceeded against and punished accordingly.
However, if the person proves that the offence was committed without
his knowledge, or that he had exercised all due diligence to prevent the
commission of such offence then he shall be excused.
(2) If a Central Government or State Government employee is nominated as a
director of a company by virtue of his employment then he shall not be liable
for prosecution under the chapter.
(3) Where any offence under this Act, has been committed by a company and
it is proved that the offence has been committed with the consent of, or is
attributable to, any neglect on the part of any director pr employee of the
122
company then such shall be liable to be proceeded against and punished

accordingly.
• Cognizance of offences [Section 142]

(1) Court shall take cognizance of any offence punishable under section 138 only if
it is in writing.
Time limit for filing the complaint is 1 month.
The complaint should be filed in a Metropolitan Magistrate or a Judicial
Magistrate of the first class or any court above these courts.
(2) Place of Jurisdiction of court for the trail of offence : The offence under section
138, which deals with the dishonour of cheque, shall be inquired into and tried
only by a court within whose local jurisdiction,—
(a) if the cheque is delivered for collection through an account, the branch
of the bank where the payee or holder in due course, as the case may be,
maintains the account, is situated; or
(b) if the cheque is presented for payment by the payee or holder in due
course, otherwise through an account, the branch of the drawee bank
where the drawer maintains the account, is situated.
• Validation for transfer of pending cases [Section 142A]

(1) All cases of cheque bouncing which were pending in any court, before the Act
came into force, will be transferred to a court with the appropriate jurisdiction.
(2) The payee has filed a complaint against the drawer in a court with the appropriate
jurisdiction; all subsequent complaints against that person regarding cheque
bouncing will be filed in the same court. This will be irrespective of the mode
of presentation of cheque.
(3) If more than one case is filed by the same payee against the same drawer before
different courts, the case will be transferred to the court with the appropriate
jurisdiction before which the first case was filed.
123
• Power of Court to try cases summarily [Section 143]
(1) All offences under this Chapter shall be tried by a Judicial Magistrate of the first
class or by a Metropolitan Magistrate and certain provisions of Code of Criminal
Procedure, 1973.
In case of summary trial In case where no summary trial can be made:

The Magistrate can pass a Where it appears to the Magistrate that the
sentence of imprisonment for a nature of the case is such that a sentence
term not exceeding one year and of imprisonment for a term exceeding one
an amount of fine exceeding five year may have to be passed or that it is, for
thousand rupees. any other reason, undesirable to try the case
summarily, the Magistrate shall after hearing
the parties, record an order to that effect
and thereafter recall any witness who may
have been examined and proceed to hear or
rehear the case in the manner provided by
the Code.
(2) Speedy Trial: The trial of a case under this section shall be continued from day to
day until its conclusion, unless the Court finds the adjournment of the trial beyond
the following day to be necessary for reasons to be recorded in writing.
(3) Speedy and efficient Disposal: Every trial under this section shall be conducted as
fast as possible and an effort should be made to conclude the trial within six months
from the date of filing of the complaint.
• Power to direct interim compensation (Section 143A):

(1) The Court trying an offence under section 138 may order the drawer of the
cheque to pay interim compensation to the complainant—
a) In a summary trial or a summons case, where he pleads not guilty to the
accusation made in the complaint; and
b) In any other case, upon framing of charge.
(2) The interim compensation shall not exceed 20% of the amount of the cheque
(3) The interim compensation shall be paid within 60 days from the date of the
order, or within such further period not exceeding 30 days as may be directed
by the Court on sufficient cause being shown by the drawer of the cheque.
124
(4) If the drawer of the cheque is acquitted, the Court shall direct the complainant
to repay to the drawer the amount of interim compensation, with interest at
the bank rate as published by the Reserve Bank of India, prevalent at the
beginning of the relevant financial year, within 60 days from the date of the
order, or within such further period not exceeding 30 days as may be directed
by the Court on sufficient cause being shown by the complainant.
(5) The interim compensation payable under this section may be recovered as if it
were a fine under the Code of Criminal Procedure, 1973.
(6) The amount of fine imposed under section 138 or the amount of compensation
awarded under section 357 of the Code of Criminal Procedure, 1973, shall be
reduced by the amount paid or recovered as interim compensation under this
section.
• Offences to be compoundable [Section 147]

Every offence punishable under this Act shall be compoundable.
• Section 148: Power of Appellate Court to order payment pending appeal against
conviction.
(1) In an appeal by the drawer against conviction under section 138, the Appellate
Court may order the appellant to deposit such sum which shall be a minimum
of 20% of the fine or compensation awarded by the trial Court.
The amount payable under this section shall be in addition to any interim
compensation paid by the appellant under section 143A.
(2) The amount shall be deposited within 60 days from the date of the order, or
within such further period not exceeding 30 days as may be directed by the
Court on sufficient cause being shown by the appellant.
(3) The Appellate Court may direct the release of the amount deposited by the
appellant to the complainant at any time during the pendency of the appeal:
If the appellant is acquitted, the Court shall direct the complainant to repay
to the appellant the amount so released, with interest at the bank rate as
published by the Reserve Bank of India, prevalent at the beginning of the
relevant financial year, within 60 days from the date of the order, or within
such further period not exceeding thirty days as may be directed by the Court
onsufficient cause being shown by the complainant.
125
SUMMARY
Introduction
• The Act was introduced on 1st March, 1882.
• The Law in India relating to negotiable instruments is contained in the Negotiable
Instruments Act, 1881. It deals with
(i) Promissory Notes
(ii) Bills of Exchange
(iii) Cheque.
• Recent three amendments made in the N.I. Act:
(i) The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act,
2002
(ii) The Negotiable Instruments (Amendment) Act, 2015
(iii) Negotiable Instruments (Amendment) Act, 2018.
2.1 Applicability: Whole of India including Jammu & Kashmir
2.2: Meaning and Characteristics of Negotiable Instrument

• Meaning: Section 13 of the Act provides for only three kinds of negotiable instruments
namely, bills of exchange, promissory notes and cheques, payable either to order or
bearer.
It is a transferrable written piece of paper creating a right of a person to receive
money and a corresponding liability of a person to pay money.
• Essential Characteristics of Negotiable Instrument:
(1) It is necessarily in writing
(2) It should be signed
(3) It is free transferable from one person to another
(4) Holder in due course’s title is free from defects:
(5) It can be transferred any number of times till its satisfaction.
(6) Every negotiable instrument must contain either a promise or order to pay
money. Also, the promise or order must be unconditional.
(7) The promise or order to pay must consist of money only. Nothing should be
payable, whether in addition or in substitution of money. Also, the sum payable
must be certain.
(8) A negotiable instrument is subject to certain presumptions (Section 118).
(i) Consideration
126
(ii) Date
(iii) Time of acceptance
(iv) Time of transfer
(v) Order of endorsements
(vi) Stamp
(vii) Holder
The above presumptions are rebuttable by evidence to the contrary.
2.3: Promissory Note (Section 4)

• Meaning: An instrument in writing (not being bank note or a currency note) containing
an uncon¬ditional undertaking, signed by the maker, to pay a certain sum of money
to a certain person or to the order of a certain person, or to the bearer of the
instrument.
• Parties to Promissory Note:
(1) Maker
(2) Payee
• Essential characteristics of a Promissory Note.
(1) In writing
(2) An express promise to pay.
(3) The promise to pay should be definite and unconditional. However, the promise
to pay may be subject to a condition, which according to the ordinary experience
of mankind, is bound to happen.
(4) A promissory note must be signed by the maker
(5) Promise to pay money only.
(6) Promise to pay a certain sum
(7) The maker and payee must be certain, definite and different persons.
(8) A promissory note must be properly stamped.
2.4: Bill of Exchange (Section 5)

• Meaning: An instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money to a certain person
or to the order of a certain person or to the bearer of the instrument.
• Parties to Bill of Exchange:
(1) Drawer
(2) Drawee
(3) Payee
127
• Essential characteristics of bill of exchange

(1) It must be in writing.
(2) Must contain an express order to pay.
(3) The order to pay must be definite and unconditional
(4) The drawer must sign the instrument
(5) Drawer, drawee and payee must be certain.
(6) The sum must be certain.
(7) The order must be to pay money only.
(8) It must be stamped.
2.5: Cheque (Section 6)

• Meaning: It defines a cheque as a bill of exchange drawn on a specified banker and
not expressed to be payable otherwise than on demand and includes the electronic
image of a truncated cheque and a cheque in the electronic form.
• Parties to Cheque:
(1) Drawer
(2) Drawee Bank
(3) Payee
• Essential Characteristics of a cheque

(1) All the essential characteristics of a bill of exchange
(2) Must be drawn on a specified banker
(3) It must be payable on demand
2.6: Difference between Promissory Note / Bill of Exchange / Cheque
2.7: Crossing of Cheque (Section 123 to 131)

• Meaning of crossing: Crossing of a cheque means an instruction to the drawee bank
that the payment is not to be made at the counter but through a bank.
• Who may cross? [Section 125]
(4) Drawer
(5) Holder
(6) Banker
• Types of crossing:
(1) General Crossing: If the cheque is not crossed like this, then the payee or any
128
person can claim the amount of cheque over the counter i.e. in cash from the
drawee bank.
However, if the cheque is crossed generally then the payee or any person
thereof cannot claim the amount in cash, the cheque has to be credited only to
an Account.
(2) Account Payee Crossing: Because of such crossing, only payee’s account can be
credited.
(3) Special Crossing: Because of such crossing, only the bank specified in the
crossing Account can be credited.
(4) Not Negotiable Crossing: When the words “not negotiable” are written, even
a HIDC will get the same title as that of transferor. Thus, if the title of the
transferor is defective, the title of transferee will also be defective. Even if
the crossing is “Not Negotiable”, still it can be negotiated further whether
the cheque is bearer or order, but it will be negotiated along with the above
instruction.
2.8: Payment in Due Course (Section 10)

Payment in due course means payment in accordance with the apparent tenor of the
instrument, in good faith and without negligence to any person in possession thereof
under circum¬stances, which do not afford a reasonable ground for believing that he is
not entitled to receive payment of the amount therein mentioned.
2.9: Protection of Liability of the Banker

• Protection of Liability of the Paying Banker: When the drawee bank makes the
payment in due course, it is discharged and hence not liable.
• Protection of Liability of the Collecting Banker: When collecting bank collects the
money for its customer in good faith, it is not liable.
2.10: Acceptance (Section 7)

• Meaning: Section 7 states that an acceptance is the signature of the drawee of a bill
that has signed his assent upon the bill and delivered it.
• Essentials of valid acceptance
(1) In writing,
(2) Signed by the drawee or his agent,
(3) On bill of exchange,
(4) Completed by delivery to the holder
129
• Types of Acceptance:
(1) General Acceptance
(2) Conditional/Qualified Acceptance
• Who can accept the bill of exchange?
(1) Drawee
(2) Where more than 1 drawees are specified, then any or all can accept it. Only
those who accept are liable to pay.
(3) Drawee in case of need
(4) An acceptor for honour
(5) Agent of any of the persons mentioned above.
(6) Acceptor by estoppels
2.11: Holder (Section 8)

• The “holder” of a promissory note, bill of exchange or cheque means any person
entitled in his own name to the possession thereof, and to receive or recover the
amount due thereon from the parties thereto.
• Holder is not a person who holds the instrument but he is a person who has a right
to hold and who is entitled to receive or recover the amount due thereon from the
parties thereto.
• His rights and title are dependent on the transferor
2.12: Holder in Due Course (Section 9)

• ”Holder in due course” means any person who for consideration before maturity
and in good faith became the possessor of a promissory note, bill of exchange or
cheque.
• His rights and title are independent on the transferor
• Essentials To become Holder In Due Course (HIDC):
(1) The holder must have paid lawful & valuable consideration:
(2) A holder must acquire the instrument before its maturity in order to attain the
status of holder in due course.
(3) The holder must have obtained the instrument in good faith.
(4) The instrument must be complete and regular on the face of it.
(5) He must have received the instrument as a holder
• Privileges of being a Holder In Due Course:
(1) In case of Inchoate Instrument
(2) In case of fictitious bill
130
(3) In case of conditional instrument or ‘escrow’

(4) In case of instrument obtained by unlawful means or for unlawful consideration
(5) Estoppel against denying original validity of instrument without consideration.
(6) In case Payee’s capacity to indorse is denied
(7) Liability of prior parties
(8) Instrument free from all defects
• Effect of Forgery: Holder in due course is protected when there is defect in the title.
But he derives no title when there is entire absence of title as in the case of forgery.
• Difference between Holder & Holder in due course
2.13: Classification of Instruments

(1) Bearer and Order Instruments:
• Bearer Instrument: It is an instrument where the name of the payee is blank or
where the name of payee is specified with the words “or bearer” or where the
last indorsement is blank.
• Order Instrument: It is an instrument which is payable to a person or Payable
to a person or his order or payable to order of a person or where the last
indorsement is full
(2) Inland and Foreign Instruments (Section 11 & 12)
• Inland Instrument: Any instrument drawn or made in India and
Either payable in or drawn upon any person resident in India shall be deemed
to be an inland instrument.
• Foreign Instruments: Instrument which is not an inland instrument.
(3) Inchoate and Ambiguous Instruments:
• Inchoate Instrument (Section 20):
It means an Instrument that is incomplete in certain respects.
(i) The person gives a blank instrument with authority to the holder to
complete it with appropriate amount up to the stamp value of the
instrument.
(ii) Delivery of such a paper is essential. The words “when one person signs
and delivers to another” are important.
(iii) The person signing and delivering the inchoate instrument is liable both
to a holder and holder in due course. However, there is a difference in
their respective rights. The holder of such an instrument cannot recover
the amount in excess of the amount intended to be paid by the signor.
The holder in due course can, how¬ever, recover any amount on such
131
instrument provided it is covered by the stamp affixed on the instrument.

• Ambiguous Instrument:
An instrument which is vague and cannot be clearly iden¬tified either as a bill
of exchange, or as a promissory note, is an Ambiguous instrument. In other
words, such an instrument may be construed either as prom¬issory note, or as
a bill of exchange.
(4) Demand and Time Instruments:
• Demand Instruments (Section 19): A promissory note or bill of exchange in
which no time for payment is mentioned is payable on demand. Bills and notes
are payable either on de¬mand or at a fixed future time. Cheques are always
payable on demand.
• Time instrument (Section 22): A bill or note which is payable:
a) After a fixed period or
b) After sight or
c) On a specified day or
d) On the happening of an event which is certain to happen is known as time
instrument.
2.14: Transfer of Instrument

• One of the essential characteristics of a negotiable instrument is that it is freely
transferable from one person to another. The rights in a negotiable instrument can
be transferred from one person to another by
3. Assignment under Transfer of Property Act
4. Negotiation under the Negotiable Instruments Act
• Modes of negotiation of instrument?
(i) A promissory note, bill of exchange or cheque payable to bearer is negotiable
by the delivery thereof (Section 47)
(ii) A promissory note, bill of exchange or cheque payable to order is negotiable
by the holder by indorsement and delivery thereof (Section 48)
2.15: Indorsement of Instrument (Section 15)

• Meaning: When the maker or holder of a negotiable instrument signs the same
otherwise than as such maker, for the purpose of negotiation, on the back or face
thereof or on a slip of paper an¬nexed thereto known as allonge- he is said to
indorse the same and as called the indorser. The person to whom the instrument is
indorsed is called the indorsee.
132
• Essentials of a valid indorsement:

(1) Signature of indorser
(2) Who may negotiate? [Section 51]
(3) Effect of indorsement [Section 50]
(4) Indorser who excludes his own liability or makes it conditional [Section 52]
• Kinds of Indorsements:
(1) Indorsement in Blank/General Indorsement: Where the Indorser just puts his
signature without specifying the Indorsee, the Indorsement is said to be in
blank (Section 16).
(2) Indorsement in Full/Special Indorsement: Where along with Indorser’s signature,
the name of the Indorsee is specified, the Indorsement is called ‘Indorsement in
full’ (Section 16).
(3) Restrictive Indorsement: An Indorsement is restrictive which prohibits the
further negotiation of a negotiable instrument.
(4) Partial indorsement: An indorsement which transfers only a part of amount of
the instrument is called as partial indorsement. Such indorsement is invalid
under law.
(5) Conditional Indorsement: A conditional Indorsement is one, which makes the
transfer of the property in a negotiable instrument from the Indorser to the
Indorsee, dependent upon the fulfillment of a stated condition.
Conditional delivery: Bill may be delivered along with a condition. The
transferee does not become holder until he fulfills the condition. A bill which
is conditionally deliv¬ered is called an escrow.
(6) Facultative Indorsement: Where such words are added to an Indorsement
whereby the Indorser waives his right on the instrument.
(7) Indorsement ‘Sans Recourse’: An Indorser of a negotiable instrument may, by
express words in the Indorsement, exclude his own liability thereon (Section
52).
(8) Indorsement ‘Sans Frais’: Where the indorser does not want the indorsee or any
subsequent holder to incur any expenses on his account on the instrument, the
indorsement is ‘sans Frais’.
• Negotiation Back:
 When an endorser, after he has negotiated an instrument, again becomes its
holder before its maturity, the instrument is said to be negotiated back to that
133
holder. In such a case, none of the intermediate holders is liable to him.

 However, where prior party has excluded its liability on the instrument and
the in¬strument is negotiated back to him, he may sue all those intermediate
parties whom he was not liable as a prior party.
2.16: Rights and Obligations of Parties to an Instrument obtained illegally

• Instrument obtained by unlawful means or for unlawful consideration [Section 58]:
When a negotiable instrument has been lost, or has been obtained from any maker,
acceptor or holder thereof by means of an offence or fraud, or for an unlawful
consideration, possessor or indorsee is not entitled to receive the amount unless he
is holder in due course
• Instrument acquired after dishonour or when overdue [Section 59]: The negotiable
instrument can be transferred even after dishonour or maturity but the person
obtaining it can never become holder in due course.
• Instrument negotiable till payment or satisfaction [Section 60]: A negotiable
instrument may be negotiated infinitely until payment or satisfaction.
• Accommodation note or bill: If any person has become a holder in good faith and
for consideration, after maturity, of a negotiable instrument without consideration,
for the purpose of enabling some party thereto to raise money thereon, he can
recover the amount of the note or bill from any prior party.
2.17: Discharge from Liability (Section 82 to 90)
Discharge of Instrument Discharge of Party

When the rights against all the When only some of the parties
parties on an instrument come to an instrument are discharged
to an end, the instrument is from liability but others continue
discharged. That is, when the to be liable thereon, it is only
liability of primary party ceases, discharge of some of the parties
the instrument is discharged. from liability.
Modes of discharge:
(1) By cancellation, Release or Payment (Section 82)
(2) By allowing drawee more than 48 hours (Section 83)
(3) By delay in presenting cheques (Section 84)
(4) Forgery of Indorser’s signature in case of Cheque (Section 85)
134
(5) By qualified acceptance (Section 86)

(6) By material alteration (Section 87)
(7) Discharge of Bank: As per Section 89, bank is discharged by payment in due course
in case of alteration not apparent from records.
(8) As per Section 90, when the acceptor of bill of exchange or maker of promissory
note becomes holder on or after maturity, the instrument is discharged.
2.18: Dishonour of Bill of Exchange/ Promissory Note (Section 92 to 98)
Dishonour of bill of exchange Dishonour of Promissory Note

• Dishonour by non-acceptance • Dishonour by non-payment
(Section 92) (Section 93)
(1) When the bill is presented When the maker in the
for acceptance and drawee promissory note fails to pay.
or one or more of the several
drawees refuse to accept the
bill within 48 hours.
(2) When presentment for
acceptance is excused and it
remains unaccepted.
(i) Where the drawee
cannot be found after
reasonable search.
(ii) Where the drawee is a
fictitious person.
(3) Where drawee is incompetent
to contract.
(4) Where the acceptance is
qualified.
• Dishonour by non-payment
(Section 93)
When acceptor in the bill of
exchange fails to pay.
Notice of dishonour (Section 93 to 98): Notice of dishonour should be given within
135
reasonable time by the holder/agent/legal representative/official receiver to his prior

party in order to make him liable at the place of business/residence.
2.19: Dishonour of Cheque

• Dishonour of cheque for insufficiency, etc., of funds in the account (Section 138)
Sections 138 provides for criminal penalties in the event of dishonour of cheques for
insufficiency of funds.
The drawer, under Sec. 138, may be punished with imprisonment upto 2 years or
with a fine up to twice the amount of the cheque or with both.
However, in order to attract the aforesaid penalties, following conditions must be
satisfied:
(1) The cheque should have been dishonoured due to insufficiency of funds in the
account maintained by him with a banker for payment of any amount of money
to another person from out of that account.
(i) In case of stop-payment, it shall be deemed to have been so dishonoured
for in¬sufficiency of funds unless stop-payment can be justified.
(ii) Dishonour due to closure of account has also been held to be dishonoured
for insufficiency of funds
(iii) Directing the payee not to present will be deemed to have the same effect
(2) The payment for which the cheque was issued should have been in discharge
of a legally enforceable debt or liability in whole or part of it.
(3) The cheque should have been presented within 3 months from the date on
which it is drawn.
• Offences by Companies (Section 141)

If the person committing an offence is a company, every person, who at the time the
offence was committed and the company shall be jointly liable for the offence.
• Cognizance of offences [Section 142]

Court shall take cognizance of any offence punishable under section 138 only if it is
in writing. Time limit for filing the complaint is 1 month. The complaint should be
filed in a Metropolitan Magistrate or a Judicial Magistrate of the first class or any
court above these courts.
136
LIST OF LEGAL TERMS
SR. LEGAL WORD MEANING PG NO.

(This column is
NO.
to be filled by
students)
1 Rebuttable by The fact given can be proved wrong by giving
evidence to the with evidence
contrary
2 Apparent tenor Here it means whatever is visible on the
instrument
3 Supra Protest With reference to the acceptance or payment
of a protested bill of exchange, or other
negotiable instrument, by a third party acting
to protect the good name of the drawer or
an endorser of the bill upon protest.
4 Court shall take Court shall consider the complaint for
cognizance of any starting the legal procedure.
offence
5 Tried by a court To examine and determine the issues involved
in a case in a court of law. To hear evidence
in order to determine the guilt or innocence
of an accused (i.e hear a case in the court)or
person)
6 Summary trial Summary trial is the name given to trials
where cases are disposed of speedily
and the procedure are simplified and the
recording of such trials are done summarily.
In a summary trial only, small offences are
tried and complicated cases are reserved for
summons or warrant trials
7 Acquitted Free from a criminal charge by a verdict of
not guilty
8 Compoundable Compoundable offences are those offences
Offence where, the complainant (one who has
filed the case, i.e. the victim), enter into a
compromise, and agrees to have the charges
dropped against the accused.
137
QUESTIONS
Note: Some questions of past RTPs, Mock test Papers and Question Papers are not
included as ICAI has removed some concepts from the syllabus with effect from
November 2021 attempt.
1. Discuss with reasons, whether the following persons can be called as a ‘holder’
under the Negotiable Instruments Act, 1881:
(i) X who obtains a cheque drawn by Y by way of gift.
(ii) A, the payee of the cheque, who is prohibited by a court order from receiving
the amount of the cheque.
(iii) M, who finds a cheque payable to bearer, on the road and retains it.
(iv) B, the agent of C, is entrusted with an instrument without indorsement by C,
who is the payee.
(v) B, who steals a blank cheque of A and forges A’s signature.
(ICAI Module, May’20 RTP)
2. M owes money to N. Therefore, he makes a promissory note for the amount in

favour of N, for safety of transmission he cuts the note in half and posts one half to
N. He then changes his mind and calls upon N to return the half of the note which
he had sent. N requires M to send the other half of the promissory note. Decide how
rights of the parties are to be adjusted. (ICAI Module)
OR
Manoj owes money to Umesh. Therefore, he makes a promissory note for the amount
in favour of Umesh, for safety of transmission he cuts the note in half and posts one
half to Umesh. He then changes his mind and calls upon Umesh to return the half
of the note which he had sent. Umesh requires Manoj to send the other half of the
promissory note. Decide how rights of the parties are to be adjusted.
Give your answer in reference to the Provisions of Negotiable Instruments Act,
1881. (May’19 RTP, May’19 Mock Test, May’20 Mock Test)
3. Mr. V draws a cheque of `11,000 and gives to Mr. B by way of gift. State with reason
whether -
(1) Mr.B is a holder in due course as per the Negotiable Instrument Act, 1881?
(2) Mr.B is entitled to receive the amount of `11,000 from the bank?
(ICAI Module, May’18-4 Marks, May’20 Mock Test)
138
4. Mr. Muralidharan drew a cheque payable to Mr. Vyas or order. Mr. Vyas lost the
cheque and was not aware of the loss of the cheque. The person who found the
cheque forged the signature of Mr. Vyas and endorsed it to Mr. Parshwanath as the
consideration for goods bought by him from Mr. Parshwanath. Mr. Parshwanath
encashed the cheque, on the very same day from the drawee bank. Mr. Vyas
intimated the drawee bank about the theft of the cheque after three days. Examine
the liability of the drawee bank.
(ICAI Module, Nov’18-4 Marks, Nov’19 Mock Test)
OR
Mr. Madhavan drew a cheque payable to Mr. Vikas or order. Mr. Vikas lost the cheque
and was not aware of the loss of the cheque. The person who found the cheque
forged the signature of Mr. Vyas and Indorsed it to Mr. Pawan as the consideration
for goods bought by him from Mr. Pawan. Mr. Pawan encashed the cheque, on
the very same day from the drawee bank. Mr. Vikas intimated the drawee bank
about the theft of the cheque after three days. Examine the liability of the drawee
bank. Give your answer in reference to the Provisions of Negotiable Instruments Act,
1881. (Nov’19 RTP)

5. C issues a cheque for `15 without writing the word ‘only’ and gives it to D. D adds
the words ‘hundred only’ after fifteen and adds two zeros after figure 15 as there is
sufficient space for making these additions. The bank pays `1,500 to D who absconds.
Is the bank liable to C for excess payment (ICAI Module)
6. Bholenath drew a cheque in favour of Surendar. After having issued the cheque;
Bholenath requested Surendar not to present the cheque for payment and gave
a stop payment request to the bank in respect of the cheque issued to Surendar.
Decide, under the provisions of the Negotiable Instruments Act, 1881 whether the
said acts of Bholenath constitute an offence? (ICAI Module, May’18- 4 Marks)
OR
Rahul drew a cheque in favour of Aman. After having issued the cheque; Rahul
requested Aman not to present the cheque for payment and gave a stop payment
request to the bank in respect of the cheque issued to Aman. Decide, under the
provisions of the Negotiable Instruments Act, 1881 whether the said acts of Rahul
constitute an offence? (Nov’20 RTP)
139
7. Mr. X is the payee of an order cheque. Mr. Y steals the cheque and forges Mr. X
signature and endorses the cheque in his own favour. Mr. Y then further endorses the
cheque to Mr. Z, who takes the cheque in good faith and for valuable consideration.
Examine the validity of the cheque as per the provisions of the Negotiable Instruments
Act, 1881 and also state whether Mr. Z can claim the privileges of holder-in-due
course. (Nov’19- 3 Marks)
8. Ram draws a cheque of 1 lakh. It was a bearer cheque. Ram kept the cheque with
himself. After some time, Ram gives this cheque to Shyam as a gift on his birthday.
Decide whether Shyam is having a valid title over the cheque and whether Shyam
is a holder in due course or not in relation to this cheque as per the Section 9 of the
Negotiable Instruments Act 1881. (Nov’20-3 Marks)
9. State with reasons whether each of the following instruments is an Inland Instrument
or a Foreign Instrument as per The Negotiable Instruments Act, 1881:
(i) Ram draws a Bill of Exchange in Delhi upon Shyam a resident of Jaipur and
accepted to be payable in Thailand after 90 days of acceptance.
(ii) Ramesh draws a Bill of Exchange in Mumbai upon Suresh a resident of Australia
and accepted to be payable in Chennai after 30 days of sight.
(iii) Ajay draws a Bill of Exchange in California upon Vijay a resident of Jodhpur
and accepted to be payable in Kanpur after 6 months of acceptance.
(iv) Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a resident of China
and accepted to be payable in China after 45 days of acceptance.
(Nov’20 – 4 Marks)
10. (i) Are the following instruments signed by Mr. Honest is valid promissory Notes?
Give the reasons.
(a) I promise to pay D’s son ` 10000 for value received (D has two sons)
(b) I promise to pay ` 5000/- on demand at my convenience
(ii) Who is the competent authority to issue a promissory note ‘payable to bearer’?
Your answers shall be in accordance with the provisions of the Negotiable
Instruments Act, 1881. (Nov’20 – 3 Marks)
140
1. Person named in the instrument to whom money is directed to be paid—

(a) Drawer
(b) Acceptor
(c) Maker
(d) Payee (ICAI Module)
2. Maker of a bill of exchange is called as—

(a) Drawer
(b) Drawee
(c) Acceptor
(d) Payee (ICAI Module)
3. Days of grace provided to the Instruments at maturity is—

(a) 1 day
(b) 2 days
(c) 3 days
(d) 5 days (ICAI Module, May’19 Mock Test)
4. Parties to a negotiable instrument can be discharged from liability by—

(a) Cancellation
(b) Payment
(c) Release
(d) All of the above (ICAI Module)
5. Validity period for the presentment of cheque in bank is—

(a) 3 months
(b) 6 months
(c) 1 year
(d) 2 years (ICAI Module, May’19 Mock Test, May’21 Mock Test)
6. Offences committed under the Negotiable Instruments Act can be—

(a) Compoundable
(b) Non- compoundable
141
(c) Non- compoundable and non-bailable

(d) Bailable (ICAI Module, Nov’19 Mock Test)
7. A negotiable instrument that is payable to order can be transferred by:

(a) Simple delivery
(b) Endorsement and delivery
(c) Endorsement
(d) Registered post (ICAI Module)
8. M drew a cheque amounting to Rs. 2 lakh payable to N and subsequently delivered

to him. After receipt of cheque N indorsed the same to C but kept it in his safe locker.
After sometime, N died, and P found the cheque in N’s safe locker. State the nature
of the Instrument as amounting to indorsement under the NI Act, 1881.
(a) Yes, it’s an Indorsement, as P becomes the holder of the cheque that he found
in the N’s safe locker.
(b) No, it’s not an Indorsement and P does not become the holder of the cheque
(c) Yes , it’s an Indorsement, as P was a ultimate custodian of the cheque
(d) No, it’s not an Indorsement, as N indorsed it to C and not to the P.
(Nov’19 Mock Test, May’20 Mock Test)

9. While drawing a bill of exchange, a person whose name is given in addition to the
drawee who can be resorted in case of need, is called
(a) Acceptor
(b) Acceptor for honour
(c) Drawee in case of need
(d) Drawer (May’19 Mock Test, May’21 Mock Test)
10. The date of maturity of a bill payable hundred days after sight and which is presented
for sight on 4thMay, 2017, is (as per the provisions of the Negotiable Instruments
Act, 1881):
(a) 13 August,2017
(b) 14 August,2017
(c) 15 August,2017
(d) 16August,2017 (May’19 Mock Test)
142
11. As per the Negotiable Instruments Act, 1881, when the day on which
a promissory note or bill of exchange is at maturity is a public holiday, the
instrument shall be deemed to be due on the....
(a) said public holiday
(b) 5 days succeeding public holiday
(c) next succeeding business day
(d) next preceding business day
(May’19 Mock Test, May’20 Mock Test, ICAI Sample Question)
12. Mr. Aylam issued a cheque amounting to INR 25,000 dated 2nd February 2020 to Mr.
Gandhi which was deposited by Mr. Gandhi on 16th March 2020 in his bank account.
The said cheque got dishonored on 17th March 2020 by the bank citing insufficient
funds in the account of Mr. Aylam. Then Mr. Gandhi demanded the payment from
Mr. Aylam by issuing the notice on 31st March 2020 which was received by Mr.
Aylam on 2nd April 2020. Assuming that Mr. Aylam failed to make the payment
within stipulated time, what is the last date by which Mr. Gandhi should have made
a complaint in the court?
(a) 17th May 2020
(b) 2nd May 2020
(c) 17th April 2020
(d) 30th April 2020 (Nov’20 Mock Test, May’21 Mock Test)
13. Which of the following is not a correct statement with respect to characteristics of
a Promissory Note:
(a) An oral promise to pay is sufficient
(b) It should be in writing
(c) There must be an express promise to pay
(d) The promise to pay should be definite and unconditional (May’21 Mock Test)
143
ANSWERS
1: Person to be called as a holder: As per section 8 of the Negotiable Instruments

Act, 1881 ‘holder’ of a Negotiable Instrument means any person entitled in his own
name to the possession of it and to receive or recover the amount due thereon from
the parties thereto. On applying the above provision in the given cases—
(i) Yes, X can be termed as a holder because he has a right to possession and to
receive the amount due in his own name.
(ii) No, he is not a ‘holder’ because to be called as a ‘holder’ he must be entitled
not only to the possession of the instrument but also to receive the amount
mentioned therein.
(iii) No, M is not a holder of the Instrument though he is in possession of the
cheque, so is not entitled to the possession of it in his own name.
(iv) No, B is not a holder. While the agent may receive payment of the amount
mentioned in the cheque, yet he cannot be called the holder thereof because
he has no right to sue on the instrument in his own name.
(v) No, B is not a holder because he is in wrongful possession of the instrument.
2: The question arising in this problem is whether the making of promissory note is
complete when one half of the note was delivered to N. Under Section 46 of the
N.I. Act, 1881, the making of a Promissory Note is completed by delivery, actual or
constructive. Delivery refers to the whole of the instrument and not merely a part
of it. Delivery of half instrument cannot be treated as constructive delivery of the
whole. So the claim of N to have the other half of the Promissory Note sent to him is
not maintainable. M is justified in demanding the return of the first half sent by him.
He can change his mind and refuse to send the other half of the Promissory Note as
the note was never properly negotiated.
3: According to section 9 of the Negotiable Instrument Act, 1881, “Holder in due course”
means-
• any person
• who for consideration
• becomes the possessor of a promissory note, bill of exchange or cheque (if
payable to bearer), or the payee or endorsee thereof, (if payable to order),
• before the amount mentioned in it became payable, and
• without having sufficient cause to believe that any defect existed in the title of
144
the person from whom he derived his title.

In the instant case, Mr. V draws a cheque of `11,000 and gives to Mr. B by way of
gift.
(i) Mr. B is holder but not a holder in due course since he did not get the cheque
for value and consideration.
(ii) Mr. B’s title is good and bonafide. As a holder he is entitled to receive `11,000
from the bank on whom the cheque is drawn.
4: Cheque payable to order [Section 85 of the Negotiable Instruments Act, 1881]

(1) Where a cheque payable to order purports to be indorsed by or on behalf of
the payee, the drawee bank is discharged by payment in due course.
(2) Where a cheque is originally expressed to be payable to bearer, the drawee bank
is discharged by payment in due course to the bearer thereof, notwithstanding
any indorsement whether in full or in blank appearing thereon, and
notwithstanding that any such indorsement purports to restrict or exclude
further negotiation.
As per the given facts, cheque is drawn payable to “Mr. Vyas or order”. It was lost
and Mr. Vyas was not aware of the same. The person found the cheque and forged
and endorsed it to Mr. Parshwanath, who encashed the cheque from the drawee
bank. After few days, Mr. Vyas intimated about the theft of the cheque, to the
drawee bank, by which time, the drawee bank had already made the payment.
According to above stated section 85, the drawee banker is discharged when it has
made a payment against the cheque payable to order when it is purported to be
endorsed by or on behalf of the payee. Even though the signature of Mr. Vyas is
forged, the banker is protected and is discharged. The true owner, Mr. Vyas, cannot
recover the money from the drawee bank in this situation.
5: As per Section 89 of Negotiable Instruments Act, 1881, bank is discharged by

payment in due course in case of alteration not apparent from records.
In the given question, C issues a cheque for `15 without writing the word ‘only’ and
gives it to D. D adds the words ‘hundred only’ after fifteen and adds two zeros after
figure 15 as there is sufficient space for making these additions. This alteration
is not apparent from records. The bank paid `1,500 to D who absconds. Bank is
discharged and it is not liable to C for excess payment
145
6: As per the facts stated in the question, Bholenath (drawer) after having issued the
cheque, informs Surender (drawee) not to present the cheque for payment and as
well gave a stop payment request to the bank in respect of the cheque issued to
Surender.
Section 138 of the Negotiable Instruments Act, 1881, is a penal provision in the
sense that once a cheque is drawn on an account maintained by the drawer with his
banker for payment of any amount of money to another person out of that account
for the discharge in whole or in part of any debt or liability, is informed by the bank
unpaid either because of insufficiency of funds to honour the cheques or the amount
exceeding the arrangement made with the bank, such a person shall be deemed to
have committed an offence.
Once a cheque is issued by the drawer, a presumption under Section 139 of the
Negotiable Instruments Act, 1881 follows and merely because the drawer issues a
notice thereafter to the drawee or to the bank for stoppage of payment, it will not
preclude an action under Section 138.
Also, Section 140 of the Negotiable Instruments Act, 1881, specifies absolute liability
of the drawer of the cheque for commission of an offence under the section 138 of
the Act. Section 140 states that it shall not be a defence in a prosecution for an
offence under section 138 that the drawer had no reason to believe when he issued
the cheque that the cheque may be dishonoured on presentment for the reasons
stated in that section.
Accordingly, the act of Bholenath, i.e., his request of stop payment constitutes an
offence under the provisions of the Negotiable Instruments Act, 1881.
7: Forgery confers no title and a holder acquires no title to a forged instrument. Thus,
where a signature on the negotiable instrument is forged, it becomes a nullity.
Therefore, cheque further endorsed to Mr. Z, is not valid.
Since a forged instrument is a nullity, therefore the property in the instrument remains
vested in the person who is the holder at the time when the forged signatures
were put on it. Forgery is also not capable of being ratified. In the case of forged
endorsement, the person claiming under forged endorsement even if he is purchaser
for value and in good faith, cannot acquire the rights of a holder in due course.
Therefore, Mr. Z, acquires no title on the cheque
146
8: “Holder in due course” [Section 9 of the Negotiable Instruments Act, 1881]—

“Holder in due course” means—
• any person
• who for consideration
• became the possessor of a promissory note, bill of exchange or cheque (if
payable to bearer), or the payee or endorsee thereof, (if payable to order),
• before the amount mentioned in it became payable, and
• without having sufficient cause to believe that any defect existed in the title of
the person from whom he derived his title.
In the instant case, Ram draws a cheque for ` 1 lakh and hands it over to Shyam by
way of gift. Here, Shyam’s title is good and bonafide. As a holder he is entitled to
receive ` 1 lakh from the bank on whom the cheque is drawn. However, Shyam is not
a holder in due course as he does not get the cheque for value and consideration.
9. “Inland instrument” and “Foreign instrument” [Sections 11 & 12 of the Negotiable

Instruments Act, 1881]
A promissory note, bill of exchange or cheque drawn or made in India and made
payable in, or drawn upon any person resident in India shall be deemed to be an
inland instrument.
Any such instrument not so drawn, made or made payable shall be deemed to be
foreign instrument.
Following are the answers as to the nature of the Instruments:
(i) In first case, Bill is drawn in Delhi by Ram on a person (Shyam), a resident of
Jaipur (though accepted to be payable in Thailand after 90 days) is an Inland
instrument.
(ii) In second case, Ramesh draws a bill in Mumbai on Suresh resident of Australia
and accepted to be payable in Chennai after 30 days of sight, is an Inland
instrument.
(iii) In third case, Ajay draws a bill in California (which is situated outside India) and
accepted to be payable in India (Kanpur), drawn upon Vijay, a person resident
in India (Jodhpur), therefore the Instrument is a Foreign instrument.
(iv) In fourth case, the said instrument is a Foreign instrument as the bill is drawn
in India by Mukesh upon Dinesh, the person resident outside India (China) and
also payable outside India (China) after 45 days of acceptance.
147
10. (i) Promissory Note: As per the provisions of Section 4 of the Negotiable Instruments
Act, 1881, a promissory note is an instrument in writing (not being a bank-
note or a currency note) containing an unconditional undertaking, signed by
the maker, to pay a certain sum of money to or to the order of a certain person,
or to the bearer of the instruments.
(a) This is not a valid promissory note as D has two sons and it is not specified
in the promissory note that which son of D is the payee.
(b) This is not a valid promissory note as details of the payee are not
mentioned in it and it is not an unconditional undertaking.
(ii) A promissory note cannot be made payable to the bearer (Section 31 of Reserve
Bank of India Act, 1934). Only the Reserve Bank or the Central Government can
make or issue a promissory note ‘payable to bearer’.
ANSWER TO MCQs
1 D 2 A 3 C 4 D 5 A
6 A 7 B 8 B 9 C 10 B
11 D 12 C 13 A
148
The General Clauses Act, 1897
Chapter 3
Introduction
• This Act is an adaptation with modifications of Lord Brougham’s Act which was
passed in 1850. Then The General Clauses Act, 1868 was passed which was the
earliest Act to be passed in India with the object of shortening the language of Acts
of the Governor-General in Council. The General Clauses Act, 1887 supplemented
the earlier Act by defining a few more words in common use and laying down certain
new rules of construction. In the process of consolidating these two Acts, additions
suggested by subsequent experience, the General Clauses Act, 1897, was drafted.
• The General Clauses Act, 1897 was enacted on 11th March, 1897.
• The General Clauses Act 1897 belongs to the class of Acts which may be called as
interpretation Acts. It lays down the basic rules as to how courts should interpret
the provisions of an Act of Parliament. It also defines certain words or expressions
so that there is no unnecessary repetition of the definition of those words in other
Acts.
• Object, purpose and importance of the General Clauses Act:
(1) To shorten the language of Central Acts;
(2) To provide, as far as possible, for uniformity of expression in Central Acts, by
giving definitions of a series of terms in common use;
(3) To state convenient rules for the construction and interpretation of central
acts.
(4) To guard against slips and oversights by importing into every act certain
common form clauses, which otherwise ought to be inserted in every central
act
• The Act has also been called as the “Law of all Laws”.
3.1: Applicability
(1) The Act does not define any “territorial extent” clause.
(2) It shall apply to every territory where a Central Act is applicable and would apply
in the construction of that Central Act.
149
3.2: Some Basic Understandings of Legislation

(1) Preamble:
Every Act has a preamble which expresses the scope, object and purpose of the
Act. It is the main source for understanding the intention of lawmaker behind the
Act. Whenever there is ambiguity in understanding any provision of Act, Preamble
is accepted as an aid to construction of the Act. It basically discloses the primary
intention of the legislature but can only be brought in as an aid to construction if
the language of the statute is not clear. However, it cannot override the provisions
of the enactment.
Example: Preamble of the Negotiable Instruments Act, 1881 states - “An Act to
define and amend the law relating to Promissory Notes, Bills of Exchange and
Cheques.”
(2) How an ‘Act’ is formed?

Act is a Bill passed by both the houses of Parliament and assented by the President.
Whereas ‘Bill’ is a draft of a legislative proposal put in the proper form which, when
passed by both houses of Parliament and assented to by the President becomes an
Act.
On getting assent from President, an Act is notified on the Official Gazettes of India.
Example: Concept paper on the Companies Act, 2013 was placed on the website of
MCA on 4-8-2004.
New Companies Bill, 2009 was introduced in Lok Sabha on 3-8-2009.
With recommended changes in the Companies Bill 2009, Companies Bill 2011 was
introduced.
Companies Bill, 2012 was introduced and Passed by Lok Sabha on 18-12- 2012. It
was then passed by Rajya Sabha on 8-8-2013.
Act received assent of President on 29- 8- 2013 as Companies Act, 2013. Notified
in gazette on 30- 8- 2013.
(3) Definitions :
Every Act contains definitions for the purpose of that particular Act and those
definitions are usually mentioned in the Section 2 of that Act but in some other
Acts, they are also mentioned in Section 3 or in other initial sections.
Hence, definitions are defined in the Act itself.
However, if there may be words which are not defined in the definitions of the Act,
the meaning of such words may be taken from General Clauses Act, 1897.
150
“Means” and/or “include”:

(i) Some definitions use the word “means”. Such definitions are exhaustive definitions
and exactly define the term:
Example: Definition of ‘Company’ as given in section 2(20) of the Companies Act,
2013. It states, “Company” means a company incorporated under this Act or under
any previous company law.
(ii) Some definitions use the word “include”. Such definitions do not define the word but
are inclusive in nature. The word defined is not restricted to the meaning assigned
to it but has extensive meaning which also includes the meaning assigned to it in
the definition section.
Example: Word ‘debenture’ defined in section 2(30) of the Companies Act, 2013
states that “debenture” includes debenture stock, bonds or any other instrument of
a company evidencing a debt, whether constituting a charge on the assets of the
company or not”. This is a definition of inclusive nature.
(4) “Shall” and “May”

The word ‘shall’ is used to raise a presumption of something which is mandatory
or imperative while the word ‘may’ is used to connote something which is not
mandatory but is only directory or enabling
Example: Section 3 of the Companies Act, 2013 states that “A company may be
formed for any lawful purpose by......”
Here, the word used “may” shall be read as “shall”. Usage of word ‘may’ here makes
it mandatory’ for a company for the compliance of section 3 for its formation.
3.3. Preliminary [Section 1]

Preliminary is the introductory part of any law which generally contains Short Title,
extent, commencement, application etc. The General Clauses Act contains only
short title in the Preliminary part of the Act.
The “Short title” of the Act states ‘This Act may be called the General Clauses Act,
1897’.
151
3.4. Definitions [Section 3]
1 Sec Act
3(2) ‘Act’, used with reference to an offence or a civil wrong, shall include a
series of acts, and words which refer to acts done extend also to illegal
omissions.
Act can be positive act and even negative act (i.e. refraining from doing
something which is required to be done)
2 Sec Affidavit
3(3) ‘Affidavit’ shall include affirmation and declaration in the case of
persons by law allowed to affirm or declare instead of swearing.
This definition does not define affidavit. However, we can understand this
term in general parlance. Affidavit is a written statement confirmed by
oath or affirmation for use as evidence in Court or before any authority.
3 Sec Central Act
3(7) ‘Central Act’ shall mean an Act of Parliament (i.e. Acts passed from
26th January,1950), and shall include-
(a) An Act of the Dominion Legislature or of the Indian Legislature
passed before the commencement of the Constitution (i.e. Acts
passed between the 15th August, 1947 and the 26th January,
1950) and
(b) An Act made before such commencement by the Governor General
in Council or the Governor General, acting in a legislative capacity;
4 Sec Central Government
3(8) ‘Central Government’ shall-
(a) In relation to anything done before the commencement of the
Constitution, mean the Governor General in Council, as the case
may be; and shall include,:
(i) In relation to functions entrusted to the Government of a Province,
(ii) In relation to the administration of a Chief Commissioner’s
Province,
AND
(b) In relation to anything done or to be done after the commencement
of the constitution of the Constitution, mean the President; and
shall include:
(i) In relation to function entrusted under the Constitution, to the
152
Government of a state, the State Government acting within the

scope of the authority given to it under that clause;
(ii) In relation to the administration of a Part C state before the
commencement of the Constitution (Seventh Amendment) Act,
1956 the Chief Commissioner or the Lieutenant Governor or the
Government of a neighbouring State or other authority acting
within the scope of the authority given to him and in relation to
the administration of a Union territory, the administrator thereof
acting within the scope of the authority given to him.
(iii) In relation to the administration of a Union territory, the
administrator thereof acting within the scope of the authority
given to him under article 239 of the Constitution;
The date of commencement of the Constitution (Seventh Amendment)

Act, 1956 is 1st January, 1956.
The new Constitution of India, which came into force on 26th January
1950, made India a sovereign democratic republic. The new republic
was also declared to be a “Union of States”. Between 1947 and 1950
the territories of the princely states were politically integrated into the
Indian Union. The constitution of 1950 distinguished between three
main types of states and a class of territories:
5 Sec Commencement
3(13) ‘Commencement’ used with reference to an Act or Regulation, shall
mean the say on which the Act or Regulation comes into force.
Coming into force or entry into force (also called commencement)
refers to the process by which legislation; regulations, treaties and
other legal instruments come to have legal force and effect.
6 Sec Document
3(18) ‘Document’ shall include any matter written, expressed or described
upon any substance by means of letters, figures or marks or by more
than one of those means which is intended to be used or which may be
used, for the purpose or recording that matter.
For example, book, file, painting, inscription and even computer files
are all documents.
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7 Sec Enactment
3(19) ‘Enactment’ shall include a Regulation or any Act (or a provision
contained therein) made by the Union Parliament or the State
Legislature.
8 Sec Financial year
3(21) Financial year shall mean the year commencing on the first day of
April.
Difference between Financial Year and Calendar Year: Financial year
starts from first day of April but Calendar Year starts from first day of
January.
9 Sec Good Faith
3(22) A thing shall be deemed to be done in “good faith” where it is in fact
done honestly, whether it is done negligently or not.
This definition of the good faith does not apply to that enactment
which contains a special definition of the term “good faith” and there
the definition given in that particular enactment has to be followed.
10 Sec Government
3(23) ‘Government’ or ‘the Government’ shall include both the Central
Government and State Government.
11 Sec Government securities
3(24) ‘Government securities’ shall mean securities of the Central Government
or of any State Government, but in any Act or Regulation made before
the commencement of the Constitution shall not include securities of
the Government of any Part B state.
12 Sec Immovable Property
3(26) Immovable Property’ shall include:
i) Land,
ii) Benefits to arise out of land, and
iii) Things attached to the earth, or
iv) Permanently fastened to anything attached to the earth.
Example: Trees, any machinery fixed to the soil, standing crops are
regarded as immovable property because they are attached to or
rooted in the earth.
Example: Whether the right to catch or carry fish is a movable or
immovable property?
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”The Section 3 of Transfer of Property Act does not define the term
except to say that immovable property does not include standing
timber, growing crops or grass. As fish do not come under that
category the definition in the General Clauses Act applies and as a
profit a prendre is regarded as a benefit arising out of land it follows
that it is immovable property within the meaning of the Transfer of
Property Act.” Thus, the court construed “right to catch or carry fish” as
an immovable property.
Example: Right of way to access from one place to another, may come
within the definition of Immovable property whereas to right to drain
of water is not immovable property. Any machinery fixed to the soil,
standing crops can be held as immovable property according to the
General Clauses Act, 1897
13 Sec Imprisonment
3(27) Imprisonment shall mean imprisonment of either description as defined
in the Indian Penal Code (45 of 1860)
As per Section 53 of the Indian Penal Code, the punishment of
imprisonment is of two descriptions, namely, rigorous, that is with
hard labour and simple. So, when an Act provides that an offence is
punishable with imprisonment, the Court may, in its discretion, make
the imprisonment rigorous or simple
14 Sec Indian law
3(29) ‘Indian law’ shall mean any Act, Ordinance, Regulation, rule, order,
bye law or other instrument passed in India but does not include any
Act of Parliament of the United Kingdom or any Order in Council, rule
or other instrument made under such Act;.
15 Sec Month
3(35) ‘Month’ shall mean a month reckoned according to the British calendar;
The word “month occurring in Section 271 (l)(a)(i) of the Income-tax
Act, 1961, was construed to mean a period of thirty days and not a
month as defined in the General Clauses Act, 1897
16 Sec Movable Property
3(36) ‘Movable Property’ shall mean property of every description, except
immovable property.
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17 Sec Oath
3(37) ‘Oath’ shall include affirmation and declaration in the case of persons
by law allowed to affirm or declare instead of swearing.
18 Sec Offence
3(38) ‘Offence’ shall mean any act or omission made punishable by any law
for the time being in force.
Any act or omission which is if done, is punishable under any law for
the time being in force, is called as offence.
19 Sec Official Gazette
3(39) ‘Official Gazette’ or ‘Gazette’ shall mean:
(i) The Gazette of India, or
(ii) The Official Gazette of a state.
Note: The Gazette of India is a public journal and an authorised
legal document of the Government of India, published weekly by the
Department of Publication, Ministry of Housing and Urban Affairs. As a
public journal, the Gazette prints official notices from the government.
The gazette is printed by the Government of India Press
20 Sec Person
3(42) ‘Person’ shall include:
(i) any company, or
(ii) association, or
(iii) body of individuals, whether incorporated or not
21 Sec Registered
3(49) ‘Registered’ used with reference to a document, shall mean registered
in India under the law for the time being force for the registration of
documents.
22 Sec Rule
3(51) ‘Rule’ shall mean a rule made in exercise of a power conferred by any
enactment, and shall include a Regulation made as a rule under any
enactment.
23 Sec Schedule
3(52) ‘Schedule’ shall mean a schedule to the Act or Regulation in which the
word occurs.
24 Sec Section
3(54) ‘Section’ shall mean a section of the Act or Regulation in which the
word occurs.
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25 Sec Sub-section
3(61) ‘Sub-section’ shall mean a sub-section of the section in which the
word occurs;
26 Sec Swear
3(62) ‘Swear’, with its grammatical variations and cognate expressions, shall
include affirming and declaring in the case of persons by law allowed
to affirm or declare instead of swearing.
Note: The terms “Affidavit”, “Oath” and “Swear” have the same
definitions in the Act.
27 Sec Writing
3(65) Expressions referring to ‘writing’ shall be construed as including
references to printing, lithography, photography and other modes of
representing or reproducing words in a visible forms;
28 Sec Year
3(66) ‘Year’ shall mean a year reckoned according to the British calendar.
• Application to foregoing definitions to previous enactments [Section 4]-

There are certain definitions in section 3 of the General Clauses Act, 1897 which
would also apply to the Acts and Regulations made prior to 1897 i.e., on the
previous enactments of 1868 and 1887. This provision is divided into two parts-
(1) Application of terms/expressions to all [Central Acts] made after the 3rd
January, 1868, and to all Regulations made on or after the 14th January,
1887-
Here the given relevant definitions in section 3 of the following words and
expressions, that is to say, ‘affidavit’, ‘immovable property’, ‘imprisonment’,
“month’, ‘movable property’, ‘oath’, ‘person’, ‘section’, ‘and ‘year’ apply also,
unless there is anything repugnant in the subject or context, to all [Central
Acts] made after the 3rd January, 1868, and to all Regulations made on or
after the 14th January, 1887.
(2) Application of terms/expressions to all Central Acts and Regulations made on
or after the 14th January, 1887- The relevant given definitions in the section
3 of the following words and expressions, that is to say, ‘commencement’,
‘financial year’, ‘offence’, ‘registered’, schedule’, ‘sub-section’ and ‘writing’ apply
also, unless there is anything repugnant in the subject or context, to all Central
Acts and Regulations made on or after the 14th January, 1887.
Note: The dates 3rd January, 1868 and 14th January, 1887 are the dates of old
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General Clauses Act which was passed in 1868 and 1887. Since the definitions
were added in each General Clauses Act, not all definitions were applicable to
all laws.
• Application of certain definitions to Indian Laws [Section 4A]

The definitions in section 3 of the expressions ‘Central Act’, ‘Central Government’,
“Gazette’, ‘Government’, ‘Government Securities’, ‘Indian Law’, and “Official Gazette’,
‘shall apply, unless there is anything repugnant in the subject or context, to all
Indian laws.
3.5. General Rules of Construction (Section 5 to 13)
Section 5 Coming into operation of enactment:

• Where, if any specific date of enforcement is prescribed in the Official
Gazette, Act shall into enforcement from such date.
• If no date of commencement is specified for any Central Act, then it
shall be implemented from date on which it received assent from:
a. Governor General – for Central Acts and /or
b. President – for Act of Parliament
• Where an Act empowers the government to bring any of the
provisions into operation on any day which it deems fit, Court cannot
issue a mandamus to compel the Government to bring the same into
operation on particular day.
However if a sufficient time has elapsed since an Act or any of its
provisions has been passed and it has not been brought into force
(operation) by the Government, the Court through a writ can direct
the Government to consider the question as to when the same should
begin to operate.
• Also, law does not consider fraction of day, thus where an Act
provides that it is to come into force on the first day of February,
it will come into force on as soon as the clock has struck 12 on the
night of 31st January.
• All laws generally operate prospectively and only if there are
express words specifying retrospective effect, then only it will have
retrospective effect.
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Section 6 Effect of Repeal

Where any Central legislation or any regulation made after the
commencement of this Act repeals any Act made or yet to be made,
unless another purpose exists, the repeal shall not:
(1) Revive anything not enforced or prevailed during the period at which
repeal is effected or;
(2) Affect the previous operation of any enactment so repealed or
anything duly done or suffered there under; or
(3) Affect any right, privilege, obligation or liability acquired, accrued or
incurred under any enactment so repealed; or
(4) Affect any penalty, forfeiture or punishment incurred in respect of
any offence committed against any enactment so repealed; or
(5) Affect any inquiry, litigation or remedy with regard to such claim,
privilege, debt or responsibility or any inquiry, litigation or remedy
may be initiated, continued or insisted.
• Whenever an Act is repealed, it must be considered as if it had
never existed. Object of repeal is to obliterate the Act from
statutory books, except for certain purposes as provided under
Section 6 of the Act.
• Repeal’ of provision is in distinction from ‘deletion’ of provision.
‘Repeal’ ordinarily brings about complete obliteration of the
provision as if it never existed, thereby affecting all rights and
all causes of action related to the ‘repealed’ provision while
‘deletion’ ordinarily takes effect from the date of legislature
affecting the said deletion, never to effect total effecting
or wiping out of the provision as if it never existed. For the
purpose of this section, the above distinction between the two
is essential.

• Example: Companies Act, 1956 is repealed. But if any Director is
appointed under this Act, even though the Act is repealed, it will not
affect the director’s appointment.
Similarly, if some person is penalized under the Companies Act,
1956, the penalty is still valid even if the Act is repealed.
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Section 6A Repeal of Act making textual amendment in Act or Regulation

Where any Central Act or Regulation repeals any Act by which the text
of any other Central Act or Regulation was amended by the express
omission, insertion or substitution of any matter, the repeal shall not
affect the continuance of any such amendment made by the enactment
so repealed and in operation at the time of such repeal.
Example: Let’s say, Companies Act, 1956 has amended some part of
Securities Exchange Board of India Act. Now Companies Act, 1956 is
repealed. But the amendment will not be affected.
Section 7 Revival of repealed enactments
To revive a repealed statute, it is necessary to state the purpose to do so.
Section 8 Construction of references to repealed enactments
Where any Act is repealed and re-enacted, with or without modification,
any provision of a former enactment, then references in any other
enactment or in any instrument to the provision so repealed shall be
construed as references to the provision so re-enacted unless specified
otherwise.
Example: Section 115 JB of the Income Tax Act, 1961, for calculation of
book profits, the provisions of Companies Act, 1956 are required to be
referred. With the introduction of Companies Act, 2013, the corresponding
change has not been made in section 115 JB of the Income Tax Act, 1961.
But applying this section 8 of the General Clauses Act, book profits to be
calculated under section 115 JB of the Income Tax Act will be as per the
Companies Act, 2013.
Every Act has its own distinction. If a later Act merely makes a reference to
a former Act or existing law, it is only by reference and all amendments,
repeals new law subsequently made will have effect unless its operation
is saved by the relevant provision of the section of the Act.
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Section 9 Commencement and termination of time

In any legislation or regulation the word “from” shall be used to exclude
the first day and use the word “to” to include the last day.
Example: If a company declares dividend for its shareholder in its

Annual General Meeting held on 31/08/2019. Under the provisions of
the Companies Act, 2013, company is required to pay declared dividend
within 30 days from the date of declaration i.e. from 01/09/2019 to
30/09/2019. In this series of 30 days, 31/08/2019 will be excluded and
last 30th day i.e. 30/09/2019 will be included.
Section 10 Computation of time
If any proceeding is to take place on a particular day or within a prescribed
period and if the court or office is closed on that day or last day of the
prescribed period then the proceeding shall be conducted on the next day
afterwards when the court or office is open.
Section 11 Measurement of Distances
In the measurement of any distance, for the purposes
of any Central Act or Regulation made, distance
shall be measured in a straight line on a horizontal
plane unless specified otherwise.
Section 12 Duty to be taken pro rata in enactments
Where any duty of customs or excise or in the nature thereof, is leviable
on any given quantity, by weight, measure or value of any goods or
merchandise, then a like duty is leviable according to the same rate on
any gender or less quantity.
Example: If custom duty on 100 kilograms of Material X is `10000 then
for 10 kilograms it will be `1000
Section 13 Gender and number
• In all legislations and Regulations, all words having masculine
gender shall include feminine gender and all singular words shall
include plural and vice versa.
It means, wherever any lay specifies the pronoun ‘he’, it shall also
include ‘she’.
• But this general rule is to be applied very carefully for interpreting
laws dealing with matters of succession. Thus, the words “male
descendants” were not interpreted to include female descendants.
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• Similarly if an Act is for a specific gender then only that specific

gender is to be considered. For example, Maternity Benefits Act
covers is made only for females.
• Where a word for a common gender is available but the word used
conveys a specific gender, there is a presumption that the provisions
of General Clauses Act do not apply. Thus, the word ‘bullocks’ could
not be interpreted to include ‘cows’
3.6: Powers and Functionaries (Section 14 to 19)
Section 14 Power conferred to be exercisable from time to time

If any power is given by the Central Act or Regulation then the power
shall be exercised from time to time as the occasion requires unless there
is a different intention.
Section 15 Power to appoint to include power to appoint ex-officio
If Legislation or Regulation gives any power to appoint, the appointment
may be made by appointing ex-officio as well.
Ex-officio is a Latin word which means by virtue of one’s position or office.
Example: As per Companies Act, 2013, Chairman of any General Meeting
is Chairman of Board of Directors unless he chooses not to. Hence if
anyone is Chairman of Board of Directors of any company, he is ex-officio
Chairman of the Meeting.
So if anyone has a power to appoint Chairman of Board of Directors, he
has an implied power to appoint Chairman of Meeting.
Section 16 Power to appoint to include power to suspend or dismiss
If the Legislation or Regulation gives any power to make appointments
then it implies that Authority shall also have the power to suspend or
dismiss any person appointed whether by itself or any other authority in
exercise of that power.
Example: The Constitution has given powers to the Chief Justice to appoint officers
and servants of a High Court, he has implied power to suspend or dismiss them.
Section 17 Substitution of functionaries
For the purpose of indicating the application of a law to every person or
number of persons for the time being executing the functions of an office, the
official title of the officer at present executing the functions, or that of the
officer by whom the functions are commonly executed should be mentioned.
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Section 18 Successors
In any functionaries or of corporations having perpetual succession, the
law of successors should be specified.
Example: Companies Act, 2013 has specified as to what is to be done if
the sole member of One Person Company dies as they want OPC to have
perpetual succession.
Section 19 Official Chiefs and subordinates
Any law that shall be applicable to the chief or superior shall apply to
the deputies and subordinates who are performing the duties of that
office in place of the superior.
3.7: Provision as to Orders, Rules Etc. made under Enactments (Section 20 to 24)
Section 20 Construction of orders, etc., issued under enactments

Any expression used in the notification, order, scheme, rule, form, or
by-law shall have the same meaning as in the Act or regulation unless
otherwise mentioned.
‘Notification’ in common parlance means a formal announcement of a
legally relevant fact and “notification publish in Official Gazette” means
notification published by the authority of law. It is a formal declaration
and should be in accordance with the declared policies or statute.
Example: The Word “company” used in Rules of Companies Act will have
the same meaning as given in Section 2(20) of Companies Act.
Section 21 Power to issue, to include power to add, to amend, vary or rescind
notifications, orders, rules or bye-laws
Any power given by the legislation or regulation to issue any notification,
order, scheme, rule, form, or by-law shall include the power to add, to
amend, vary or rescind notifications, orders, rules or bye-laws so issued.
Section 22 Making of rules or bye-laws and issuing of orders between passing and
commencement of enactment
Where any Central Act or Regulation passed but not commenced
immediately gives any power to:
• make rules or bye-laws, or
• to issue orders with respect to the application of the Act or Regulation
or with respect to the establishment of any Court or the appointment
of any Judge or officer there under or
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• with respect to the person by whom, or the time when, or the place
where, or the manner in which, or the fees for which, anything is to
be done under the Act or Regulation,
then that power may be exercised at any time after passing of the Act or
Regulation;
but rules, bye-laws or orders so made or issued shall not take effect till
the commencement of the Act or Regulation.
Example: Indian Contract Act, 1872 was given an assent on 25th April,
1872 but it was introduced on 1st September, 1872. Between this period,
if any bye-laws or orders are passed then they will take effect only from
1st September, 1872.
Section 23 Provisions applicable to making of rules or bye-laws after previous
publications
Where, by any Central Act or Regulation, a power to make rules or bye-
laws is expressed to be given, then the following provisions shall apply:
1. The authority having power to make the rules or bye-laws shall
publish a draft of the proposed rules or bye-laws for the information
of persons likely to be affected thereby.
2. The publication shall be made in such manner as that authority
deems to be sufficient, or, if the condition with respect to previous
publication so requires, in such manner as the Government concerned
prescribes.
3. A notice shall be published with the draft specifying a date on or
after which the draft will be taken into consideration.
consider the objections and suggestions of the authority whose
sanction, approval or concurrence is required with respect to the
draft before the date so specified.
5. The publication in the Official Gazette of a rule or bye-law shall be
conclusive proof that the rule or bye-laws has been duly made.
It is a conclusive presumption that after the publication of the rules
in the Official Gazette, it is to be concluded that the procedure
for making the rules had been followed. Any irregularities in the
publication of the draft cannot therefore be questioned.
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Section 24 Continuation of orders etc, issued under enactments repealed and re-
enacted
Where any Central Act or Regulation is repealed and re-enacted with or
without modification, then unless it is otherwise expressly provided any
appointment, notification, order, scheme, rule, form or bye-law, made or
issued under the repealed Act, continue in force, and be deemed to have
been made or issued under the provisions so re-enacted.
Example: Companies Act, 1956 is repealed and now re-enacted as
Companies Act, 2013. If there is any notification, order, scheme, rule,
form as per the old Companies Act, then they shall continue even if the
Act is repealed unless specified otherwise in the new Act.
The Mines Act of 1923 was repealed and replaced by the Mines Act of
1952. Rules made under the repealed Act must be deemed to continue in
force by virtue of this section until specified otherwise.
Where any Central Act or Regulation has been extended to any local
area by a notification and then subsequently withdrawn from the re-
extended area by subsequent notification, then the provisions of such Act
or Regulation shall be deemed to have been repealed and re-enacted in
such area or part.
3.8. Miscellaneous (Section 25 to 30)
Section 25 Recovery of Fines

Section 63 to 70 of the Indian Penal Code and the provisions of the
Code of Criminal Procedure in relation to the issue and the execution of
warrants for the levy of fines shall apply to all fines imposed under any
Act, Regulation, rule or bye-laws, unless the Act, Regulation, rule or
bye-law contains an express provision to the contrary.
Section 26 Provision as to offence punishable under two or more enactments
Where an act or omission constitutes an offence under two enactments,
the offender may be prosecuted and punished under either or both the
enactments but shall not be liable to be punished twice for the same
offence.
Article 20(2) of the Constitution states that no person shall be prosecuted
and punished for the same offence more than once.
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Provisions of Section 26 and Article 20(2) of the Constitution apply only

when the two offences which form the subject of prosecution is the same,
i.e., the ingredients which constitute the two offences are the same. If the
offences under the two enactments are distinct and not identical, none of
these provisions will apply.
Section 27 Meaning of Service by post
• Where any legislation or regulation requires any document to be
served by post, then unless a different intention appears, the service
shall be deemed to be effected by:
1. Properly addressing
2. Pre paying
3. Posting by registered post
A letter containing the document to have been effected at the time
at which the letter would be delivered in the ordinary course of post.
• A notice when required under the statutory rules to be sent by
‘registered post acknowledgement due’ is instead sent by ‘registered
post’ only, the person sending such notice cannot claim that notice
is sent properly by ‘registered post’ under this section. As this Section
is to be applied when any Act does not specify how the document is
to be sent by post.
• Where a notice is sent to the landlord by registered post and the
same is returned by the tenant with an endorsement of refusal, it
will be presumed that the notice has been served.
• Where notice sent by registered post to person concerned at proper
address is deemed to be served upon him in due course unless
contrary is proved. Endorsement ‘not claimed/not met’ is sufficient
to prove deemed service of notice.
Section 3 Citation of enactments
(28) • Citation is when you refer to, summarize, paraphrase, or quote from
another source.
• In any Act/Regulation/rule/bye law/instrument or document, made,
any enactment may be cited by reference to the title or short title (if any)
given thereon or by reference to the number and years thereof,
or any provision in an enactment may be cited by reference to the section
or sub-section of the enactment in which the provision is contained.
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In this case, the description or citation of a portion of another enactment

shall be construed as including each word, section or other part mentioned
or referred to unless mentioned otherwise.
Section 29 Saving for previous enactments, rules and bye laws
When any Act, Regulation, rule or bye-law are amended, then the
amendments will be considered as modifications or additions and the
rest of the Act, Regulation, rule or bye-law shall still continue.
Section 30 Application of Act to Ordinances
• What is an Ordinance? Ordinances are laws that are declared by
the President of India (Indian Parliament) on the recommendation
of the Union Cabinet, which will have the same effect as an Act of
Parliament. They can only be issued when Parliament is not in session.
They enable the Indian government to take immediate legislative
action. Ordinances cease to operate either if Parliament does not
approve of them within six weeks of reassembly, or if disapproving
resolutions are passed by both Houses. It is also compulsory for a
session of Parliament to be held within six months.
• In this Act the expression Central Act, wherever it occurs, except in
Section 5 and the word ‘Act’ in clauses (9), (13), (25), (40), (43), (53)
and (54) of section 3 and in section 25
shall be deemed to include Ordinance made and promulgated by the
Governor General.
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SUMMARY
Introduction
• The General Clauses Act, 1897 was enacted on 11th March, 1897.
• The Act lays down the basic rules as to how courts should interpret the provisions
of an Act of Parliament. It also defines certain words or expressions so that there is
no unnecessary repetition of the definition of those words in other Acts.
• The Act has also been called as the “Law of all Laws”.
3.1: Applicability
The Act does not define any “territorial extent” clause. It shall apply to every territory
where a Central Act is applicable and would apply in the construction of that Central Act.
3.2: Some Basic Understandings of Legislation

(1) Preamble:
Every Act has a preamble which expresses the scope, object and purpose of the Act.
It is the main source for understanding the intention of lawmaker behind the Act.
(2) How an ‘Act’ is formed?

Act is a Bill passed by both the houses of Parliament and assented by the President.
Whereas ‘Bill’ is a draft of a legislative proposal
(3) Definitions :
Every Act contains definitions which are usually mentioned in the Section 2 of that
Act but in some other Acts; they are also mentioned in Section 3 or in other initial
sections.
However, if there may be words which are not defined in the definitions of the Act,
the meaning of such words may be taken from General Clauses Act, 1897.
“Means” and/or “include”:
(i) Some definitions use the word “means”. Such definitions are exhaustive
definitions and exactly define the term:
(ii) Some definitions use the word “include”. Such definitions do not define the
word but are inclusive in nature.
(4) “Shall” and “May” :The word ‘shall’ is used to raise a presumption of something
which is mandatory or imperative while the word ‘may’ is used to connote something
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which is not mandatory but is only directory or enabling
3.3. Preliminary [Section 1]

Preliminary is the introductory part of any law which generally contains Short Title,
extent, commencement, application etc.
3.4. Definitions [Section 3]

1. Section 3(2) Act
2. Section 3(3) Affidavit
3. Section 3(7) Central Act
4. Section 3(8) Central Government
5. Section 3(13) Commencement
6. Section 3(18) Document
7. Section 3 (19) Enactment
8. Section 3(21) Financial Year
9. Section 3 (22) Good faith
10. Section 3 (23) Government
11. Section 3(24) Government Securities
12. Section 3(26) Immovable Property
13. Section 3(27) Imprisonment
14. Section 3(29) Indian Law
15. Section 3(35) Month
16. Section 3(36) Movable Property
17. Section 3(37) Oath
18. Section 3(38) Offence
19. Section 3(39) Official Gazette
20. Section 3(42) Person
21. Section 3(49) Registered
22. Section 3(51) Rule
23. Section 3(52) Schedule
24. Section 3(54) Section
25. Section 3(61) Sub-section
26. Section 3(62) Swear
27. Section 3(65) Writing
28. Section 3(66) Year
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• Application to foregoing definitions to previous enactments [Section 4]-

There are certain definitions in section 3 of the General Clauses Act, 1897 which
would also apply to the Acts and Regulations made prior to 1897 i.e., on the
previous enactments of 1868 and 1887. This provision is divided into two
Application of terms/expressions Application of terms/expressions

to all [Central Acts] made after to all Central Acts and Regulations
the 3rd January, 1868, and to all made on or after the 14th January,
Regulations made on or after the 1887-
14th January, 1887- Following words and expressions,
Following words and expressions, that is to say, ‘commencement’,
that is to say, ‘affidavit’, ‘immovable ‘financial year’, ‘offence’, ‘registered’,
property’, ‘imprisonment’, “month’, schedule’, ‘sub-section’ and ‘writing’
‘movable property’, ‘oath’, ‘person’, apply.
‘section’, ‘and ‘year’ apply.

• Application of certain definitions to Indian Laws [Section 4A]

The expressions ‘Central Act’, ‘Central Government’, “Gazette’, ‘Government’,
‘Government Securities’, ‘Indian Law’, and “Official Gazette’, ‘shall apply, unless there
is anything repugnant in the subject or context, to all Indian laws.
3.5. General Rules of Construction (Section 5 to 13)
Section 5 Coming into operation of enactment:

• Where, if any specific date of enforcement is prescribed in the Official
Gazette, Act shall into enforcement from such date.
• If no date of commencement is specified for any Central Act, then it
shall be implemented from date on which it received assent.
Section 6 Effect of Repeal
Where any Central legislation or any regulation made after the
commencement of this Act repeals any Act made or yet to be made,
unless another purpose exists, the repeal shall not:
(1) Revive anything not enforced or prevailed during the period at which
repeal is effected or;
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(2) Affect the previous operation of any enactment so repealed or

anything duly done or suffered there under; or
(3) Affect any right, privilege, obligation or liability acquired, accrued or
incurred under any enactment so repealed; or
(4) Affect any penalty, forfeiture or punishment incurred in respect of
any offence committed against any enactment so repealed; or
(5) Affect any inquiry, litigation or remedy with regard to such claim,
privilege, debt or responsibility or any inquiry, litigation or remedy
may be initiated, continued or insisted.
Section 6A Repeal of Act making textual amendment in Act or Regulation
Where any Central Act or Regulation repeals any Act by which the text
of any other Central Act or Regulation was amended by the express
omission, insertion or substitution of any matter, the repeal shall not
affect the continuance of any such amendment made by the enactment
so repealed and in operation at the time of such repeal.
Section 7 Revival of repealed enactments
To revive a repealed statute, it is necessary to state the purpose to do so.
Section 8 Construction of references to repealed enactments
Where any Act is repealed and re-enacted, with or without modification,
any provision of a former enactment, then references in any other
enactment or in any instrument to the provision so repealed shall be
construed as references to the provision so re-enacted unless specified
otherwise.
Section 9 Commencement and termination of time
In any legislation or regulation the word “from” shall be used to exclude
the first day and use the word “to” to include the last day.
Section 10 Computation of time
If any proceeding is to take place on a particular day or within a prescribed
period and if the court or office is closed on that day or last day of the
prescribed period then the proceeding shall be conducted on the next day
afterwards when the court or office is open.
Section 11 Measurement of Distances
In the measurement of any distance, for the purposes of any Central Act
or Regulation made, distance shall be measured in a straight line on a
horizontal plane unless specified otherwise.
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Section 12 Duty to be taken pro rata in enactments

Where any duty of customs or excise or in the nature thereof, is leviable
on any given quantity, by weight, measure or value of any goods or
merchandise, then a like duty is leviable according to the same rate on
any gender or less quantity.
Section 13 Gender and number
In all legislations and Regulations, all words having masculine gender
shall include feminine gender and all singular words shall include plural
and vice versa.
3.6: Powers and Functionaries (Section 14 to 19)
Section 14 Power conferred to be exercisable from time to time

Section 15 Power to appoint to include power to appoint ex-officio
Section 16 Power to appoint to include power to suspend or dismiss
Section 17 Substitution of functionaries
For the purpose of indicating the application of a law to every person,
the official title of the officer at present executing the functions, or that
of the officer by whom the functions are commonly executed should be
mentioned.
Section 18 Successors
In any functionaries or of corporations having perpetual succession, the
law of successors should be specified.
Section 19 Official Chiefs and subordinates
Any law that shall be applicable to the chief or superior shall apply to
the deputies and subordinates who are performing the duties of that
office in place of the superior.
3.7: Provision as to Orders, Rules Etc. made under Enactments (Section 20 to 24)
Section 20 Construction of orders, etc., issued under enactments

Any expression used in the notification, order, scheme, rule, form, or
by-law shall have the same meaning as in the Act or regulation unless
otherwise mentioned.
Section 21 Power to issue, to include power to add, to amend, vary or rescind
notifications, orders, rules or bye-laws
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Section 22 Making of rules or bye-laws and issuing of orders between passing and
commencement of enactment
Such rules, bye-laws or orders so made or issued shall not take effect till
the commencement of the Act or Regulation.
Section 23 Provisions applicable to making of rules or bye-laws after previous
publications
1. Publish a draft of the proposed rules
2. The publication shall be made in such manner as that authority
deems to be sufficient.
3. A notice shall be published with the draft specifying a date on or
after which the draft will be taken into consideration.
consider the objections and suggestions
5. The publication in the Official Gazette of a rule or bye-law shall be
conclusive proof that the rule or bye-laws has been duly made.
Section 24 Continuation of orders etc, issued under enactments repealed and re-
enacted
Any appointment, notification, order, scheme, rule, form or bye-law,
made or issued under the repealed Act, continue in force, and be deemed
to have been made or issued under the provisions so re-enacted.
3.8. Miscellaneous (Section 25 to 30)
Section 25 Recovery of Fines

Section 63 to 70 of the Indian Penal Code and the provisions of the Code
of Criminal Procedure shall apply to all fines imposed.
Section 26 Provision as to offence punishable under two or more enactments
The offender may be prosecuted and punished under either or both the
enactments but shall not be liable to be punished twice for the same offence.
Section 27 Meaning of Service by post
Where any legislation or regulation requires any document to be served
by post, then unless a different intention appears, the service shall be
deemed to be effected by:
1. Properly addressing
2. Pre paying
3. Posting by registered post
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Section 3 Citation of enactments

(28) In any Act/Regulation/rule/bye law/instrument or document, made, any
enactment may be cited by reference to the title or section.
In this case, the description or citation of a portion of another enactment
shall be construed as including each word, section or other part mentioned
or referred to unless mentioned otherwise.
Section 29 Saving for previous enactments, rules and bye laws
When any Act, Regulation, rule or bye-law are amended, then the
amendments will be considered as modifications or additions and the
rest of the Act, Regulation, rule or bye-law shall still continue.
Section 30 Application of Act to Ordinances
In this Act the expression Central Act, wherever it occurs, except in Section
5 and the word ‘Act’ in clauses (9), (13), (25), (40), (43), (53) and (54) of
section 3 and in section 25 shall be deemed to include Ordinance made
and promulgated by the Governor General.
LIST OF LEGAL TERMS
SR. NO. LATIN TERM MEANING PG NO.

(This column
is to be filled
by students)
1. Profit à prendre A profit à prendre is a right to take from the
land owned by another person part of the
natural produce grown on that land or part
of the soil, earth or rock comprising the land.
1. Mandamus A judicial writ issued as a command to an
inferior court or ordering a person to perform
a public or statutory duty
2. Writ A form of written command in the name of a
court or other legal authority to act
3. Repeals the Act Revokes/Annuls i.e. gets rid of the Act (law)
4. Obliterate Make it disappear/ wipe out
174
QUESTIONS
1. As per the provisions of the Companies Act, 2013, a whole time Key Managerial
Personnel (KMP) shall not hold office in more than one company except its subsidiary
company at the same time. Referring to the Section 13 of the General Clauses
Act, 1897, examine whether a whole time KMP can be appointed in more than one
subsidiary company? (ICAI Module, Nov’20 Mock Test, May’21 Mock Test)
2. X owned a land with fifty tamarind trees. He sold his land and the timber (obtained
after cutting the fifty trees) to Y. X wants to know whether the sale of timber
tantamount to sale of immovable property. Advise him with reference to provisions
of “General Clauses Act, 1897”.
(ICAI Module, Nov’19 RTP, May’19 Mock Test, Nov’19 Mock Test, May’18- 4 Marks)

3. Komal Ltd. declares a dividend for its shareholders in its AGM held on 27th September,
2018. Referring to provisions of the General Clauses Act, 1897 and Companies Act,
2013, advice:
(i) The dates during which Komal Ltd. is required to pay the dividend?
(ii) The dates during which Komal Ltd. is required to transfer the unpaid or
unclaimed dividend to unpaid dividend account?
(ICAI Module, Nov’18-4 Marks, May’20 Mock Test)
4. A notice was served on Mr. P for appearing in the court. However, the notice could
not be served on account of the fact that the house of the Mr. P was found locked.
Thus, Mr. P. did not appear in the court at the said date. Examine the situation as
per the provisions of the General Clauses Act, 1897 and determine whether Mr. P.
will be liable in the given situation. (May’19 Mock Test)
5. Referring to the provisions of the General Clauses Act, 1897, find out the day/ date
on which the following Act/Regulation comes into force. Give reasons also,
(1) An Act of Parliament which has not specifically mentioned a particular date.
(2) The Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) (Fifth Amendment) Regulations. 2015 was issued by SEBI vide
Notification dated 14th August, 2015 with effect from 1st January, 2016
(May’19- 2 Marks, Nov’20 RTP)
175
6. If it is defined as:
(i) “Company means a company incorporated under the Companies Act, 2013 or
under any previous company Law”.
(ii) “Person” includes. under the Consumer Protection Act,1986.
How would you interpret/construct the nature and scope of the above definitions?
(May’19- 3 Marks)
7. Mr. Vyas is the owner of House No. 20 in Geeta Colony, Delhi. He has rented two
rooms in this house to Mr. Iyer. The Income Tax Authority has served a show cause
notice to Mr. Vyas. The said notice was received by Mr. Iyer and returned the notice
with an endorsement of refusal. Decide with reference to provisions of “General
Clauses Act, 1897”, whether the notice was rightfully served on Mr. Vyas.
(May’20 RTP)
8. Elucidate the term “Commencement” as per the General Clauses Act, 1897.
9. PK and VK had a long dispute regarding the ownership of a land for which a legal
suit was pending in the court. The court fixed the date of hearing on 29.04.2018,
which was announced to be a holiday subsequently by the Government. What will
be the computation of time of the hearing in this case under the General Clauses
Act, 1897? (Jan’21- 2 Marks)
10. Income Tax Act, 1961 provides that the gratuity paid by the government to its
employees is fully exempt from tax. You are required to explain the scope of the
term ‘government’ and clarify whether the exemption from gratuity income will be
available to the State Government Employees? Give your answer in accordance with
the provisions of the General Clauses Act, 1897. (Jan’21- 2 Marks)
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MULTIPLE CHOICE QUESTION (Homework)
1. The General Clauses Act, 1897 was enacted on:

(a) 11th March, 1897 (b) 14th January, 1897
(c) 14th January, 1887 (d) 3rd January, 1868
(ICAI Module)

2. The General Clauses Act, 1897 intends to:
(a) Provide general definitions.
(b) Applicable to all Central Acts and Regulations.
(c) Applicable where there is no definition, unless there is anything repugnant in
the subject or context.
(d) All of the above. (ICAI Module)
3. The preamble is most important in any legislation, it:

(a) Provides definitions in the Act.
(b) Expresses scope, object and purpose of the Act.
(c) Provides summary of the entire Act.
(d) None of the above. (ICAI Module, May’20 Mock Test)
4. As per a Rule of an Educational Institution, every student may come on weekends

for extra classes but every student shall appear on a weekly test conducted in the
institute, which means:
(a) Attending weekend classes is optional but appearing in weekly test is
compulsory.
(b) Attending weekend classes is compulsory but appearing in weekly test is
optional.
(c) Attending weekend classes and appearing in weekly test, both are compulsory
for students.
(d) Attending weekend classes and appearing in weekly test both are optional for
students. (ICAI Module, Nov’19 Mock Test)
5. Which of the following is not an Immovable Property?

(a) Land (b) Building
(c) Timber (d) Machinery permanently attached to the land
(ICAI Module, May’19 Mock Test, May’20 Mock Test, May’21 Mock Test)
177
6. Mr. A died at the age of 72 leaving behind some movable and immovable properties
to be distributed between his two sons C& D, as per his registered will. His Will
clearly mentioned that all the immovable property should go to C and all the
movable property should go to (D) Both the brothers divided the property as per
will except below mentioned properties, because they could not establish which
property should go to whom. Kindly help them by ticking the property/ies which
should go to D as per the provisions of the general Clause Act, 1897):
(a) Standing crop in the fields
(b) Cut crop, ready to sell
(c) Tube well in the agriculture land
(d) Sandal wood tree (May’19 Mock Test)
7. Which of the following given Statement/s is/are correct:

(i) In all Central Acts and Regulations, any words which denote the masculine
gender shall also be taken to include females, and vice versa
(ii) In all Central Acts and Regulations, words in the singular shall include the
plural, but not vice versa.
a) Only statement (1) is correct
b) Only statement (2) is correct
c) Both the statements are correct
d) None of the statement is correct (Nov’19 Mock Test)
8. The act by which the operation of a previous Act comes to an end, is called as ___
(a) The Repealing Act
(b) The Consolidating Act
(c) The Amending Act
(d) Analogous Act (Nov’19 Mock Test)
9. Where an act of parliament does not expressly specify any particular day as to the
day of coming into operation of such Act, then it shall come into operation on the
day on which
(a) It receives the assent of the President
(b) It receives the assent of the Governor General
(c) It is notified in the official gazette
(d) None of these (ICAI Module)
178
10. Where an act or omission constitutes an offence under two or more enactments,
then the offender shall be liable to be prosecuted and punished under
(a) Under either or any of those enactments
(b) Twice for the same offence
(c) Either a. or b. as per the discretion of the court
(d) None of these (ICAI Module, Nov’20 Mock Test, May’21 Mock Test)
11. What among the following could be considered in the term ‘Immovable Property’ as
defined under section 3(26) of the General Clauses Act, 1897?
(i) The soil for making bricks
(ii) Right to catch fish
(iii) Right to drain water
(iv) Doors and Windows of the house
(a) Only (i) and (iv)
(b) Only (i), (ii) and (iv)
(c) Only (i) and (ii)
(d) Only (ii), (iii) and (iv) (Nov’20 Mock Test)
179
ANSWERS
1. Section 203(3) of the Companies Act, 2013 provides that whole time key managerial
personnel shall not hold office in more than one company except in its subsidiary
company at the same time. With respect to the issue that whether a whole time
KMP of holding company be appointed in more than one subsidiary company or can
be appointed in only one subsidiary company.
It can be noted that Section 13 of General Clauses Act, 1897 provides that the word
‘singular’ shall include the ‘plural’, unless there is anything repugnant to the subject
or the context. Thus, a whole time key managerial personnel may hold office in
more than one subsidiary company as per the present law.

2. “Immovable Property” [Section 3(26) of the General Clauses Act, 1897]: ‘Immovable
Property’ shall include:
(i) Land,
(ii) Benefits to arise out of land, and
(iii) Things attached to the earth, or
(iv) Permanently fastened to anything attached to the earth.
It is an inclusive definition. It contains four elements: land, benefits to arise out of
land, things attached to the earth and things permanently fastened to anything
attached to the earth. Where, in any enactment, the definition of immovable
property is in the negative and not exhaustive, the definition as given in the General
Clauses Act will apply to the expression given in that enactment.
In the instant case, X sold Land along with timber (obtained after cutting trees) of
fifty tamarind trees of his land. According to the above definition, Land is immovable
property; however, timber cannot be immovable property since the same are not
attached to the earth.
3. As per section 9 of the General Clauses Act, 1897, for computation of time, the
section states that in any legislation or regulation, it shall be sufficient, for the
purpose of excluding the first in a series of days or any other period of time to use
the word “from” and for the purpose of including the last in a series of days or any
other period of time, to use the word “to”.
(i) Payment of dividend: In the given instance, Komal Ltd. declares dividend for
its shareholder in its Annual General Meeting held on 27/09/2018. Under the
provisions of Section 127 of the Companies Act, 2013, a company is required
180
to pay declared dividend within 30 days from the date of declaration, i.e.
from 28/09/2018 to 27/10/2018. In this series of 30 days, 27/09/2018 will
be excluded and last 30th day, i.e. 27/10/2018 will be included. Accordingly,
Komal Ltd. will be required to pay dividend within 28/09/2018 and 27/10/2018
(both days inclusive).
(ii) Transfer of unpaid or unclaimed divided: As per the provisions of Section 124 of
the Companies Act, 2013, where a dividend has been declared by a company but
has not been paid or claimed within 30 days from the date of the declaration,
to any shareholder entitled to the payment of the dividend, the company
shall, within 7 days from the date of expiry of the said period of 30 days,
transfer the total amount of dividend which remains unpaid or unclaimed to a
special account to be opened by the company in that behalf in any scheduled
bank to be called the “Unpaid Dividend Account” (UDA). Therefore, Komal Ltd.
shall transfer the unpaid/unclaimed dividend to UDA within the period of 28th
October, 2018 to 3rd November, 2018 (both days inclusive).
4. According to section 27 of the General Clauses Act, 1897, where any legislation
or regulation requires any document to be served by post, then unless a different
intention appears, the service shall be deemed to be effected by:
a. properly addressing
b. pre-paying, and
c. posting by registered post.
A letter containing the document to have been effected at the time at which the
letter would be delivered in the ordinary course of post
Hence, where the where the notice could not be served on account of the fact that
the house of MrP was found locked, it will be deemed that the notice was properly
served as per the provisions of Section 27 of the General Clauses Act, and it would
be for Mr. P to prove that it was not really served and that he was not responsible
for such non-service.
5. (1) According to section 5 of the General Clauses Act, 1897, where any Central Act
has not specifically mentioned a particular date to come into force, it shall be
implemented on the day on which it receives the assent of the President in case
of an Act of Parliament.
(2) If any specific date of enforcement is prescribed in the Official Gazette, the
Act shall come into enforcement from such date. Thus, in the given question,
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the SEBI (Issue of Capital and Disclosure Requirements) (Fifth Amendment)

Regulations, 2015 shall come into enforcement on 1st January, 2016 rather
than the date of its notification in the gazette.
6. Restrictive and extensive definitions: The definition of a word or expression in

the definition section may either be restricting of its ordinary meaning or may be
extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’
restrictive and exhaustive, we must restrict the meaning of the word to that given
in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima
facie’ extensive: here the word defined is not restricted to the meaning assigned to
it but has extensive meaning which also includes the meaning assigned to it in the
definition section.
Thus,
(i) The definition is restrictive and exhaustive to the effect that only an entity
incorporated under the Companies Act, 2013 or under any previous Companies
Act, shall deemed to be company.
(ii) The definition is inclusive in nature, thereby the meaning assigned to the
respective word (here ‘person’) is extensive. It has a wider scope to include
other terms into the ambit of the definition having regard to the object of the
definition.
7. According to section 27 of the General Clauses Act, 1897, where any legislation
or regulation requires any document to be served by post, then unless a different
intention appears, the service shall be deemed to be effected by:
(i) Properly addressing
(ii) Pre-paying, and
(iii) Posting by registered post.
letter would be delivered in the ordinary course of post.
The facts of the question are similar to a decided case law, wherein it was held that
where a notice is sent to the landlord by registered post and the same is returned
by the tenant with an endorsement of refusal, it will be presumed that the notice
has been served. Thus, in the given question it can be deemed that the notice was
rightfully served on Mr. Vyas.
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8. Section 3(13) of the General Clauses Act, 1897, defines the term “Commencement”.
“Commencement” used with reference to an Act or Regulation, shall mean the day
on which the Act or Regulation comes into force.
Coming into force or entry into force (also called commencement) refers to the
process by which legislation; regulations, treaties and other legal instruments come
to have a legal force and effect.
A law cannot be said to be in force unless it is brought into operation by legislative
enactment, or by the exercise of authority by a delegate empowered to bring it into
operation. The theory of a statute being “in operation in a constitutional sense”
though it is not in fact in operation has no validity.
9. According to Section 10 of the General Clauses Act, 1897, where by any legislation
or regulation, any act or proceeding is directed or allowed to be done or taken
in any court or office on a certain day or within a prescribed period then, if the
Court or office is closed on that day or last day of the prescribed period, the act or
proceeding shall be considered as done or taken in due time if it is done or taken on
the next day afterwards on which the Court or office is open. In the given question,
the court fixed the date of hearing of dispute between PK and VK, on 29.04.2018,
which was subsequently announced to be a holiday. Applying the above provisions
we can conclude that the hearing date of 29.04.2018, shall be extended to the next
working day.
10. According to section 3(23) of the General Clauses Act, 1897, ‘Government’ or ‘the
Government’ shall include both the Central Government and State Government.
Hence, wherever, the word ‘Government’ is used, it will include Central Government
and State Government both. Thus, when the Income Tax Act, 1961, provides that
gratuity paid by the government to its employees is fully exempt from tax, the
exemption from gratuity income will be available to the State Government employees
also.
ANSWER TO MCQs
1 A 2 D 3 B 4 A 5 C
6 B 7 A 8 A 9 A 10 A
11 B
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Interpretation of Statutes, Deeds and Documents
Chapter 4
Interpretation of Statutes, Deeds

and Documents
SECTION-A: CONCEPTS
Introduction
• Even if the laws are drafted by legal experts, yet the language might be confusing
or it might be misconstrued. Hence, many a times, the intention of the law is to
be gathered not only from the language but the surrounding circumstances that
prevailed at the time when that particular law was enacted.
• There are three wings of Government: Legislature, Executive and Judiciary. It is the
legislature which lays down the laws and it is the Executive which executes those
laws. But it is judiciary which settles the disputes after interpreting the law made
by legislature. There arises need for the judges to ascertain the correct meaning of
the law laid by the legislature. Here the rules of interpretation are used.
4.1: Meaning of ‘Statute’

• To the common man the terms ‘Statute’ generally means the laws and regulations
of every sort without considering from which source they come from.
• A statute has been defined as ‘the written will of the legislature’. A Statute is a law
established by the act of legislative power, i.e., an Act of legislature.
• The Constitution of India does not use the term ‘Statute’ but it uses the term ‘law’.
‘Law’ includes any ordinance, order, bye-law, rule, regulations, notification, custom
or usage having the force of law.
4.2: Meaning of ‘Interpretation’

• Interpretation is the process of ascertaining the true meaning of the words used in
a Statute.
• ‘Interpretation’ is the process by which the real meaning of an Act (or a document)
and the intention of the legislature in enacting it (or of the parties executing the
document) is ascertained.
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4.3: Importance of Interpretation

Interpretation is required in following situations:
(1) The ambiguity of the words used in the statute: If there are words that have more
than one meaning, and it may not be clear which meaning is to be used, rules of
interpretation can be applied.
(2) Change in the environment: Since society changes from time to time and there are
new developments happening in a society which were not taken into consideration
when the law was made, the rules of interpretation help in tackling this situation.
(3) Complexities of the statutes: Since statutes are complex and huge, it contains
complicated words, jargons and some technical terms which are not easy to
understand and this complexity may lead to confusion. Interpretation rules help in
understanding them.
(4) When legislation doesn’t cover a specific area: Every time when laws are out, it
doesn’t cover all the area, it leaves some grey areas and interpretation helps in
bridging the gaps between.
(5) Drafting error: The draft may be made without sufficient knowledge of the subject.
It may also happen due to the wrong use of words and incorrect grammar. This
makes the draft unclear and creates ambiguity in the law.
(6) Incomplete rules: There are few implied rules and regulations and some implied
powers and privileges which are not mentioned in the statute and when these are
not defined properly in the statute this leads to ambiguity.
4.4: Classification of Interpretation

• Prof. H.F.Jolowicz, in his Lectures on Jurisprudence has classified interpretation as:
Legal Doctrinal
When there is an actual rule of law When its purpose is to discover ‘real’
which binds the Judge to place a certain and ‘true’ meaning of the statute.
interpretation of the statute.
Grammatical Logical
When the court When the court
Authentic Usual
applies only the goes beyond the
When rule of When it comes from
ordinary rules of words and tries
interpretation is some other source
speech for finding to discover the
derived from the such as custom or out the meaning of intention of the
legislator himself case law. the words used in statute in some
the statute. other way
185
• According to Fitzerald, interpretation is of two kinds:
Literal Functional
The literal interpretation is that It is that which departs from the letter
which regards conclusively the verbal of the law and seeks elsewhere for some
expression of the law. It does not look other and more satisfactory evidence of
beyond the ‘literaligis’. the true intention of the legislature.
4.5: Meaning of important Terms

(1) Document:
• In common language, a document is a paper or other material thing giving
information, proof or evidence of anything. The Law defines ‘document’ in a
more technical form.
• Section 3 of the Indian Evidence Act, 1872 states that ‘document’ means any
matter expressed or described upon any substance by means of letters, figures
or marks or by more than one of those means, intended to be used, or which
may be used, for the purpose of recording that matter.
• Generally, documents comprise of following four elements :
(i) Matter—This is the first element. Its usage with the
word “any” shows that the definition of document is
comprehensive. It is basically what matter is produced
in the document.
(ii) Record—This second element must be certain mutual
or mechanical device employed on the substance. It is
basically the device by which matter is produced on substance. It must be
by writing, expression or description. E.g. Pen, pencil etc
(iii) Substance—This is the third element on which a mental or intellectual
elements comes to find a permanent form. It is the surface on which the
matter is produced. E.g. Paper
(iv) Means—This represents fourth element by which such permanent form is
acquired and those can be letters, any figures, marks, symbols which can
be used to communicate between two persons.
(2) Instrument:
• In common parlance, ‘instrument’ means a formal legal document which
creates or confirms a right or records a fact. It is a formal writing of any kind,
186
such as an agreement, deed, charter or record, drawn up and executed in a

technical form.
• It also means a formal legal document having legal effect, either as creating
liability or as affording evidence of it.
(3) Deed:
• ‘Deed’ as an instrument in writing (or other legible
representation or words on parchment or paper)
purporting to effect some legal disposition.
• Simply stated deeds are instruments though all
instruments may not be deeds. However, in India no
distinction seems to be made between instruments and
deeds.
4.6: Interpretation and Construction

• Interpretation is the activity of identifying the meaning of a particular use of
language in context.
• Construction is the activity of applying that meaning to particular factual
circumstances.
• Difference between Interpretation and Construction:
Interpretation differs from construction. Interpretation is of finding out the true
sense of any form and construction is the drawing of conclusion respecting subjects
that lie beyond the direct expression of the text.
Where the Court sticks to the plain meaning of the language used by the legislature,
it would be ‘interpretation’ of the words, but where the meaning is not plain, the
court has to decide whether the wording was meant to cover the situation before
the court. Here the court would be doing ‘construction’.
But more often the two terms are used interchangeably
187
4.7: Process of Interpretation
Aids for process

of Interpretation
Statutory Statutory
Illustrated
Illustrated by
Illustrated by by case-law Illustrated
specific definitions
General Clauses relating to the by Rules of
contained in
Act, 1897 interpretation of Interpretation
individual Acts
statutes
4. 8: Rules of Interpretation/Construction
(A) Primary rules: (B) Secondary rules:

(1) Rule of Literal Construction (1) Noncitur a Sociis,
(2) Rule of Reasonable (2) Expressio Unis Est Exclusio
Construction Alterius
(3) Rule of Beneficial (3) Contemporanea Expositio
Construction
(4) Rule of Harmonious
Construction
(5) Rule of Exceptional
Construction
(6) Rule of Ejusdem Generis

188
(A) Primary rules:
(1) Rule of Literal • Meaning of the word is clear: Where the words are clear,
Construction / the language is plain, and only one meaning can be derived,
Grammatical then the words should be followed literally.
Construction The rule is called as ‘literalegis’, i.e., literal construction of law.
The Court should adopt literal interpretation, unless the
language is ambiguous, or literal sense would give rise to an
abnormality or defeat the purpose of the Act.
• Grammatical meaning: The language used in a Statute must
be construed according to the rules of grammar unless the
language is ambiguous or its literal sense gives rise to any
abnormality.
• Ordinary meaning: A Statute must be interpreted according
to the clear words used. The words and sentences of a Statute
must be given their ordinary and natural meaning.
• Technical meaning: It is presumed that words and phrases in
a technical legislation have a technical meaning and hence
to be interpreted accordingly. However, if a word has no
technical meaning, it is given the ordinary meaning.
• Trade meaning: If a provision relates to a particular trade,
the words used therein must be given that meaning which
everybody conversant with that trade understands. Such
meaning may differ from the ordinary or popular meaning.
• Implications of the rule:
(a) Every word to be given a meaning
(b) Courts cannot legislate: If a matter has not been
provided for in a Statute, it cannot be supplied by the
Courts even if the Court finds that it should have been
so provided.
(c) No reference to legal decisions: Literal construction
involves arriving at the meaning of the words without
reference to legal decision.
• The maxim ‘absoluta sententia expositore non indiget’ (which
means a simple preposition needs no expositor i.e., when
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you have plain words capable of only one interpretation, no

explanation to them is required) is applicable.
• Example: In R v. Harriss, 1836, the defendant bit off the
victim’s nose. The statute says it is offence ‘to stab cut or
wound’ a person. Here the court applied the literal rule, the
act of biting did not come within the meaning of stab cut or
wound as these words implied an instrument had to be used.
Therefore the defendant’s conviction was quashed.
• Example: In a question before the court whether the sale
of betel leaves was subject to sales tax. The Supreme Court
held that betel leaves could not be given the dictionary,
technical or botanical meaning when the ordinary and
natural meaning is clear and unambiguous. Being the word
of everyday use it must be understood in its popular sense
by which people are conversant with it as also the meaning
which the statute dealing with the matter would attribute to
it. Therefore, the sale of betel leaves was liable to sale tax.
(2) Rule of • Narrow interpretation fails to achieve the purpose: Where
Reasonable the words of a Statute appear to be prima facie clear and
construction/ unambiguous, but on close scrutiny they may turn out to
Logical be deficient in carrying out the intention of the legislature,
Construction reasonable construction should be resorted. If the ordinary
meaning contradicts with the apparent purpose of the Act,
the Court may modify the meaning of the words and even
the structure of the sentence
• Giving effect to the intention of the legislature: While
interpreting a Statute, it is the duty of the Court to find out the
intention of the Statute. It has to look into the circumstances,
which prevailed at the time when the Statute was passed
and which necessitated the passing of the Statute.
• Sensible meaning: The words of a statute must be constructed
so as to lead to a rational, fair and sensible meaning.
Ordinarily, the words of a Statute are given their ordinary
and natural meaning. However, if the words are ambiguous,
an attempt must be made to discover the intent of the
legislature.
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• Reasonable construction follows the principle of ‘Ut Res Magis

Valeat Quam Pareat’ which means when the interpretation
of the statute is made it should be done in a meaningful and
sensible manner.
• Example: In R v Allen [1], the defendant was charged with
the offence of bigamy under Sec 57 of the Offences against
the Person Act, 1861. The statute states whosoever being
married shall marry any other person during the lifetime of
the former husband or wife is guilty of an offence. Under
a literal interpretation of this section the offence would be
impossible to commit since civil law will not recognize a
second marriage any attempt to marry in such circumstances
would not be recognized as a valid marriage. The court
applied the rule of reasonable construction and held that
the word ‘marry’ should be interpreted as ‘to go through a
marriage ceremony’. The defendant’s conviction was upheld.
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(3) Heydon’s • Ambiguous words: Haydon’s Rule may be applied if the

Rule of words used in a Statue are ambiguous and are capable of
Interpretation more than one meaning.
or “The • Literal interpretation defeats the object of the Act: If giving
Mischief Rule” literal meaning to the words would defeat the object of
or Rule of the legislature, the Court may depart from the dictionary
Beneficial meaning and instead give it a meaning which will advance
Construction the remedy and suppress the mischief.
of this rule/ • Extended meaning is required: If the object of a Statue is
Purposive public safety, words can be given a more extended meaning
Construction as compared to their ordinary meaning to give effect to that
object.
• Essence of the rule/Methodology
(i) Consideration of background of the statute: The Court
shall consider the historical background of the Statute,
common law before the Statute was enacted and the
mischief, which the Statute intended to remedy. In
particular, the Court shall consider the following four
matters:
(a) What was the law before making of the Act?
(b) What was the mischief or defect, which the law did
not provide?
(c) What is the remedy that the Act has provided?
(d) What is the reason for the remedy?
(ii) Suppress the mischief and advance the remedy: After
the Court has considered the above four matters, the
rule requires the Court to adopt that construction which
will suppress the mischief and advance the remedy.
• Example: Application of this mischief rule is also well-found
in the construction of section 2(d) of the Prize Competition
Act, 1955. This section defines ‘prize competition’ as “any
competition in which prizes are offered for the solution of any
puzzle based upon the building up arrangement, combination
or permutation of letters, words or figures”. The issue was
whether the Act applies to competitions which involve
substantial skill and are not in the nature of gambling.
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Supreme Court, after referring to the previous state of law,

to the mischief that continued under that law and to the
resolutions of various states under Article 252(1) authorizing
Parliament to pass the Act has stated as follows: “having
regard to the history of the legislation, the declared object
thereof and the wording of the statute, we are of opinion
that the competitions which are sought to be controlled and
regulated by the Act are only those competitions in which
success does not depend on any substantial degree of skill.”
(RMD Chamarbaugwalla V. Union of India).
(4) Rule of • Basis of the Rule: When there is a conflict between two or
Harmonious more provisions, harmonious construction is to be adopted.
Construction • Essence of Harmonious Construction:
1. Provisions to be reconciled: Where two provisions relate to
the same subject matter, these should be reconciled and
effect must be given to both of them. Any inconsistency
either within a section or between two different sections
of a Statute must be avoided.
2. Act to be read as a whole
• Harmonious construction - Methodology:
1. Harmonize the provisions:
(a) Any head-on clash between them should be
avoided.
(b) If it is not possible to harmonize the two conflicting
provisions, they should be so interpreted that effect
is given to all of them.
(c) One section shall not be allowed to defeat the
other provisions of the Act unless it is impossible
to harmonize them or to give effect to all the
provisions.
2. Course of action if it is impossible to harmonize: If it is
impossible to harmonize the two conflicting provisions,
the recourse shall be as follows:
(a) The provision enacted or amended later in point of
time shall prevail.
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(b) The Court shall find out which provision is more

general and which is more specific. The more
specific provision shall be so construed as to
exclude the more general provision. principle
is usually expressed by the maxim, “generalia
specialibus non derogant”- It means a specific rule
will override a general rule
• Example: Indian Contract Act specifies rules for minor and
Indian Partnership Act, 1932 also specifies a rule if minor
is admitted in the partnership firm. Partnership Contract is
a contract and hence both Acts are applicable but if they
contradict, then preference will be given to Indian Partnership
Act as it is more specific.
• In some cases, the statute may give a clear indication as to
which provision is subservient and which overrides. This is
done by the use of the terms “subject to”, “notwithstanding”
and “without prejudice”.
 Subject to: The impact of the words “subject to” when
used in a provision is that when the same subject
matter is covered by that provision and by another
provision or enactment subject to which it operates and
there is a conflict between them, then the latter will
prevail over the former. This limitation cannot operate,
when the subject matter of the two provisions is not the
same. Thus a clause that uses the words “subject to” is
subservient to another.
 Notwithstanding: A clause that begins with the words
“notwithstanding anything contained” is called a non-
obstante clause. Unlike the “subject to” clause, the
notwithstanding clause has the effect of making the
provision prevail over others. When this term is used
then the clause will prevail over the other provision(s)
mentioned therein.
194
A notwithstanding clause can operate at four levels.
Clause Effect Example

1. Notwithstanding The clause will N o t w i t h s t a n d i n g
anything contained override such anything contained in
in another section other section(s) sub-sections (1) & (2)...
or sub-section of / sub-section(s) (Section 297(3)) of the
that statute. earlier Companies Act
1956.
2. Notwithstanding The clause N o t w i t h s t a n d i n g
anything contained will override anything contained in
in a statute. the entire this Act, the Central
enactment. Government May...
(Section 408 (1) of the
earlier Companies Act,
1956.
3. Notwithstanding The cluse will ...and on such
anything contained prevail over publication, the rules
in specific section(s) the other as approved by the
or sub-section(s) or enactment. Central government
all the provisions shall by the Central
contained in Government shall be
another statute. deemed to have been
validly made not
withstanding anything
contained in the
companies Act, 1956,
(Section 7A of the
Securities Contracts
(Regulation) Act, 1956
195
4. Notwithstanding The cluse will ...the rules so made

anything contained override all are amended shall,
in any other law other laws. notwithstanding
for the time being anything to the
in force. contrary contained in
the companies Act,
1956, or in any other
law for the time being
in force, have effect
(Section 8 of the
Securities Contracts
(Regulation) Act, 1956.
 Without prejudice: When certain particular provisions

follow general provisions and when it is stated that
the particular provisions are without prejudice to those
general provisions the particular provisions would not
restrict or circumscribe the operation and generality of
the preceding general provisions. In other words, the
particular provisions shall operate in addition to and
not in derogation of the general provisions
(5) Rule of The rule of exceptional construction may be studied under the
Exceptional following heads:
Construction (i) Common Sense Rule
(ii) Construction of words ‘and’ and ‘or’
(iii) Construction of the word ‘may’
(iv) Construction of the word ‘shall’ or ‘must’
(v) Judging a provision as mandatory or directory
(i) Common Sense Rule:
Full effect must be given to every word contained in a Statute.
However, words in a Statute may be eliminated if no sensible
meaning can be drawn.
(ii) Construction of words ‘and’ and ‘or’:
The word ‘and’ is normally conjunctive, i.e., if two provisions
are separated by the conjunction ‘and’, requirements of
both the provisions should be satisfied. If two clauses are
separated by the word ‘or’, satisfying the requirements of any
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of the two clauses would be sufficient.

(iii) Construction of the word ‘may’
Directory force: The word ‘may’ is generally construed to have
a directory force only.
Mandatory force: The word ‘may’ has a mandatory force in
the following cases:
(a) Where the subject involves a discretion coupled with an
obligation, i.e., when a power is given, there is duty to
discharge the obligation.
(b) Where a remedy will be advanced and mischief will be
suppressed.
(iv) Construction of the word ‘shall’ or ‘must’
Mandatory force: The word ‘shall’ is ordinarily construed to
have a mandatory force. Where a provision in the Statute
provides for a specific penalty, the Court has no discretion to
determine whether such provision is directory or mandatory.
It is to be taken as mandatory provision.
Directory force: The word ‘shall’ has a directory force
(a) where it has been used against the Government, unless
a contrary intention is manifest in the Statute; or
(b) where the intention of the legislature so demands; or
(c) where giving it a mandatory interpretation would result
in absurd results.
(v) Judging a provision as mandatory or directory
Whether a provision is a mere direction or a mandatory
command depends upon the purpose of the Act, the intention
of the legislature and general inconvenience to the public.
Following generalizations may be drawn:
(a) Prohibitory provisions (i.e., use of negative,, words in a
provision) imply that the provision is mandatory.
(b) If the non-compliance of a provision results in penalty,
it implies mandatory intention of the Statute.
(c) If a provision gives a power coupled with a duty, it is
mandatory in nature.
(d) If no public policy is involved, the procedure is treated
only as directory.
(e) Provisions enacted to prevent fraud and mischief is held
as mandatory.
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(6) Rule of • Meaning of the rule

Ejusdem The term ‘Ejusdem Generis’ means of the same class or
Generis species’.
The rule states that general words following specific words
are to be construed with reference to the words preceding
them.
• Applicability of the Rule:
For application of the rule, all the following conditions need
to be satisfied:
(a) There must be an enumeration of certain specific words.
(b) The specific words contained in the enumeration must
constitute a class or category.
(c) The specific words must be of the same kind or
nature.
(d) The specific words must not exhaust the whole
category.
• Example: Where a Statute uses the words ‘such as oxen,
bulls, goat, cows, buffaloes, sheep, horses, etc.’, the word
‘etc’ cannot include wild animals like lion and tiger. Also,
all domestic animals would not be covered. The illustrations
given relate to all four legged animals and hence other
domestic animals like dogs, cats etc. can be included but not
cock or hen has no similarity with the illustrations of other
domestic animals given
(B) Secondary Rules:
(1) Expression • Expression Unius Est Exclusio Alterius means that express
Unius Est mention of one thing implies the exclusion of another.
Exclusio • As per this maxim, if two or more things belonging to a
Alterius particular class are mentioned, other members of that class
are silently excluded.
• Example: Where a Statute refers to ‘lands, house and coal
mines, other mines except coal mine are excluded and ‘other
mines’ cannot be made to fall within the general term ‘lands’.
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(2) Noscitur • The meaning of a word is derived from its associate words,
A Sociis i.e., the meaning of a word is to be judged by the company
(Construction it keeps. The words in a Statute are construed with reference
of associated to the words found in immediate connection with them.
words) • If two or more words which are capable of analogous (similar
or parallel) meaning are grouped together, they should be
understood in cognate sense, i.e., they take their colour from
each other and are given a similar or related meaning.
• Example: If some statute specifies ‘plant & machinery’, here
plant refers to machines. But if some statute specifies “plant
& trees’, here plant refer to plant which grows in soil and not
machine. Hence, what will be meaning of plant, will depend
on its associated word.
(3) Effect of In this connection, we have to bear in mind two Latin maxims:
Usage (i) ‘Optima Legum interpres est consuetude’ (the custom is the
best interpreter of the law); and
(ii) ‘Contempranea exposito est optima et fortissinia in lege’
(i) ‘Contempranea exposito est optima et fortissinia in lege’
means best way to interpret a document is to read it as it
would have been read when made.
As per this rule, the best interpretation/construction of a
statute or any other document is that which has been made
by the contemporary authority. In simple words, old statutes
and documents should be interpreted as they would have
been at the time when they were enacted/written. Expose
the old laws to new circumstances and technology.
(ii) Optima Legum interpres est consuetude’ (the custom is the
best interpreter of the law): If there is uniform notorious
practice continued under an old statute and the Legislature
has not amended the same, then the usage or practice
receives judicial or legislative approval.
Example: Indian Contract Act,1872, does not mention anything
about electronic contracts as when the law was made, electronic
contracts did not exist. But still electronic contracts like online
shopping, booking online tickets are valid.
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4.9: Aids of Interpretation
(A) Internal Aids: (B) External Aids:

1. Title, 1. Historical setting
2. Preamble, 2. Consolidating Statutes and previous
3. Headings & title of chapter law.
4. Marginal notes 3. Usage
5. Definitional Clauses 4. Earlier & Later Acts and Analogous
6. Illustrations Acts
7. Proviso 5. Dictionary Definitions
8. Explanation 6. Use of Foreign Decisions
9. Schedules
10. Read the Statute as a Whole
Internal Aids of Interpretation
(1) Title • An enactment would have what is known as a ‘Short Title’

and also a ‘Long Title’.
• The ‘Short Title’ merely identifies the enactment and is
chosen merely for convenience, the ‘Long Title’ on the other
hand, describes the enactment and does not merely identify
it. Hence, long title can be used for interpretation.
• The title of a statute is an important part of the Act and may
be referred to for the purpose of ascertaining its general scope,
although it cannot override the clear meaning of the enactment.
• Example: Full title of the Supreme Court Advocates (Practice in
High Courts) Act, 1951 specify that this is an Act to authorize
Advocates of the Supreme Court to practice as of right in any
High Court.
(2) Preamble • The preamble expresses the (scope) and (object) of the Act.
It is a part of the Act. It state the reasons for creation of the
Act and the evil which it wants to suppress.
• The Preamble to an Act discloses the primary intention of the
legislature but can only be brought in as an aid to construction
if the language of the statute is not clear. However, it cannot
override the provisions of the enactment.
200
• Example: Preamble of the Negotiable Instruments Act, 1881

states - “An Act to define and amend the law relating to
Promissory Notes, Bills of Exchange and Cheque.
• Example: Use of the word ‘may’ in section 5 of the Hindu
Marriage Act, 1955 provides that “a marriage may be
solemnized between two Hindus....” has been construed to
be mandatory in the sense that both parties to the marriage
must be Hindus as defined in section 2 of the Act. It was
held that a marriage between a Christian male and a Hindu
female solemnized under the Hindu Marriage Act was void.
This result was reached also having regard to the preamble
of the Act which reads: ‘An Act to amend and codify the law
relating to marriage among Hindus
(3) Headings • A number of sections covering a particular subject are
and title of a grouped together in the form of a chapter. Each chapter is
chapter given a heading, which represents the subject matter dealt
with the chapter.
• The headings may be referred to for the purpose of construction
of the enactment or its parts. However, headings cannot
restrict the clear meaning of an enactment. Further, heading
to one group of sections cannot be used to interpret another
group of sections.
• There is a controversy regarding the weightage to be given to
headings while interpreting a Statute.
The position is as under:
(a) According to one view, a heading is a preamble to the
provisions following it and therefore the heading is
treated as a key to interpretation of sections covered by
it.
(b) The other view considers that heading may be referred
to only when the enacting words are ambiguous.
• Example: Chapter contained in the Code of Criminal
Procedure, 1973 read as ‘Limitation for taking cognizance of
certain offences’, was not held to be controlling and it was
held that a cumulative reading of various provisions in the
said chapter clearly indicated that the limitation prescribed
therein was only for the filing of the complaint or initiation
of the prosecution and not for taking cognizance.
201
(4) Marginal • Generally, marginal notes are printed at the left hand margin
notes of the sections in an enactment. But, Acts published by
private publishers show the marginal notes at the top of the
section. Marginal notes are essentially a heading/title to the
section. Marginal notes summarize the effect of a section.
• In India, the Courts have given different views regarding the
use of marginal notes in construction of a Statute. Many
Courts have held that marginal notes cannot be referred
to for the purpose of constructing a Statute. However,
certain Courts have held that marginal notes may be used
to understand the legislative intent, if the words of a Statute
are ambiguous. But marginal notes cannot limit or restrict
the meaning of clear words used in the section.
• Example:
(5) Definitional • A definition clause performs the following two functions:

Clauses (a) It acts as a key to proper interpretation and thus avoids
ambiguities,
(b) It shortens the language and avoids repetition.
• Where the meaning of a word or expression is defined in a
Statute, it is that meaning alone which must be given to it. The
Court cannot ignore the statutory definition and speculate as
to what should be the true meaning of the expression, unless
there is anything repugnant in the context.
202
• A word defined in the Act bears the same meaning throughout

the Act, unless by doing so any absurdity is created in the
subject or context.
• Where the language used in the definition itself is ambiguous,
the definition should be construed in the light of the purpose
of the Act and having regard to the ordinary connotation of
the word defined.
• Construction of definitions may understood under the
following headings:
(i) Restrictive and extensive definitions
(ii) Ambiguous definitions
(i) Restrictive and extensive definitions: The definition of a word
or expression in the definition section may either be restricting
of its ordinary meaning or may be extensive of the same.
When a word is defined to ‘mean’ something, the definition
is prima facie restrictive and exhaustive & the meaning of
such word must be restricted to the meaning given in the
definitional clause.
Example: Definition of ‘Company’ as given in section 2(20)
of the Companies Act, 2013. It states, “Company” means a
company incorporated under this Act or under any previous
company law.
Where an expression is defined to ‘include’ something, the
definition is prima facie extensive and its meaning can also
include something else in addition to the meanin0g assigned
to it in the definitional clause.
Example: Word ‘debenture’ defined in section 2(30) of the
Companies Act, 2013 states that “debenture” includes
debenture stock, bonds or any other instrument of a company
evidencing a debt, whether constituting a charge on the
assets of the company or not”. This is a definition of inclusive
nature.
A definition in the form of ‘is deemed to include’ is an inclusive
definition.
A definition in the form of ‘to apply and to include’ is an
inclusive definition.
203
(ii) Ambiguous definitions: Sometime the definition section may

itself be ambiguous, and so it may have to be interpreted
in the light of the other provisions of the Act. Such type of
definition is not to be read in isolation. It must be read in
the context of the phrase which it defines, realizing that
the function of a definition is to give accuracy and certainty
to a word or phrase which would otherwise be vague and
uncertain but not to contradict.
Example: Termination of service of a seasonal worker after
the work was over does not amount to retrenchment as per
the Industrial Disputes Act, 1947. But the termination of
employment of a daily wager who is engaged in a project,
on completion of the project will amount to retrenchment
if the worker had not been told when employed that his
employment will end on completion of the project.
(6) Illustrations • Illustrations are examples added to a section. Illustrations
are inserted to clarify the scope and object of the section.
Illustrations follow the text of the Sections and, therefore,
do not form a part of the Sections. However, illustrations
do form a part of the statute and are considered to be of
relevance and value in construing the text of the sections.
• But illustrations cannot modify the section. Hence, if there
is a conflict between the section and illustration, the section
will prevail.
(7) Proviso • The normal function of a proviso is to except something
out of the enactment or to qualify something stated in the
enactment which would be within its purview if the proviso
were not there. As a general rule, a proviso is added to an
enactment to qualify or create an exception to what is in the
enactment.
• Distinction between Proviso, exception and saving Clause
 ‘Exception’ is intended to restrain the enacting clause to
particular cases.
204
Example:
 Proviso’ is used to remove special cases from general

enactment and provide for them specially.
Example:
 ‘Saving clause’ is used to preserve from destruction

certain rights, remedies or privileges already existing.
They are added in case of repeal and re-enactment of
Acts to ensure the continuation of past rights
Example: Companies Act, 1956 gave certain rights to
directors and auditors. Now that Act is repealed and a
new Act is re-enacted as Companies Act, 2013. But the
old rights given to auditors and directors still exist by
virtue of saving clause provided.
205
(8) Explanation • An explanation is generally a clarification of the legislative

mind. It explains the meaning of the words contained in the
section.
• Object of an explanation: The purpose of explanation is to
(a) include something within a section or to exclude
something from it; or
(b) clarify any ambiguity in the main section; or
(c) explain the meaning the section; or
(d) make the main section more meaningful and purposeful.
• Example:
(9) Schedules • The Schedules form part of an Act. Therefore, they must be
read together with the Act for all purposes of construction.
However, the expressions in the Schedule cannot control
or prevail over the expression in the enactment. If there
appears to be any inconsistency between the schedule and
the enactment, the enactment shall always prevail.
• Example: Schedules given in Income Tax Act, 1961.
(10) Read the • It is the elementary principle that construction of a statute
Statute as a is to be made of all its parts taken together and not of one
Whole part only.
• Example: If one section of an Act requires ‘notice’ should be
given, then a verbal notice would generally be sufficient. But,
if another section provides that ‘notice’ should be ‘served’ on
the person or ‘left’ with him, or in a particular manner or
place, then it would obviously indicate that a written notice
was intended.
206
External Aids of Interpretation
(1) Historical The history of the external circumstances which led to the
setting: enactment in question is of much significance in construing any
enactment. We can take help from all those external or historical
facts which are necessary in the understanding and comprehension
of the subject matter and the scope and object of the enactment.
(2) Consolidating The Preambles to many statutes contain expressions such as “An
Statutes & Act to consolidate” the previous law, et(c) In such a case, the
Previous Law Courts may stick to the presumption that it is not intended to
alter the law.
Example:
(3) Usage : Usage of trade is also sometimes taken into consideration in

construing an Act. The acts done under a statute provide quite
often the key to the statute itself. It is well known that where the
meaning of the language in a statute is doubtful, usage, how that
language has been interpreted and acted upon over a long period
– may determine its true meaning.
Example: The term ‘reasonable time’ where not specifically defined
in the Act, will be interpreted as per the day to day usage and
customs.
(4) Earlier & Later • Exposition of One Act by Language of Another :
Acts and The general principle is that where there are different statutes
Analogous in ‘pari materia’ (i.e.in an analogous case- i.e. comparable
Acts: in certain respects), though made at different times, or even
expired and not referring to each other, they shall be taken
together as one system and as explanatory of each other.
207
• Where a single section of one Act (say, Code of Criminal

Procedure) is incorporated into another statute (say Negotiable
Instruments Act), it must be read in the sense which it bore
in the original Act from which it is taken consequently, all
the rest of Code of Criminal Procedure should be referred,
to ascertain what that Section means, though one Section
alone is incorporated in the new Act (Negotiable Instruments
Act).
• Earlier Act Explained by the Later Act: If there is a later
Act explaining the earlier one, then the later Act may be
construed in the light of the earlier Act. Where the earlier
statute contained a negative provision but the later one.
Example: Suppose the earlier bye-law limited the appointment
of the chairman of an organisation to a person possessed of
certain qualifications and the later bye-law authorises the
election of any person to be the chairman of the organisation.
In such a case, the later bye-law would be so construed as
to harmonise and not to conflict with the earlier bye-law:
the expression ‘any person’ used in the later bye-law would
be understood to mean only any eligible person who has the
requisite qualifications as provided in the earlier bye-law.
• Reference to Repealed Act: Where a part of an Act has been
repealed, it loses its operative force. Nevertheless, such a
repealed part of the Act may still be taken into account for
construing the un-repealed part. This is so because it is part
of the history of the new Act.
(5) Dictionary • If the particular word is defined in the act itself, then that
Definitions : specific meaning is to be followed. But where a word is
not defined in the Act itself, we may refer to dictionaries to
find out the general sense in which that word is commonly
understood.
• But, in selecting one out of the several meanings of a word,
the context in which it is used in the Act must be taken into
consideration.
208
(6) Use of Foreign • Foreign decisions of countries following the same system
Decisions: of jurisprudence (legal system) as ours and given on laws
similar to ours can be legitimately used for construing our
own Acts.
• But, more importance is always to be given to the language
of the Indian statute. Where guidance can be obtained from
Indian decisions, reference to foreign decisions is not required.
• Example: India and England has similar legal system and
hence English judgements can be used for interpreting law.
But using American judgements will be incorrect as they
follow different legal system.
4.10: Rules of Interpretation/Construction of Deeds and Documents

(1) Whenever a document is written in a language which is clear and definite and no
doubt arises in its application to the facts, there is no need to resort to the rules of
interpretation.
(2) While interpreting any deed or document, the intention of the parties should be considered.
To ascertain the intention of the parties, the document must be considered as a whole.
It is from the whole of the document, coupled with the surrounding circumstances, that
the general intention of the party or parties is to be ascertained. Attempt must be made
to gather the intention of the parties from the exact words used in the deed.
(3) As far as possible, effect is to be given to all words used in a document.
(4) The same word cannot have two different meanings in the same document, unless the
context compels the adoption of such a rule.
(5) The status and training of the parties using the words have also to be taken into account
as the same words may be used by an ordinary person in one sense and by a trained
person or a specialist in quite another special sense.
(6) It may also happen that there is a conflict between two or more clauses of the same
document. An effort must be made to resolve the conflict by interpreting the clauses so
that all the clauses are given effect to. If, however, it is not possible to give effect to all
of them, then it is the earlier clause that will over-ride the latter one.
Similarly, if one part of the document is in conflict with another part, an attempt should
always be made to read the two parts of the document harmoniously, if possible. If
that is not possible, then the earlier part will prevail over the latter one which should,
therefore, be disregarded.
209
SUMMARY
Introduction
Even if the laws are drafted by legal experts, yet the language might be confusing or it
might be misconstrued. Hence, many a times, the intention of the law is to be gathered
not only from the language but the surrounding circumstances that prevailed at the time
when that particular law was enacted. Here the rules of interpretation are used.
4.1: Meaning of ‘Statute’

A statute has been defined as ‘the written will of the legislature’.
4.2: Meaning of ‘Interpretation’

‘Interpretation’ is the process by which the real meaning of an Act (or a document) and
the intention of the legislature in enacting it (or of the parties executing the document)
is ascertained.
4.3: Importance of Interpretation

Interpretation is required in following situations:
(1) The ambiguity of the words used in the statute
(2) Change in the environment
(3) Complexities of the statutes
(4) When legislation doesn’t cover a specific area
(5) Drafting error
(6) Incomplete rules
4.4: Classification of Interpretation

• Prof. H.F.Jolowicz, in his Lectures on Jurisprudence has classified interpretation
Legal Doctrinal
Authentic Usual Grammatical Logical
• According to Fitzerald, interpretation is of two kinds:

Literal Functional
210
4.5: Meaning of important Terms

(1) Document: Section 3 of the Indian Evidence Act, 1872 states that ‘document’ means
any matter expressed or described upon any substance by means of letters, figures
or marks or by more than one of those means, intended to be used, or which may
be used, for the purpose of recording that matter.
(2) Instrument: Section 2(14) of the Indian Stamp Act, 1899 states that ‘instrument’
includes every document by which any right or liability is or purports to be created,
transferred, extended, extinguished or recorded.
(3) Deed: ‘Deed’ as an instrument in writing (or other legible representation or words on
parchment or paper) purporting to effect some legal disposition.
4.6: Interpretation and Construction

Interpretation differs from construction. Interpretation is of finding out the true sense
of any form and construction is the drawing of conclusion respecting subjects that lie
beyond the direct expression of the text.
4.7: Process of Interpretation
Aids for process

of Interpretation
Statutory Statutory
Illustrated
Illustrated by
Illustrated by by case-law Illustrated
specific definitions
General Clauses relating to the by Rules of
contained in
Act, 1897 interpretation of Interpretation
individual Acts
statutes
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4.8: Rules of Interpretation/Construction
(A) Primary rules: (B) Secondary rules:

(1) Rule of Literal Construction (1) Noncitur a Sociis,
(2) Rule of Reasonable (2) Expressio Unis Est Exclusio
Construction Alterius
(3) Rule of Beneficial (3) Contemporanea Expositio
Construction
(4) Rule of Harmonious
Construction
(5) Rule of Exceptional
Construction
(6) Rule of Ejusdem Generis
4.9: Aids of Interpretation
(A) Internal Aids: (B) External Aids:

1. Title, 1. Historical setting
2. Preamble, 2. Consolidating Statutes and previous
3. Headings & title of chapter law.
4. Marginal notes 3. Usage
5. Definitional Clauses 4. Earlier & Later Acts and Analogous
6. Illustrations Acts
7. Proviso 5. Dictionary Definitions
8. Explanation 6. Use of Foreign Decisions
9. Schedules
10. Read the Statute as a Whole
4.10: Rules of Interpretation/Construction of Deeds and Documents

Firstly, for interpreting any deed or document, the intention of the parties should be
considered. To ascertain the intention of the parties, the document must be considered
as a whole. It is from the whole of the document, coupled with the surrounding
circumstances, that the general intention of the party or parties is to be ascertained.
Same words should be given same meaning unless it creates any abnormality.
212
LIST OF LATIN TERMS
S R . LATIN TERM MEANING PG NO.

(This column is
NO.
to be filled by
students)
1. Litera legis Literal construction of law
2. Absoluta sententia Simple preposition needs no expositor i.e.,
expositore non when you have plain words capable of only
indiget one interpretation, no explanation to them is
required
3. Ut Res Magis Valeat The interpretation of the statute is made it
Quam Pareat should be done in a meaningful and sensible
manner
4. Generalia A specific rule will override a general rule.
specialibus non
derogant
5. Ejusdem Generis Same class or species
6. Expression Unius Est Express mention of one thing implies the
Exclusio Alterius exclusion of another
7. Noscitur A Sociis Meaning of a word is derived from its associate
words
8. Contempranea Best way to interpret a document is to read it
exposito est optima as it would have been read when made
et fortissinia in lege’
9. Optima Legum The custom is the best interpreter of the law
interpres est
consuetude’
10. Pari materia’ In an analogous case- i.e. comparable in
certain respects
213
QUESTIONS
1. Explain how ‘Dictionary Definitions’ can be of great help in interpreting / constructing

an Act when the statute is ambiguous.
(ICAI Module, May’19 Mock Test, Nov’19 Mock Test, Nov’18-2 Marks)
2. The ‘Statute should be read as a Whole’. Explain the statement. (Nov’18 RTP)
3. Explain whether Foreign Decisions be used for construing Indian Acts. (Nov’19 RTP)
4. The meaning of a word is to be judged by the company it keeps’. Explain the concept
of ‘Noscitur A Sociis’. (May’20 Mock Test)
OR
“Associate words to be understood in common sense manner.” Explain this statement
with reference to rules of interpretation of statutes. (Nov’20 – 3 Marks)
5. At the time of interpreting a statutes what will be the effect of ‘Usage’ or ‘Practice’?
(Nov’19-3 Marks, Nov’20 Mock Test, May’21 RTP, May’21 Mock Test, Nov’21 RTP)
6. ‘Preamble does not over-ride the plain provision of the Act.’ Comment. Also give
suitable example. (Nov’20 RTP)
7. Sohel, a director of a Company, not being personally concerned or interested,

financially or otherwise, in a matter of a proposed motion placed before the Board
Meeting, did not disclose his interest although he has knowledge that his sister is
interested in that proposal. He restrains from making any disclosure of his interest
on the presumption that he is not required by law to disclose any interest as he is not
personally interested or concerned in the proposal. He made his presumption relying
on the ‘Rule of Literal Construction’. Explaining the scope of interpretation under this
rule in the given situation, decide whether the decision of Sohel is correct?
(Jan’21 - 3 Marks)
8. What is External Aid to interpretation? Explain how the Dictionary definitions are
the External Aids to Interpretations? (Jan’21- 3 Marks)
214
(1) When there is a conflict between two or more statute or two or more parts of a
statute and both of them need to be honoured, then which rule of interpretation is
to be applied:
(a) Rule of Harmonious construction
(b) Rule of Literal construction
(c) Rule of Beneficial construction
(d) Rule of exceptional construction (May’19 Mock Test)
(2) An aid that expresses the scope, object and purpose of the Act—
(a) Title of the Act
(b) Heading of the Chapter
(c) Preamble
(d) Definitional sections
(May’19 Mock Test, ICAI Module, Nov’20 RTP,May’21 Mock Test)
(3) An internal aid that may be added to include something within the section or to
exclude something from it, is—
(a) Proviso
(b) Explanation
(c) Schedule
(d) Illustrations (May’19 Mock Test, ICAI Module, ICAI Sample Question)
(4) As per _________, the best way to interpret a statute or document is to read it as
it would have been read when it was enacted or made.
(a) Optima legume interpres est consuetude
(b) Expressio unius Est Exclusio Alterius
(c) Ut res magis valeat quam pereat
(d) Contemporanea expositio (Nov’19 Mock Test)
(5) If the _________ used in a statute make it clear that a ________ sense is intended,
the rule of Ejusdem Generis shall not apply.
(a) Specific words, narrow
(b) Specific words, wider
215
(c) General words, narrow

(d) General words, wider (Nov’19 Mock Test)
(6) Formal legal document which creates or confirms a right or record a fact is a—
(a) Document
(b) Deed
(c) Statute
(d) Instrument (ICAI Module, May’20 Mock Test, May’21 Mock Test)
(7) Which among the following is the cardinal rule of construction of statutes—
(a) Harmonious Rule of construction
(b) Beneficial Rule of construction
(c) Literal Rule of construction
(d) Reasonable Rule of construction (ICAI Module, ICAI Sample Question)
(8) Rule of Reasonable Construction is based on the maxim—

(a) Absolut asentenia expositor non indigent
(b) Ut res magis valeat quam pareat
(c) Quo facit per alium facit per se
(d) Contemporanea exposition (ICAI Module)
(9) Rule of Beneficial construction is also known as—

(a) Purposive construction
(b) Mischieve Rule
(c) Heydons’s Rule
(d) All of the Above (ICAI Module, May’20 Mock Test)
(10) Pick the odd one out of the following aids to interpretation—
(a) Preamble
(b) Marginal Notes
(c) Proviso
(d) Usage (ICAI Module)
(11) Which rule of construction is applicable where there is a real and not merely
apparent conflict between the provisions of an Act, and one of them has not been
made subject to the other—
216
(a) Rule of Beneficial construction

(b) Rule of Literal construction
(c) Rule of Harmonious construction
(d) Rule of Exceptional construction (ICAI Module)
(12) The preamble is most important in any legislation, it:

(a) Provides definitions in the Act.
(b) Expresses scope, object and purpose of the Act.
(c) Provides summary of the entire Act.
(d) None of the above. (May’20 Mock Test)
(13) ________________________ is the cardinal rule of construction that words,

sentences and phrases of a statute should be read in their ordinary, natural and
grammatical meaning so that they may have effect in their widest amplitude
(a) Rule of Literal Construction
(b) Rule of Harmonious Construction
(c) Rule of Beneficial Construction
(d) Rule of Exceptional Construction (Nov’20 Mock Test, May’21 Mock Test)
217
ANSWERS
1. Dictionary Definitions: First we refer the Act in question to find out if any particular
word or expression is defined in it. Where we find that a word is not defined in the Act
itself, we may refer to dictionaries to find out the general sense in which that word
is commonly understood. However, in selecting one out of the several meanings of
a word, we must always take into consideration the context in which it is used in the
Act. It is the fundamental rule that the meanings of words and expressions used in
an Act must take their colour from the context in which they appear. Further, judicial
decisions laying down the meaning of words in construing statutes in pari materia
will have greater weight than the meaning furnished by dictionaries. However, for
technical terms, reference may be made to technical dictionaries.
2. Read the Statute as a Whole’: It is the elementary principle that construction of a

statute is to be made of all its parts taken together and not of one part only. The
deed/ statute must be read as a whole in order to ascertain the true meaning of its
several clauses, and the words of each clause should be so interpreted as to bring
them into harmony with other provisions – if that interpretation does no violence to
the meaning of which they are naturally susceptible. And the same approach would
apply with equal force with regard to Acts and Rules passed by the legislature.
One of the safest guides to the construction of sweeping general words is to examine
other words of like import in the same enactment or instrument to see what
limitations must be imposed on them. If we find that a number of such expressions
have to be subjected to limitations and qualifications and that such limitations and
qualifications are of the same nature, that circumstance forms a strong argument
for subjecting the expression in dispute to a similar limitation and qualification.
3. Use of Foreign Decisions:

• Foreign decisions of countries following the same system of jurisprudence (legal
system) as ours and given on laws similar to ours can be legitimately used for
construing our own Acts.
• But, more importance is always to be given to the language of the Indian
statute. Where guidance can be obtained from Indian decisions, reference to
foreign decisions is not required.
218
4. Associated Words to be Understood in Common Sense Manner: When two words

or expressions are coupled together one of which generally excludes the other,
obviously the more general term is used in a meaning excluding the specific one.
On the other hand, there is the concept of ‘Noscitur A Sociis’ (‘it is known by its
associates’), that is to say ‘the meaning of a word is to be judged by the company it
keeps’. When two or more words which are capable of analogous (similar or parallel)
meaning are coupled together, they are to be understood in their cognate sense (i.e.
akin in origin, nature or quality). They take, as it were, their colour from each other,
i.e., the more general is restricted to a sense analogous to the less general. It is
a rule wider than the rule of ejusdem generis, rather ejusdem generis is only an
application of the noscitur a sociis. It must be borne in mind that nocitur a sociis, is
merely a rule of construction and it cannot prevail in cases where it is clear that the
wider words have been deliberately used in order to make the scope of the defined
word correspondingly wider.
For example, in the expression ‘commercial establishment means an establishment
which carries on any business, trade or profession’, the term ‘profession’ was
construed with the associated words ‘business’ and ‘trade’ and it was held that a
private dispensary was not within the definition.
5. Effect of ‘Usage’ or ‘Practice’:

• In this connection, we have to bear in mind two Latin maxims:
(i) ‘Optima Legum interpres est consuetude’ (the custom is the best interpreter
of the law); and
(ii) ‘Contempranea exposito est optima et fortissinia in lege’
• ‘Contempranea exposito est optima et fortissinia in lege’ means best way to
interpret a document is to read it as it would have been read when made.
• As per this rule, the best interpretation/construction of a statute or any other
document is that which has been made by the contemporary authority. In simple
words, old statutes and documents should be interpreted as they would have
been at the time when they were enacted/written. Expose the old laws to new
circumstances and technology.
• Optima Legum interpres est consuetude’ (the custom is the best interpreter of
the law): If there is uniform notorious practice continued under an old statute
and the Legislature has not amended the same, then the usage or practice
receives judicial or legislative approval.
219
6. Preamble: The Preamble expresses the scope, object and purpose of the Act more
comprehensively. The Preamble of a Statute is a part of the enactment and can
legitimately be used as an internal aid for construing it. However, the Preamble
does not over-ride the plain provision of the Act. But if the wording of the statute
gives rise to doubts as to its proper construction, for example, where the words
or phrase has more than one meaning and a doubt arises as to which of the two
meanings is intended in the Act, the Preamble can and ought to be referred to in
order to arrive at the proper construction.
In short, the Preamble to an Act discloses the primary intention of the legislature
but can only be brought in as an aid to construction if the language of the statute
is not clear. However, it cannot override the provisions of the enactment.
Example: Use of the word ‘may’ in section 5 of the Hindu Marriage Act, 1955 provides
that “a marriage may be solemnized between two Hindus.....” has been construed
to be mandatory in the sense that both parties to the marriage must be Hindus as
defined in section 2 of the Act. It was held that a marriage between a Christian male
and a Hindu female solemnized under the Hindu Marriage Act was void. This result
was reached also having regard to the preamble of the Act which reads: ‘An Act to
amend and codify the law relating to marriage among Hindus”
7. Rule of Literal Construction

Normally, where the words of a statute are in themselves clear and unambiguous,
then these words should be construed in their natural and ordinary sense and
it is not open to the court to adopt any other hypothetical construction. This is
called the rule of literal construction. This principle is contained in the Latin maxim
“absoluta sententia expositore non indeget” which literally means “an absolute
sentence or preposition needs not an expositor”. In other words, plain words require
no explanation. Sometimes, occasions may arise when a choice has to be made
between two interpretations – one narrower and the other wider or bolder. In such a
situation, if the narrower interpretation would fail to achieve the manifest purpose
of the legislation, one should rather adopt the wider one. When we talk of disclosure
of ‘the nature of concern or interest, financial or otherwise’ of a director or the
manager of a company in the subject-matter of a proposed motion (as referred
to in section 102 of the Companies Act, 2013), we have to interpret in its broader
sense of referring to any concern or interest containing any information and facts
that may enable members to understand the meaning, scope and implications of
the items of business and to take decisions thereon. What is required is a full and
220
frank disclosure without reservation or suppression, as, for instance where a son
or daughter or father or mother or brother or sister is concerned in any contract
or matter, the shareholders ought fairly to be informed of it and the material facts
disclosed to them. Here a restricted narrow interpretation would defeat the very
purpose of the disclosure.
In the given question, Sohel (a director) did not disclose his interest in a matter placed
before the Board Meeting (in which his sister has interest), as he is not personally
interested or concerned in the proposal. Here, he ought to have considered broader
meaning of the provision of law; and therefore, even though he was personally not
interested or concerned in the proposal, he should have disclosed the interest.
8. External aids are the factors that help in interpreting/construing an Act and have
been given the convenient nomenclature of ‘External Aids to Interpretation’. Apart
from the statute itself there are many matters which may be taken into account
when the statute is ambiguous. These matters are called external aids. Dictionary
Definitions:
Dictionary Definitions is one of the External Aids to interpretation. First we have
to refer to the Act in question to find out if any particular word or expression is
defined in it. Where we find that a word is not defined in the Act itself, we may
refer to dictionaries to find out the general sense in which that word is commonly
understood. However, in selecting one out of the several meanings of a word, we
must always take into consideration the context in which it is used in the Act. It
is the fundamental rule that the meanings of words and expressions used in an
Act must take their colour from the context in which they appear. Further, judicial
decisions laying down the meaning of words in construing statutes in ‘pari materia’
will have greater weight than the meaning furnished by dictionaries. However, for
technical terms reference may be made to technical dictionaries.
ANSWER TO MCQs
1 A 2 C 3 B 4 A 5 B
6 D 7 C 8 B 9 D 10 D
11 C 12 B 13 A
221
Revision Questions
REVISION
QUESTIONS
222
Revision Questions
REVISION QUESTIONS
Chapter 1. The Indian Contract Act,1872
1. Mr. Chetan was appointed as Site Manager of ABC Constructions Company on a two
years contract at a monthly salary of `50,000. Mr. Pawan gave a surety in respect
of Mr. Chetan’s conduct. After six months the company was not in position to pay
`50,000 to Mr. Chetan because of financial constraints. Chetan agreed for a lower
salary of `30,000 from the company. This was not communicated to Mr. Pawan.
Three months afterwards it was discovered that Chetan had been doing fraud since
the time of his appointment. What is the liability of Mr. Pawan during the whole
duration of Chetan’s appointment?
(ICAI Module, Nov’19 RTP, Nov’18- 4 Marks)
2. M advances to N `5,000 on the guarantee of P. The loan carries interest at ten percent
per annum. Subsequently, N becomes financially embarrassed. On N’s request, M
reduces the interest to six per cent per annum and does not sue N for one year after
the loan becomes due. N becomes insolvent. Can M sue P? (ICAI Module)
3. What are the rights of the indemnity-holder when sued? (ICAI Module)
4. Define contract of indemnity and contract of guarantee and state the conditions
when guarantee is considered invalid?
(ICAI Module, May’19 Mock Test, Nov’19 Mock Test)
5. A agrees to sell goods to B on the guarantee of C for the payment of the price of
goods in default of B. Is the agreement of guarantee valid in each of the following
alternate cases:
Case 1. If A is a Minor
Case 2: If B is a Minor
Case 3: If C is a minor. (ICAI Module)
6. S asks R to beat T and promises to indemnify R against the consequences. R beats T

and is fined `50,000. Can R claim `50,000 from S? (ICAI Module)
223
Revision Questions
7. C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted
by B, contracts with X to give time to B. Is A discharged from his liability? Explaining
the provisions of the Indian Contract Act, 1872
(Nov’18 RTP, May’19 Mock Test, May’20 Mock Test)
8. Distinguish between a contract of Indemnity and a contract of Guarantee as per The

Indian Contract Act, 1872. (Nov’20 -4 Marks)
9. Satya has given his residential property on rent amounting to ` 25,000 per month
to Tushar. Amit became the surety for payment of rent by Tushar. Subsequently,
without Amit’s consent, Tushar agreed to pay higher rent to Satya. After a few
months of this, Tushar defaulted in paying the rent.
(i) Explain the meaning of contract of guarantee according to the provisions of the
Indian Contract Act, 1872.
(ii) State the position of Amit in this regard. (Jan’21- 4 Marks)
10. Rahul is the owner of electronics shop. Priyanka reached the shop to purchase an air
conditioner whose compressor should be of copper. As Priyanka wanted to purchase
the air conditioner on credit, Rahul demand a guarantor for such transaction. Mr.
Arvind (a friend of Priyanka) came forward and gave the guarantee for payment of
air conditioner. Rahul sold the air conditioner of a particular brand, misrepresenting
that it is made of copper while it is made of aluminium. Neither Priyanka nor Mr.
Arvind had the knowledge of fact that it is made of aluminium. On being aware
of the facts, Priyanka denied for payment of price. Rahul filed the suit against Mr.
Arvind. Explain with reference to the Indian Contract Act 1872, whether Mr. Arvind
is liable to pay the price of air conditioner? (Nov’21 RTP)
1. R gives his umbrella to M during raining season to be used for two days during
Examinations. M keeps the umbrella for a week. While going to R’s house to return
the umbrella, M accidently slips and the umbrella is badly damaged. Who bear the
loss and why? (ICAI Module, Nov’20 RTP)
2. State the essential elements of a contract of bailment. Distinguish between the

‘contract of bailment’ and ‘contract of pledge’. (ICAI Module)
224
Revision Questions
3. Give four differences between Bailment and Pledge. (ICAI Module, May’18- 4 Marks)
4. Mr.Avinash wanted a loan for expanding his business, from ABC Bank. Mr.Avinash
has pledged the stock of his business to obtain the loan from bank. However, the
expansion of business did not reap the desired results and Mr.Avinash was not able
to repay the loan. Now, ABC bank wants to retain the stock for adjustment of their
loan. Advise, ABC Bank whether they can retain the stock for the adjustment of their
loan and also for payment of interest. Give your answer as per the provisions of the
Contract Act, 1872. (Nov’18 RTP)
5. Mr. Dhannaseth delivers a rough blue sapphire to a jeweller, to be cut and polished.
The jeweller carries out the job accordingly. However, now Mr. Dhannaseth refuses
to make the payment and wants his blue sapphire back. The jeweller denies the
delivery of goods without payment. Examine whether the jeweller can hold blue
sapphire. Give your answer as per the provisions of the Contract Act, 1872.
(Nov’19 Mock Test)
6. What are the rights available to the finder of lost goods under Section 168 and
Section 169 of the Indian Contract Act, 1872? (Nov’18- 3 marks)
7. What is the liability of a bailee making unauthorized use of goods bailed?

(May’19- 2 Marks)
8. (i) Srushti acquired valuable diamond at a very low price by a voidable contract
under the provisions of the Indian Contract Act, 1872. The voidable contract
was not rescinded. Srushti pledged the diamond with Mr. VK. Is this a valid
pledge under the Indian Contract Act, 1872?
(ii) Whether a Pawnee has a right to retain the goods pledged. (Nov’19- 4 Marks)
UNIT 3: AGENCY
1. A appoints M, a minor, as his agent to sell his watch for cash at a price not less than
` 700. M sells it to D for ` 350. Is the sale valid? Explain the legal position of M and
D, referring to the provisions of the Indian Contract Act, 1872.
(ICAI Module, May’19 Mock test)
225
Revision Questions
2. State with reason whether the following statement is correct or incorrect:

Ratification of agency is valid even if knowledge of the principal is materially
defective. (ICAI Module)
3. Comment on the ‘Principal is not always bound by the acts of a sub-agent ’.

(ICAI Module, May’20 Mock Test)
4. What is agent’s authority in case of an emergency? What are the essential conditions
to be satisfied to constitute a valid emergency? Give your answer as per the provisions
of the Indian Contract Act, 1872. (May’19 Mock Test)
5. Pankaj appoints Shruti as his agent to sell his estate. Shruti, on looking over the
estate before selling it, finds the existence of a good quality Granite-Mine on the
estate, which is unknown to Pankaj. Shruti buys the estate herself after informing
Pankaj that she (Shruti) wishes to buy the estate for herself but conceals the
existence of Granite-Mine. Pankaj allows Shruti to buy the estate, in ignorance of
the existence of Mine. State giving reasons in brief the rights of Pankaj, the principal,
against Shruti, the agent. Give your answer as per the provisions of the Contract
Act, 1872.
What would be your answer if Shruti had informed Pankaj about the existence of
mine before she purchased the estate, but after two months, she sold the estate at
a profit of `10 lac? (May’20 RTP)
6. Bhupendra borrowed a sum of `3 lacs from Atul. Bhupendra appointed Atul as his
agent to sell his land and authorized him to appropriate the amount of loan out of
the sale proceeds. Afterward, Bhupendra revoked the agency.
Decide under the provisions of the Indian Contract Act, 1872 whether the revocation
of the said agency by Bhupendra is lawful. (Nov’19- 4 Marks)
7. An agent is neither personally liable nor can he personally enforce the contract on
behalf of the principal.” Comment. (May’19- 2 Marks)
8. X has made an agency agreement with Y to authorize him to purchase goods on

the behalf of X for the year 2020 only. The agency agreement was signed by both
and it contains all the terms and conditions for the agent. It has a condition that
Y is allowed to purchase goods maximum upto the value of ` 10 lakhs only. In the
226
Revision Questions
month of April 2020, Y has purchased a single item of ` 12 lakhs from Z as an agent
of X. The market value of the item purchased was ` 14 lakhs but a discount of ` 2
lakhs was given by Z. The agent Y has purchased this item due to heavy discount
offered and the financially benefit to X.
After delivery of the item Z has demanded the payment from X as Y is the agent of
X. But X denied to make the payment stating that Y has exceeded his authority as
an agent therefore he is not liable for this purchase. Z has filed a suit against X for
payment.
Decide whether Z will succeed in his suit against X for recovery of payment as per
provisions of The Indian Contract Act, 1872. (Nov’20- 3 Marks)
9. Mr. Yadav, a cargo owner, chartered a vessel to carry a cargo of wheat from a
foreign port to Chennai. The vessel got stranded on a reef in the sea 300 miles from
the destination.
The ship’s managing agents signed a salvage agreement for Mr. Yadav. The goods
(wheat) being perishable, the salvors stored it at their own expense. Salvors intimated
the whole incident to the cargo owner. Mr. Yadav refuse to reimburse the Salvor, as
it is the Ship- owner, being the bailee of the cargo, who was liable to reimburse the
salvor until the contract remained unterminated. Referring to the provision of The
Indian Contract Act 1872, do you acknowledge or decline the act of Salvor, as an
agent of necessity, for Mr. Yadav. Explain? (Nov’21 RTP)
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ANSWER
1. As per the provisions of Section 133 of the Indian Contract Act, 1872, if the creditor
makes any variance (i.e. change in terms) without the consent of the surety, then
surety is discharged as to the transactions subsequent to the change.
In the instant case, Mr. Pawan is liable as a surety for the loss suffered by ABC
Constructions company due to misappropriation of cash by Mr. Chetan during the
first six months but not for misappropriations committed after the reduction in
salary.
Hence, Mr. Pawan, will be liable as a surety for the act of Mr. Chetan before the
change in the terms of the contract i.e., during the first six months. Variation in the
terms of the contract (as to the reduction of salary) without consent of Mr. Pawan,
will discharge Mr. Pawan from all the liabilities towards the act of the Mr. Chetan
after such variation.
2: M cannot sue P, because a surety is discharged from liability when, without his
consent, the creditor makes any change in the terms of his contract with the
principal debtor, no matter whether the variation is beneficial to the surety or does
not materially affect the position of the surety (Section 133, Indian Contract Act,
1872).
3: Rights of Indemnity- holder when sued (Section 125): The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the
promisor—
(1) All damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;
(2) All costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted as
it would have been prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorised him to bring or defend the suit;
(3) All sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contrary to the orders of the promisor,
and was one which it would have been prudent for the promisee to make in
the absence of any contract of indemnity, or if the promisor authorised him to
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Revision Questions
compromise the suit.

It may be understood that the rights contemplated under section 125 are not
exhaustive. The indemnity holder/ indemnified has other rights besides those
mentioned above. If he has incurred a liability and that liability is absolute, he is
entitled to call upon his indemnifier to save him from the liability and to pay it off.
4: Section 124 of the Indian Contract Act,1872 states that “A contract by which one
party promises to save the other from loss caused to him by the conduct of the
promisor himself, or the conduct of any person”, is called a “contract of indemnity”.
Section 126 of the Indian Contract Act, 1872 states that “A contract to perform the
promise made or discharge liability incurred by a third person in case of his default.”
is called as “contract of guarantee”.
The conditions under which the guarantee is invalid or void are stated in section
142,143 and 144 of the Indian Contract Act are:
(i) Guarantee obtained by means of misrepresentation.
(ii) Creditor obtained any guarantee by means of keeping silence as to material
circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor
shall not act upon it until another person has joined in it as co-surety and that
other party fails to join as such.
5: Case 1: The agreement of guarantee is void because the creditor is incompetent to

contract.
Case 2: The agreement of guarantee is valid because the capability of the principal
debtor does not affect the validity of the agreement of the guarantee.
Case 3: The agreement of guarantee is void because the surety is incompetent to
contract.
6: R cannot claim ` 50,000 from S because the object of the agreement was unlawful.
A contract of indemnity to be valid must fulfil all the essentials of a valid contract
which includes:
a. Offer and acceptance
b. Intention to create legal obligation
c. Consideration
d. Competency to contract
e. Free consent
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f. Lawful object
g. The agreement must not be expressly declared to be void- eg: an agreement
in restraint of trade/ marriage etc.
h. The terms of the agreement must not be vague or uncertain
i. The agreement must be capable of performance- An agreement to do an
impossible act is void.
j. Legal formalities
7: According to Section 136 of the Indian Contract Act, 1872, where a contract to give
time to the principal debtor is made by the creditor with a third person and not with
the principal debtor, the surety is not discharged.
In the given question the contract to give time to the principal debtor is made by the
creditor with X who is a third person. X is not the principal debtor. Hence, A is not
discharged.
8. Distinction between Indemnity and Guarantee
Point of distinction Contract of Indemnity Contract of Guarantee

Number of parties/ There are only two parties There are three parties
Parties to the namely the indemnifier creditor, principal debtor
contract (promisor) and the and surety.
indemnified (promisee).
Nature of liability The liability of the indemnifier The liability of the surety is
is primary and independent secondary as the primary
liability is that of the
principal debtor.
Time of liability The liability of the indemnifier Liability is already in
arises only on the happening existence but specifically
of a contingency. crystallizes when principal
debtor fails.
Time to Act The indemnifier need not Surety must act by extending
necessarily act at the request guarantee at the request of
of indemnified. debtor.
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Revision Questions
Right to sue third Indemnifier cannot sue a Surety can p r o c e e d

party third party for loss in his own against principal debtor in
name as there is no privity his own right because he
of contract. Such a right gets all the right of a creditor
would arise only if there is after discharging the debts.
an assignment in his favour.
Purpose Reimbursement of loss For the security of the
creditor
Competency to All parties must be In the case of a contract of
contract competent to contract guarantee, where a minor
is a principal debtor, the
contract is still valid.
Number of Contracts Only one original and There are 3 contracts made
independent contract between-
between indemnifier and • Creditor and principal
indemnified. debtor
• Creditor and Surety
• Surety and Principal
debtor
9. (i) Contract of guarantee: As per the provisions of section 126 of the Indian Contract
Act, 1872, a contract of guarantee is a contract to perform the promise made
or discharge the liability, of a third person in case of his default.
Three parties are involved in a contract of guarantee:
Surety- person who gives the guarantee,
Principal debtor- person in respect of whose default the guarantee is given,
Creditor- person to whom the guarantee is given
(ii) According to the provisions of section 133 of the Indian Contract Act, 1872,
where there is any variance in the terms of contract between the principal
debtor and creditor without surety’s consent, it would discharge the surety in
respect of all transactions taking place subsequent to such variance.
In the instant case, Satya (Creditor) cannot sue Amit (Surety), because Amit is
discharged from liability when, without his consent, Tushar (Principal debtor)
has changed the terms of his contract with Satya (creditor). It is immaterial
whether the variation is beneficial to the surety or does not materially affect
the position of the surety.
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Revision Questions
10. As per the provisions of section 142 of the Indian Contract Act 1872, where the
guarantee has been obtained by means of misrepresentation made by the creditor
concerning a material part of the transaction, the surety will be discharged. Further
according to provisions of section 134, the surety is discharged by any contract
between the creditor and the principal debtor, by which the principal debtor is
released, or by any act or omission of the creditor, the legal consequence of which
is the discharge of the principal debtor.
In the given question, Priyanka wants to purchase air conditioner whose compressor
should be of copper, on credit from Rahul. Mr. Arvind has given the guarantee
for payment of price. Rahul sold the air conditioner of a particular brand on
misrepresenting that it is made of copper while it is made of aluminium of which
both Priyanka & Mr. Arvind were unaware. After being aware of the facts, Priyanka
denied for payment of price. Rahul filed the suit against Mr. Arvind for payment of
price.
On the basis of above provisions and facts of the case, as guarantee was obtained
by Rahul by misrepresentation of the facts, Mr. Arvind will not be liable. He will be
discharged from liability.
1. M shall have to bear the loss since he failed to return the umbrella within the
stipulated time and Section 161 clearly says that where a bailee fails to return
the goods within the agreed time, he shall be responsible to the bailor for any
loss, destruction or deterioration of the goods from that time notwithstanding the
exercise of reasonable care on his part.
2. Essential elements of a contract of bailment: Section 148 of the Indian Contract Act,
1872 defines the term ‘Bailment’. A ‘bailment’ is the delivery of goods by one person
to another for some purpose upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of
the person delivering them. The essential elements of the contract of the bailment
are:
1. Delivery of goods—The essence of bailment is delivery of goods by one person
to another.
2. Bailment is a contract—In bailment, the delivery of goods is upon a contract
that when the purpose is accomplished, the goods shall be returned to the
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Revision Questions
bailor.
3. Return of goods in specific—The goods are delivered for some purpose and it is
agreed that the specific goods shall be returned.
4. Ownership of goods—In a bailment, it is only the possession of goods which is
transferred and the bailor continues to be the owner of the goods.
5. Property must be movable—Bailment is only for movable goods and never for
immovable goods or money.
Difference between contract of bailment and contract of pledge:
1. Right of sale—In case of pledge, the pawnee (pledgee) can sell the goods and
recover his debt, if pawnor (pledger) does not pay while in bailment the bailee
can retain the goods and sue for damages, but he has no authority to sell the
goods.
2. Purpose—Pledge is specifically for securing a debt, while bailment may be for
any purpose e.g. for repairs, safe custody etc.
3. Right to use the goods—In case of pledge, pawnee cannot use the goods
pledged but bailee can use the bailed goods if contract so provides.
3.
Aspects Pledge Bailment

Purpose A pledge is made for a A bailment can be for any
specific purpose as security purpose.
for payment of debt or
performance of a promise.
Parties The person who delivers the The person delivering the
good as security is called goods under a contract of
the “Pawnor”. The person bailment is called as “Bailor”.
to whom the goods are
delivered as security is called
the pawnee.
Use of Goods A pawnee does not have the The bailee may use the goods
right to use the goods. bailed as per the terms of
the contract.
Lien Lien can be exercised even A bailee can exercise lien on
for non- payment of interest. the goods bailed only for his
labour and skill employed
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Revision Questions
Sale of Goods The pawnee can sell the The bailee has no right of
goods after due notice to the sale.
pawnor.
Nature of The pledgee gets a special The bailee has no right of
Interest in property in the goods. The possession of the goods
Property general property remains bailed.
with the pawnor.
4. According to section 173 of the Indian Contract Act, 1872, the pawnee may retain
the goods pledged, not only for payment of the debt or the performance of the
promise, but for the interest, of the debt, and all necessary expenses incurred by
him in respect of the possession or for the preservation of the goods pledged.
Hence, ABC Bank can retain the stock of business of Mr.Avinash, not only for
adjustment of the loan but also for payment of interest
5. According to section 170 of the Indian Contract Act, 1872, where the bailee has, in
accordance with the purpose of the bailment, rendered any service involving the
exercise of labour or skill in respect of the goods bailed, he has, in the absence
of a contract to the contrary, a right to retain such goods until he receives due
remuneration for the services he has rendered in respect of them.
Thus, in accordance with the purpose of bailment if the bailee by his skill or labour
improves the goods bailed, he is entitled for remuneration for such services. Towards
such remuneration, the bailee can retain the goods bailed if the bailor refuses to pay
the remuneration. Such a right to retain the goods bailed is the right of particular
lien. He however does not have the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has
a right to sue the bailor. In such a case the particular lien may be waived. The
particular lien is also lost if the bailee does not complete the work within the time
agreed.
Hence, in the given situation the jeweler is entitled to retain the stone till he is paid
for the services he has rendered.
6. Rights of finder of goods

1) Right to retain goods: The finder can retain the goods against the true owner
until he receives compensation for trouble and expenses incurred by him in
preserving the goods and finding out the owner. This right is known as the
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Revision Questions
finder’s lien on the goods. But the finder cannot file a suit against the true
owner for the recovery of such expense.
2) Right to sue for reward (Section 168): If the owner has offered some reward for
the return of goods and the finder has the knowledge of such reward, he can
file a suit for the recovery of the award.
3) Right to claim expenses incurred: If the finder of goods has incurred any expenses
on the lost goods, he has a right to recover it from the real owner of goods.
4) Right of sale: Section 169 permits the finder to sell the goods in the following
cases:
a) If the owner cannot be found after reasonable search; or
b) If found, the owner refuses to pay the lawful charges to the finder; or
c) If the thing is in danger of perishing or losing the greater part of their
value; or
d) If the lawful charges of the finder amount to two - thirds of their
value.
7. Liability of bailee making unauthorised use of goods bailed: According to section

154 of the Indian Contract Act, 1872, if the bailee makes any use of the goods
bailed, which is not according to the conditions of the bailment, he is liable to make
compensation to the bailor for any damage arising to the goods from or during such
use of them.
8. (i) Pledge by person in possession under voidable contract (Section 178A of the
Indian Contract Act, 1872): When the pawnor has obtained possession of the
goods pledged by him under a contract voidable under section 19 or section
19A, but the contract has not been rescinded at the time of the pledge, the
pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor’s defect of title.
Therefore, the pledge of diamond by Srushti with Mr. VK is valid.
(ii) Right of retainer (Section 173 of the Indian Contract Act, 1872): Yes, the
pawnee may retain the goods pledged, not only for payment of the debt or the
performance of the promise, but for the interest, of the debt, and all necessary
expenses incurred by him in respect of the possession or for the preservation of
the goods pledged.
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Revision Questions
UNIT 3: AGENCY
1. According to the provisions of Section 184 of the Indian Contract Act, 1872, as
between the principal and a third person, any person, even a minor may become
an agent. But no person who is not of the age of majority and of sound mind can
become an agent, so as to be responsible to his principal. Thus, if a person who is
not competent to contract is appointed as an agent, the principal is liable to the
third party for the acts of the agent. Thus, in the given case, D gets a good title to
the watch. M is not liable to A for his negligence in the performance of his duties.
2. Incorrect: Section 198 of the Indian Contract Act, 1872 provides that for a valid
ratification, the person who ratifies the already performed act must be without
defect and have clear knowledge of the facts of the case. If the principal’s knowledge
is materially defective, the ratification is not valid and hence no agency.
3. The statement is correct. Normally, a sub-agent is not appointed, since it is

a delegation of power by an agent given to him by his principal. The governing
principle is, a delegate cannot delegate’. (Latin version of this principle is, “delegates
non potest delegare”). However, there are certain circumstances where an agent can
appoint sub-agent.
In case of proper appointment of a sub-agent, by virtue of Section 192 of the Indian
Contract Act, 1872 the principal is bound by and is held responsible for the acts of
the sub-agent. Their relationship is treated to be as if the sub-agent is appointed
by the principal himself.
However, if a sub-agent is not properly appointed, the principal shall not be bound
by the acts of the sub-agent. Under the circumstances the agent appointing the
sub-agent shall be bound by these acts and he (the agent) shall be bound to the
principal for the acts of the sub-agent.
4. An agent has authority, in an emergency, to do all such acts for the purpose of
To constitute a valid agency in an emergency, following conditions must be satisfied.
(i) Agent should not be a in a position or have any opportunity to communicate
with his principal within the time available.
(ii) There should have been actual and definite commercial necessity for the agent
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Revision Questions
to act promptly.
(iii) The agent should have acted bonafide and for the benefit of the principal.
(iv) The agent should have adopted the most reasonable and practicable course
under the circumstances, and
(v) The agent must have been in possession of the goods belonging to his principal
and which are the subject of contract
5. The problem is based on Sections 215 & 216 of the Indian Contract Act, 1872.
According to Section 215, if an agent deals on his own account in the business of the
agency, without obtaining the consent of his principal and without acquainting him
with all material circumstances, then the principal may repudiate the transaction.
On the other hand, section 216 provides that, if an agent, without the knowledge
of his principal, acts on his own account in the business of the agency, then the
principal may claim any benefit which may have accrued to the agent from such a
transaction. Hence in the first instance, though Pankaj had given his consent to Shruti
permitting the latter to act on his own account in the business of agency, Pankaj
may still repudiate the sale as the existence of the mine, a material circumstance,
had not been disclosed to him.
In the second instance, Pankaj had knowledge that Shruti was acting on her own
account and also that the mine was in existence; hence, Pankaj cannot repudiate
the transaction under section 215. Also, under Section 216, Pankaj cannot claim
any benefit from Shruti as he had knowledge that Shruti was acting on her own
account in the business of the agency.
6. According to Section 202 of the Indian Contract Act, 1872 an agency becomes
irrevocable where the agent has himself an interest in the property which forms
the subject-matter of the agency, and such an agency cannot, in the absence of an
express provision in the contract, be terminated to the prejudice of such interest.
In the instant case, the rule of agency coupled with interest applies and does not
come to an end even on death, insanity or the insolvency of the principal.
Thus, when Bhupendra appointed Atul as his agent to sell his land and authorized
him to appropriate the amount of loan out of the sale proceeds, interest was created
in favour of Atul and the said agency is not revocable. The revocation of agency by
Bhupendra is not lawful.
7. According to section 230 of the Indian Contract Act, 1872, in the absence of any
contract to that effect, an agent cannot personally enforce contracts entered into by
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Revision Questions
him on behalf of his principal, nor is he personally bound by them. Thus, an agent
cannot personally enforce, nor be bound by, contracts on behalf of principal.
Presumption of contract to the contrary: But, such a contract shall be presumed to
exist in the following cases:
(1) Where the contract is made by an agent for the sale or purchase of goods for
a merchant resident abroad/foreign principal;
(2) Where the agent does not disclose the name of his principal or undisclosed
principal; and
(3) Where the principal, though disclosed, cannot be sued.
An agent does all acts on behalf of the principal but incurs no personal liability.
The liability remains that of the principal unless there is a contract to the
contrary. An agent also cannot personally enforce contracts entered into by
him on behalf of the principal. In the light of section 226 of the Indian Contract
Act, 1872, Principal is considered to be liable for the acts of agents which are
within the scope of his authority. Further section 228 of the Indian Contract
Act, 1872 states that where an agent does more than he is authorised to do,
and what he does beyond the scope of his authority cannot be separated from
what is within it, the principal is not bound to recognise the transaction.
8. In the given case, the agency agreement was signed between X and Y, authorizing Y
to purchase goods maximum upto the value of ` 10 lakh. But Y purchased a single
item of ` 12 lakh from Z as an agent of X at a discounted rate to financially benefit
to X. On demand of payment by Z, X denied saying that Y has exceeded his authority
therefore he is not liable for such purchase. Z filed a suit against X for payment.
As said above, liability remains that of the principal unless there is a contract to the
contrary. The agency agreement clearly specifies the scope of authority of Y for the
purchase of goods, however he exceeded his authority as an agent. Therefore, in
the light of section 228 as stated above, since the transaction is not separable, X is
not bound to recognize the transaction entered between Z and Y, and therefore may
repudiate the whole transaction. Hence, Z will not succeed in his suit against X for
recovery of payment.
9. Section 189 of Indian Contract Act 1872 defines agent’s authority in an emergency.
An agent has authority, in an emergency, to do all such acts for the purpose of
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Revision Questions
In certain circumstances, a person who has been entrusted with another’s property
may have to incur unauthorized expenses to protect or preserve it. This is called an
agency of necessity. Hence, in the above case the Salvor had implied authority from
the cargo owner to take care of the cargo. They acted as agents of necessity on
behalf of the cargo owner. Cargo owner were duty-bound towards salvor. Salvor is
entitled to recover the agreed sum from Mr. Yadav and not from the ship owner, as
a lien on the goods.
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Revision Questions
Chapter 2. The Negotiable Instruments Act, 1881
1. What are the circumstances under which a bill of exchange can be dishonoured by
non-acceptance? Also, explain the consequence if a cheque gets dishonoured for
insufficiency of funds in the account.
(ICAI Module, Nov’18-5 Marks, May’19 Mock Test, Nov’19 Mock Test, May’20 Mock
Test)
2. Rama executes a promissory note in the following form, ‘I promise to pay a sum of
`10,000 after three months’. Decide whether the promissory note is a valid promissory
note. (ICAI Module)
3. C issues a cheque for `55,00,00/- in favour of D. C has sufficient amount in his

account with the Bank. The cheque was not presented within reasonable time to
the Bank for payment and the Bank; in the meantime, C became bankrupt. Decide
under the provisions of Negotiable Instruments Act, 1881, whether D can recover
the money from C? (ICAI Module)
4. On a bill of exchange for Rs. 1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the
Bill from his customer for value and in good faith before the Bill becomes payable.
State with reasons whether ‘A’ can be considered as a ‘Holder in due course’ and
whether he A can receive the amount of the Bill from ‘X’.
(May’19 Mock Test, Nov’20 Mock Test)
5. State whether the following alteration is material alteration under the provisions of
the Negotiable Instruments Act, 1881. ·
A promissory note was made without mentioning any time for payment. The holder
added the words “on demand” on the face of the instrument.
(Nov’19- 4 Marks, May’19- 2 Marks, May’21 Mock Test)
6. M drew a cheque amounting to `2 lakh payable to N and subsequently delivered to

him. After receipt of cheque N indorsed the same to C but kept it in his safe locker.
After sometime, N died, and P found the cheque in N’s safe locker. Does this amount
to Indorsement under the Negotiable Instruments Act, 1881?
(ICAI Module)
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Revision Questions
7. State briefly the rules laid down under the Negotiable Instruments Act for determining
the date of maturity of a bill of exchange. Ascertain the date of maturity of a bill
payable hundred days after sight and which is presented for sight on 4th May,
2018. (ICAI Module, May’18-5 Marks)
8. Explain the meaning of ‘Negotiation by delivery’ with the help of an example. Give
your answer as per the provisions of the Negotiable Instruments Act, 1881.
9. Calculate the date of maturity of bill of exchange drawn on 1.6.2019, payable 120
days after considering the relevant provisions of the Negotiable Instruments Act,
1881. (May’21 RTP)
10. As per the Negotiable Instruments Act, 1881, what are the parties who may cross
a cheque? (May’21 Mock Test)
11. Give answer of the following:

Amit draws a cheque for Rs. 1000 and hands it over to Beena by way of gift. Is
Beena a holder in due course? (May’21 Mock Test)
12. Referring to the provisions of the Negotiable Instruments Act, 1881, examine the
validity of the following:
A Bill of Exchange originally drawn by R for a sum of 10,000 but accepted by S only
for 7,000. (Jan’21- 3 Marks)
13. ‘Akhil’ made a promissory note for `4,500 payable to ‘Bhuvan’, and delivered the
same to ‘Bhuvan’ on the condition that he (‘Bhuvan’) will demand payment only
on the death of ‘Chaman’. Before the death of ‘Chaman’, ‘Bhuvan’ indorsed and
delivered the promissory note to ‘Deepak’, who receive the promissory note in good
faith. On the date of maturity, ‘Deepak’ presented the promissory note for payment
but ‘Akhil’ denied for payment by stating that he issued this promissory note on the
condition that it can be paid only on the death of ‘Chaman’. Can ‘Deepak’ recover
the amount due on the promissory note from ‘Akhil’ under the provisions of the
Negotiable Instrument Act 1881? (Nov’21 RTP)
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Revision Questions
ANSWER
1. As per section 91 of the Negotiable Instruments Act, 1881, a bill may be dishonoured
either by non-acceptance or by non-payment.
Dishonour by non-acceptance may take place in any one of the following
circumstances:
(i) When the drawee either does not accept the bill within forty-eight hours
(exclusive of public holidays) of presentment or refuse to accept it;
(ii) When one of several drawees, not being partners, makes default in acceptance;
(iii) When the drawee makes a qualified acceptance;
(iv) When presentment for acceptance is excused and the bill remains unaccepted;
and
(v) When the drawee is incompetent to contract.
Dishonour of Cheque for insufficiency, etc. of funds in the account: As per section
138 of the Negotiable Instruments Act 1881, where any cheque drawn by a person
on an account maintained by him with a banker for payment is dishonoured due
to insufficiency of funds, he shall be punished with imprisonment for a term which
may extend to two years or with fine which may extend to twice the amount of the
cheque or with both.
2. The promissory note is an unconditional promise in writing. In the above question

the amount is certain but the date and name of payee is missing make it a bearer
instrument. As per RBI Act, a promissory note cannot be made payable to bearer -
whether on demand or after certain days. Hence, the instrument is illegal as per RBI
Act and cannot be legally enforced.
3. Section 84(1) of the Act, provides that cheque should be presented to Bank within
reasonable time. If cheque is not presented within reasonable time, meanwhile the
drawer suffers actual damage; the drawer is discharged to the extent of such actual
damage. This would be so if the cheque would have been passed if it was presented
within reasonable time.
As per section 84(2), in determining what a reasonable time is, regard shall be had
to:
(a) the nature of the instrument
(b) the usage of trade and of bankers, and
(c) facts of the particular case.
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Revision Questions
The drawer will get discharged, but the holder of the cheque will be treated as
creditor of the bank, in place of drawer. He “Will be entitled to recover the amount
from Bank [section 84(3)]. In the above case drawer i.e. C has suffered damage as
cheque was not presented by D within reasonable time. Hence, C will get discharged
but D will be the creditor of bank for amount of cheque and can recover the amount
from bank.
4. According to section 9 of the Negotiable Instruments Act, 1881 ‘holder in due course’
means any person who for consideration becomes the possessor of a promissory
note, bill of exchange or cheque if payable to bearer or the payee or Indorsee
thereof, if payable to order, before the amount in it became payable and without
having sufficient cause to believe that any defect existed in the title of the person
from whom he derived his title.
As ‘A’ in this case prima facie became a possessor of the bill for value and in good
faith before the bill became payable, he can be considered as a holder in due
course.
But where a signature on the negotiable instrument is forged, it becomes a nullity.
The holder of a forged instrument cannot enforce payment thereon. In the event of
the holder being able to obtain payment in spite of forgery, he cannot retain the
money. The true owner may sue on tort the person who had received. This principle
is universal in character; by reason where of even a holder in due course is not
exempt from it. A holder in due course is protected when there is defect in the title.
But he derives no title when there is entire absence of title as in the case of forgery.
Hence ‘A’ cannot receive the amount on the bill.
5. An alteration is material which in any way alters the operation of the instrument
and affects the liability of parties thereto. Any alteration is material (a) which alters
the business effect of the instrument if used for any business purpose; (b) which
causes it to speak a different language in legal effect form that which it originally
spoke or which changes the legal identity or character of the instrument.
In the said case, a promissory note was made without mentioning any time for
payment. The holder added the words “on demand” on the face of the instrument.
As per the above provision of the Negotiable Instruments Act, 1881 this is not a
material alteration as a promissory note where no date of payment is specified will
be treated as payable on demand. Hence, adding the words “on demand” does not
alter the business effect of the instrument.
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Revision Questions
6. No, P does not become the holder of the cheque as the negotiation was not completed
by delivery of the cheque to him. (Section 48, the Negotiable Instruments Act, 1881)
7. Calculation of maturity of a bill of exchange: The maturity of a bill, not payable on

demand, at sight, or on presentment, is at maturity on the third day after the day
on which it is expressed to be payable (Section 22, of Negotiable Instruments Act,
1881). Three days are allowed as days of grace. No days of grace are allowed in the
case of bill payable on demand, at sight, or presentment.
When a bill is made payable at stated number of months after date, the period
stated terminates on the day of the month which corresponds with the day on which
the instrument is dated. When it is made payable after a stated number of months
after sight the period terminates on the day of the month which corresponds with the
day on which it is presented for acceptance or sight or noted for non-acceptance or
protested for non-acceptance. When it is payable a stated number of months after
a certain event, the period terminates on the day of the month which corresponds
with the day on which the event happens (Section 23).
When a bill is made payable a stated number of months after sight and has
been accepted for honour, the period terminates with the day of the month which
corresponds with the day on which it was so accepted.
If the month in which the period would terminate has no corresponding day, the
period terminates on the last day of such month (Section 23).
In calculating the date a bill made payable a certain number of days after date or
after sight or after a certain event is at maturity, the day of the date, or the day of
presentment for acceptance or sight or the day of protest for non-accordance, or
the day on which the event happens shall be excluded (Section 24).
Three days of grace are allowed to these instruments after the day on which they
are expressed to be payable (Section 22).
When the last day of grace falls on a day which is public holiday, the instrument is
due and payable on the next preceding business day (Section 25).
Answer to Problem: In this case the day of presentment for sight is to be excluded
i.e. 4th May, 2018. The period of 100 days ends on 12th August, 2018 (May 27 days
+ June 30 days + July 31 days + August 12 days). Three days of grace are to be
added. It falls due on 15th August, 2018 which happens to be a public holiday. As
such it will fall due on 14th August, 2018 i.e. the next preceding business day.
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Revision Questions
8. Negotiation by delivery
According to section 47 of the Negotiable Instruments Act, 1881, subject to the
provisions of section 58, a promissory note, bill of exchange or cheque payable to
bearer is negotiable by delivery thereof.
Exception: A promissory note, bill of exchange or cheque delivered on condition that
it is not to take effect except in a certain event is not negotiable (except in the hands
of a holder for value without notice of the condition) unless such event happens.
Example: A, the holder of a negotiable instrument payable to bearer, delivers it to
B’s agent to keep for B. The instrument has been negotiated.
9. Date of maturity of the bill of exchange: In this case the day of presentment for
sight is to be excluded i.e. 1st June, 2019. The period of 120 days ends on 29th
September, 2019 (June 29 days + July 31 days + August 31 Days + September 29
days = 120 days). Three days of grace are to be added. It falls due on 2nd October,
2019, which happens to be a public holiday. As such it will fall due on 1st October,
2019 i.e., the next preceding Business Day.
10. A cheque may be crossed by the following parties:

1. By Drawer: A drawer may cross it generally or specially.
2. By Holder: A holder may cross an uncrossed cheque generally or specially.
If the cheque is crossed generally, the holder may cross specially. If cheque
crossed generally or specially, he may add words “not negotiable”.
3. By Banker: A banker may cross an uncrossed cheque, or if a cheque is crossed
generally he may cross it specially to himself. Where a cheque is crossed
specially, the banker to whom it is crossed may again cross it specially to
another banker, his agent, for collection.
11. The “holder” of a promissory note, bill of exchange or cheque means any person
entitled in his own name to the possession thereof, and to receive or recover the
amount due thereon from the parties thereto.
“Holder in due course” means any person who for consideration became the
possessor of a promissory note, bill of exchange or cheque (if payable to bearer), or
the payee or indorsee thereof, (if payable to order), before the amount mentioned
in it became payable, and without having sufficient cause to believe that any defect
existed in the title of the person from whom he derived his title.
In the given question, Beena is a holder but not a holder in due course as she does
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Revision Questions
not get the cheque for value and consideration. Her title is good and bonafide. As
a holder she is entitled to receive Rs. 1000 from the bank on whom the cheque is
drawn.
12. As per the provisions of Section 86 of the Negotiable Instruments Act, 1881, if the
holder of a bill of exchange acquiesces in a qualified acceptance, or one limited to
part of the sum mentioned in the bill, or which substitutes a different place or time
for payment, or which, where the drawees are not partners, is not signed by all the
drawees, all previous parties whose consent is not obtained to such acceptance are
discharged as against the holder and those claiming under him, unless on notice
given by the holder they assent to such acceptance. Explanation to the above section
states that an acceptance is qualified where it undertakes the payment of part only
of the sum ordered to be paid. In view of the above provisions, the bill, which has
been drawn by R for 10,000/-, has been accepted by S only for 7,000/-. It is a clear
case of qualified acceptance, which may either be rejected by R or he may give
assent to the acceptance of 7,000/- only.
13. By virtue of provisions of section 9 of the Negotiable Instrument Act 1881, any
person who for consideration became the possessor of a negotiable instrument in
good faith and without having sufficient cause to believe that any defect existed
in the title of the person from whom he derived his title. While Sec.47 provides
if a negotiable instrument is delivered to a person, upon condition, i.e. it will be
effective on the happening of a certain event, such negotiable instrument cannot
be further negotiated unless such event happens. However, if it is transferred to a
holder in due course, his rights will not be affected by such condition.
‘Akhil’ issued a promissory note to ‘Bhuvan’ on the condition that he (‘Bhuvan’) will
demand payment only on the death of ‘Chaman’. Before the death of ‘Chaman’,
‘Bhuvan’ indorsed and delivered the promissory note to ‘Deepak’, who receive the
promissory note in good faith. On due date, ‘Deepak’ presented the promissory note
for payment but ‘Akhil’ denied for payment.
From the above provisions and facts of the case, it can be said that ‘Deepak’ has
received the promissory note in good faith, he is a holder in due course and his
rights will not be affected by any condition attached to the instrument by any prior
party. Therefore, ‘Deepak’ can recover the amount due on the promissory note from
‘Akhil’.
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Revision Questions
Chapter 3. The General Clauses Act, 1897
1. What is “Financial Year” under the General Clauses Act, 1897?

(ICAI Module)
2. What is the meaning of service by post as per provisions of The General Clauses Act,
1897?
(ICAI Module, May’19 Mock Test, May’18-2 Marks, May’20 Mock Test, May’21 RTP)
3. Explain various provisions applicable to rules or bye-laws being made after previous
publications as enumerated in Section 23 of the Genera! Clauses Act, 1897.
(Nov’18-4 Marks)
4. What do you understand by the term ‘Good Faith’? Explain it as per the provisions
of the General Clauses Act, 1897. Mr. X purchased a watch from Mr. Y carelessly
without proper enquiry. Whether the purchase made could said to be made in good
faith. (Nov’19- 4 Marks)
5. What is “Immovable Property” under the General Clauses Act, 1897?

(ICAI Module)
6. A notice when required under the Statutory rules to be sent by “registered post
acknowledgment due” is instead sent by “registered post” only. Whether the
protection of presumption regarding serving of notice by “registered post” under the
General Clauses Act is tenable? Referring to the provisions of the General Clauses
Act, 1897, examine the validity of such notice in this case.
(ICAI Module, May’18 RTP, May’19 RTP)
7. ‘Repeal’ of provision is different from ‘deletion’ of provision. Explain as per the

General Clauses Act, 1897.
(ICAI Module, Nov’18- 2 Marks, Nov’19 Mock Test, Nov’20 Mock Test, May’21 Mock
Test)
8. Mr. Ram, an advocate has fraudulently deceived his client Mr. Shyam, who was
taking his expert advice on taxation matters. Now, Mr. Ram is liable to a fine for
acting fraudulently both under the Advocates Act, 1961 as well as the Income Tax
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Revision Questions
Act, 1961. State the provision as to whether his offence is punishable under the
both the Acts, as per the General Clauses Act, 1897.
(Nov’18 RTP, May’21 Mock Test)
9. What do you understand by the term ‘Good Faith’? Explain as per the provisions of
the General Clauses Act, 1897. (May’19 Mock Test, Nov’20- 2 Marks)
OR
“The act done negligently shall be deemed to be done in good faith.” Comment with
the help of the provisions of the General Clauses Act, 1897. (Jan’21- 3 Marks)
10. Explain briefly any four effects by repeal of an existing Act by central legislation
enumerated in Section-6 of The General Clauses Act, 1897. (May’18-4 Marks)
11. The Companies Act, 2013 provides that the amount of dividend remained unpaid
/ unclaimed on expiry of 30 days from the date of declaration of dividend shall be
transferred to unpaid dividend account within 7 days from the date of expiry of such
period of 30 days. If the expiry date of such 30 days is 30.10.2018, decide the last
date on or before which the unpaid/unclaimed dividend amount shall be required
to be transferred to a separate bank account in the light of the relevant provisions
of the General Clauses Act, 1897? (May’19- 2 Marks)
12. Define the term “Affidavit” under the General Clauses Act, 1897.
(Nov’19-3 Marks, Nov’20 – 2 Marks)
13. (i) Mrs. K went to a jewellery shop to purchase diamond ornaments. The owners
of jewellery shop are notorious and indulging in smuggling activities. Mrs. K
purchased diamond ornaments honestly without making proper enquiries. Was
the purchase made in Good faith as per the provisions of the General Clauses
Act, 1897 so as to convey good title?
(ii) There are two ways to reach city A from city B. The distance between the two
cities by roadways is 100 kms and by water ways 80 kms. How is the distance
measured for the purpose of any Central Act under the provisions of the General
Clauses Act, 1897? (Nov’20- 4 Marks)
14. Mr. Apar and Mr. New, both aspiring Chartered Accountants have met in a conference
for CA students. Both are having an argument about the meaning of Financial Year.
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Revision Questions
They have approached you as a senior in the profession to guide them about the
meaning of Financial Year as per the provisions of the General Clauses Act, 1872.
Also, brief them about the difference between a calendar year and financial year.
(May’21 RTP)
15. Mr. Sohan has issued a promissory note of `1000 to Mr. Mohan on 17th May 2021
payable 3 months after date. After that, a sudden holiday was declared on 20th
August 2021 due to Moharram. As per the provisions of the General Clauses Act
1897, what should be the date of presentment of promissory note for payment?
Whether it should be 19th August 2021 or 21st August 2021? (Nov’21 RTP)
249
Revision Questions
ANSWER
i. According to Section 3(21) of the General Clauses Act, 1897, ‘Financial Year’ shall
mean the year commencing on the first day of April.
The term year has been defined under Section 3(66) as a year reckoned according
to the British calendar. Thus, as per General Clauses Act, Year means calendar year
which starts from January to December.
Hence, in view of the both above definitions, it can be concluded that Financial Year
is a year which starts from first day of April to the end of March.
2. “Meaning of Service by post” [Section 27 of the General Clauses Act, 1897]: Where
any legislation or regulation requires any document to be served by post, then
unless a different intention appears, the service shall be deemed to be effected by:
(i) Properly addressing
3. Provisions applicable to making of rules or bye-laws after previous publications:

Where, by any Central Act or Regulation, a power to make rules or bye-laws is
expressed to be given, then the following provisions shall apply:
1. The authority having power to make the rules or bye-laws shall publish a
draft of the proposed rules or bye-laws for the information of persons likely to
be affected thereby.
2. The publication shall be made in such manner as that authority deems to be
sufficient, or, if the condition with respect to previous publication so requires,
in such manner as the Government concerned prescribes.
3. A notice shall be published with the draft specifying a date on or after which
the draft will be taken into consideration.
4. The authority having power to make the rules or bye-laws shall consider
the objections and suggestions of the authority whose sanction, approval or
concurrence is required with respect to the draft before the date so specified.
5. The publication in the Official Gazette of a rule or bye-law shall be conclusive
proof that the rule or bye-laws has been duly made.
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Revision Questions
4. As per Section 3(22) of the General Clauses Act, 1897, the term “good faith” means
a thing shall be deemed to be done in “good faith” where it is in fact done honestly,
whether it is done negligently or not;
The term “Good faith” has been defined differently in different enactments. This
definition of the good faith does not apply to that enactment which contains a
special definition of the term “good faith” and there the definition given in that
particular enactment has to be followed.
The question of good faith under the General Clauses Act is one of fact. It is to
determine with reference to the circumstances of each case. Thus, anything done
with due care and attention, which is not malafide is presumed to have been done
in good faith.
In the given problem in the question, Mr. X purchased a watch from Mr. Y carelessly
without proper enquiry. Such a purchase made could not be said to be made in
good faith as it was done without due care and attention as is expected with a man
of ordinary prudence. An honest purchase made carelessly without making proper
enquiries cannot be said to have been made in good faith so as to convey good title.
5. According to Section 3(26) of the General Clauses Act, 1897, ‘Immovable Property’
shall include:
(i) Land,
(ii) Benefits to arise out of land, and
(iii) Things attached to the earth, or permanently fastened to anything attached to
the earth.
For example, trees are immovable property because trees are benefits arise out of
the land and attached to the earth. However, timber is not immovable property as
the same are not permanently attached to the earth. In the same manner, buildings
are immovable property.
6. As per the provisions of Section 27 of the General Clauses Act, 1897, where any
legislation or regulation requires any document to be served by post, then unless a
different intention appears, the service shall be deemed to be effected by:
(i) Properly addressing,
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Revision Questions
Therefore, in view of the above provision, since, the statutory rules itself provides
about the service of notice that a notice when required under said statutory rules
to be sent by ‘registered post acknowledgement due’, then, if notice was sent by
‘registered post’ only it will not be the compliance of said rules. However, if such
provision was not provided by such statutory rules, then service of notice if by
registered post only shall be deemed to be effected.
A notice when required under the statutory rules to be sent by ‘registered post
acknowledgement due’ is instead sent by ‘registered post’ only, the protection of
presumption regarding serving of notice under ‘registered post’ under this section of
the Act neither tenable not based upon sound exposition of law.
7. Repeal’ of provision is in distinction from ‘deletion’ of provision. ‘Repeal’ ordinarily

brings about complete obliteration (abolition) of the provision as if it never
existed, thereby affecting all incoherent rights and all causes of action related
to the ‘repealed’ provision while ‘deletion’ ordinarily takes effect from the date of
legislature affecting the said deletion, never to effect total effecting or wiping out
of the provision as if it never existed.
8. “Provision as to offence punishable under two or more enactments” [Section 26]:

Where an act or omission constitutes an offence under two or more enactments,
then the offender shall be liable to be prosecuted and punished under either or any
of those enactments, but shall not be punished twice for the same offence.
Thus, Mr. Ram shall be liable to punished under the Advocates Act, 1961 or the
Income Tax Act, 1961, but shall not be punished twice for the same offence.
9. “Good Faith” [Section 3(22) of the General Clauses Act, 1897]: A thing shall be
deemed to be done in “good faith” where it is in fact done honestly, whether it is
done negligently or not;
The question of good faith under the General Clauses Act is one of fact. It is to
determine with reference to the circumstances of each case. The term “Good faith”
has been defined differently in different enactments. This definition of the good faith
does not apply to that enactment whichcontains a special definition of the term
“good faith” and there the definition given in that particular enactment has to be
followed. This definition may be applied only if there is nothing repugnant in subject
or context, and if that is so, the definition is not applicable.
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Revision Questions
10. According to Section 6 of the General Clauses Act, 1897, where any Central legislation
or any regulation made after the commencement of this Act repeals any Act made
or yet to be made, unless another purpose exists, the repeal shall not:
• Revive anything not enforced or prevailed during the period at which repeal is
effected or;
• Affect the prior management of any legislation that is repealed or anything
performed or undergone or;
• Affect any claim, privilege, responsibility or debt obtained, ensued or sustained
under any legislation so repealed or;
• Affect any punishment, forfeiture or penalty sustained with regard to any
offence committed as opposed to any legislation or
• Affect any inquiry, litigation or remedy with regard to such claim, privilege,
debt or responsibility or any inquiry, litigation or remedy may be initiated,
continued or insisted.
11. Section 9 of the General Clauses Act, 1897 provides that, for computation of time,
in any legislation or regulation, it shall be sufficient, for the purpose of excluding
the first in a series of days or any other period of time to use the word “from” and
for the purpose of including the last in a series of days or any other period of time,
to use the word “to”.
As per the facts of the question the company shall transfer the unpaid/unclaimed
dividend to unpaid dividend account within the period of 7 days. 30th October 2018
will be excluded and 6th November 2018 shall be included, i.e. 31st October, 2018
to 6th November, 2018 (both days inclusive).
12. “Affidavit” [Section 3(3) of the General Clauses Act, 1897]: ‘Affidavit’ shall include
affirmation and declaration in the case of persons by law allowed to affirm or
declare instead of swearing.
There are two important points derived from the above definition:
1. Affirmation and declaration,
2. In case of persons allowed affirming or declaring instead of swearing.
The above definition is inclusive in nature. It states that Affidavit shall include
affirmation and declarations. This definition does not define affidavit. However,
we can understand this term in general parlance. Affidavit is a written statement
confirmed by oath or affirmation for use as evidence in Court or before any authority.
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Revision Questions
13. (i) In the instant case, the purchase of diamond ornaments by Mrs. K from a
Jewellery Shop, the owners of which are notorious and indulged in smuggling
activities, made in good faith, will not convey good title.
As per section 3 (22) of the General Clauses Act, 1897, a thing shall be deemed
to be done in “good faith” where it is in fact done honestly, whether it is done
negligently or not.
The definition of good faith as is generally understood in the civil law and which
may be taken as a practical guide in understanding the expression in the Indian
Contract Act, 1872 is that nothing is said to be done in good faith which is done
without due care and attention as is expected with a man of ordinary prudence.
An honest purchase made carelessly without making proper enquiries cannot
be said to have been made in good faith so as to convey good title.
(ii) “Measurement of Distances” [Section 11 of the General Clauses Act, 1897]:
In the measurement of any distance, for the purposes of any Central Act or
Regulation made after the commencement of this Act, that distance shall,
unless a different intention appears, be measured in a straight line on a
horizontal plane.
14. Financial Year: According to section 3(21) of the General Clauses Act, 1897, financial
year shall mean the year commencing on the first day of April.
The term Year has been defined under Section 3(66) as a year reckoned according
to the British calendar. Thus, as per General Clauses Act, Year means calendar year
which starts from January to December.
Difference between Financial Year and Calendar Year: Financial year starts from
first day of April but Calendar Year starts from first day of January.
15. Section10 of the General Clauses Act 1897 provides where by any legislation or
regulation, any act or proceeding is directed or allowed to be done or taken in any
court or office on a certain day or within a prescribed period then, if the Court or
office is closed on that day or last day of the prescribed period, the act or proceeding
shall be considered as done or taken in due time if it is done or taken on the next
day afterwards on which the Court or office is open.
A promissory note of `1000 was issued by Mr. Sohan to Mr. Mohan on 17th May
2021 which was payable 3 months after date. After that, a sudden holiday was
declared on 20th August 2021 due to Moharram.
In the given case, the period of 3 months ends on 17th August 2021. Three days
254
Revision Questions
of grace are to be added. It falls due on 20th August 2021 which declared to be a
public holiday after the issue of Promissory Note. In the light of provisions of Sec.
10 of the General Clauses Act 1897, the due date will be on next day when office is
open i.e. 21st August 2021.
255
Revision Questions
Chapter 4. Interpretation of Statutes, Deeds and Documents
1. Explain the rule of ‘beneficial construction’ while interpreting the statutes quoting
an example. (ICAI Module, May’19 Mock Test)
2. (i) What is the effect of proviso? Does it qualify the main provisions of an
enactment?
(ii) Does an explanation added to a section widen the ambit of a section?
(ICAI Module, Nov’18-4 Marks, May’21 Mock Test)
3. Gaurav Textile Company Limited has entered into a contract with a Company. You are
invited to read and interpret the document of contract. What rules of interpretation
of deeds and documents would you apply while doing so? (ICAI Module)

4. Differentiate Mandatory Provision from a Directory Provision. What factors decide
whether a provision is directory or mandatory?
(ICAI Module, May’18-4 Marks, May’19- 3 Marks, May’21 Mock Test)
5. Define Grammatical Interpretation. What are the exceptions to grammatical

interpretation? (ICAI Module, May’18-4 Marks)
6. Explain the meaning of term ‘Proviso’. Give the distinction between proviso, exception
and Saving Clause. (May’18 RTP)
7. Many a time a proviso is added to a Section of the enactment. Explain the function
of such a proviso in the interpretation of the section/ provision.
(May’19 RTP, May’20 RTP)
OR
Write a short note on “Proviso” with reference to the rules of interpretation.
(Nov’20- 3 Marks)
8. How far is ‘preamble’ in an enactment helpful in interpreting any of the parts of an

enactment? (May’19 Mock Test, May’19- 3 Marks)
9. Explain the principles of “Grammatical Interpretation” and “Logical Interpretation” of

a Statute. (May’19 Mock Test)
256
Revision Questions
10. What is a Document as per the Indian Evidence Act, 1872? (May’18-2 Marks)
11. How will you interpret the term “Instrument” used in statutes? (Nov’19-3 Marks)
12. Explain the principles of “grammatical interpretation” and “logical interpretation” of

a Statute. What are the duties of a court in this regard? (ICAI Module)
13. How will you interpret the definitions in a statute, if the following words are used in
a statute?
(i) Means, (ii) Includes
Give one illustration for each of the above from statutes you are familiar with.
(ICAI Module, May’20 Mock Test)
14. Write short note on:

(i) Proviso
(ii) Explanation,
with reference to interpretation of Statutes, Deeds and Documents. (ICAI Module)
15: Explain ‘Mischief Rule’ for interpretation of statute. Also, give four matters it
considers in construing an Act.
(ICAI Module, Nov’19 Mock Test, Nov’18- 4 Marks, Nov’20 Mock Test, May’21 Mock Test)
257
Revision Questions
ANSWER
1: Where the language used in a statute is capable of more than one interpretation,
the most firmly established rule for construction is the principle laid down in the
Heydon’s case. This rule enables consideration of four matters in constituting an act:
(1) What was the law before making of the Act,
(2) What was the mischief or defect for which the law did not provide,
(3) What is the remedy that the Act has provided, and
(4) What is the reason for the remedy.
The rule then directs that the courts must adopt that construction which ‘shall
suppress the mischief and advance the remedy’. Therefore even in a case where
the usual meaning of the language used falls short of the whole object of the
legislature, a more extended meaning may be attributed to the words, provided
they are fairly susceptible of it. If the object of any enactment is public safety,
then it’s working must be interpreted widely to give effect to that object. Thus in
the case of Workmen’s Compensation Act, 1923 the main object being provision of
compensation to workmen, it was held that the Act ought to be so construed, as far
as possible, so as to give effect to its primary provisions.
However, it has been emphasized by the Supreme Court that the rule in Heydon’s
case is applicable only when the words used are ambiguous and are reasonably
capable of more than one meaning
2: (i) Normally a Proviso is added to a section of an Act to except something or

qualify something stated in that particular section to which it is added. A
proviso should not be, ordinarily, interpreted as a general rule. A proviso to a
particular section carves out an exception to the main provision to which it has
been enacted as a Proviso and to no other provision.
(ii) Sometimes an explanation is added to a section of an Act for the purpose
of explaining the main provisions contained in that section. If there is some
ambiguity in the provisions of the main section, the explanation is inserted to
harmonise and clear up and ambiguity in the main section. Something may
added be to or something may be excluded from the main provision by insertion
of an explanation. But the explanation should not be construed to widen the
ambit of the section.

3: The rules regarding interpretation of deeds and documents are as follows :
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Revision Questions
First and the foremost point that has to be borne in mind is that one has to find
out what reasonable man, who has taken care to inform himself of the surrounding
circumstances of a deed or a document, and of its scope and intendments, would
understand by the words used in that deed or document.
It is inexpedient to construe the terms of one deed by reference to the terms of
another. Further, it is well established that the same word cannot have two different
meanings in the same documents, unless the context compels the adoption of such
a rule.
The Golden Rule is to ascertain the intention of the parties of the instrument after
considering all the words in the documents/deed concerned in their ordinary, natural
sense. For this purpose, the relevant portions of the document have to be considered
as a whole. The circumstances in which the particular words have been used have
also to be taken into account. Very often, the status and training of the parties using
the words have also to be taken into account as the same words maybe used by a
ordinary person in one sense and by a trained person or a specialist in quite another
sense and a special sense. It has also to be considered that very many words are
used in more than one sense. It may happen that the same word understood in one
sense will give effect to all the clauses in the deed while taken in another sense
might render one or more of the clauses ineffective. In such a case the word should
be understood in the former and not in the latter sense.
It may also happen that there is a conflict between two or more clauses of the
same documents. An effect must be made to resolve the conflict by interpreting the
clauses so that all the clauses are given effect. If, however, it is not possible to give
effect of all of them, then it is the earlier clause that will override the latter one.
4: Practically speaking, the distinction between a provision which is ‘mandatory’ and

one which is ‘directory’ is that when it is mandatory, it must be strictly observed;
when it is ‘directory’ it would be sufficient that it is substantially complied with.
However, we have to look to the substance and not merely the form, an enactment
in mandatory form might substantially be directory and, conversely, a statute in
directory form may in substance be mandatory. Hence, it is the substance that
counts and must take precedence over mere form. If a provision gives a power
coupled with a duty, it is mandatory: whether it is or is not so would depend on such
consideration as:
- the nature of the thing empowered to be done,
- the object for which it is done, and
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Revision Questions
- the person for whose benefit the power is to be exercised.
5: Grammatical Interpretation and its exceptions: ‘Grammatical interpretation’ concerns

itself exclusively with the verbal expression of the law, it does not go beyond the
letter of the law. In all ordinary cases, ‘grammatical interpretation’ is the sole form
allowable. The Court cannot take from or add to modify the letter of the law.
This rule, however, is subject to some exceptions:
(1) Where the letter of the law is logically defective on account of ambiguity,
inconsistency or incompleteness. As regard the defect to ambiguity, the Court is
under a duty to travel beyond the letter of the law so as to determine from the
other sources the true intention of the legislature. In the case of the statutory
expression being defective on account of inconsistency, the court must ascertain
the spirit of the law.
(2) If the text leads to a result which is so unreasonable that it is self-evident
that the legislature could not mean what it says, the court may resolve such
impasse by inferring logically the intention of the legislature.
6: Proviso: The normal function of a proviso is to except something out of the enactment
or to qualify something stated in the enactment which would be within its purview
if the proviso were not there. The effect of the proviso is to qualify the preceding
enactment which is expressed in terms which are too general. As a general rule, a
proviso is added to an enactment to qualify or create an exception to what is in the
enactment. Ordinarily a proviso is not interpreted as stating a general rule.
It is a cardinal rule of interpretation that a proviso to a particular provision of a
statute only embraces the field which is covered by the main provision. It carves out
an exception to the main provision to which it has been enacted as a proviso and
to no other.
Distinction between Proviso, exception and saving Clause
There is said to exist difference between provisions worded as ‘Proviso’, ’Exception’,
or ‘Saving Clause’.
Proviso Exception Saving Clause

Exception’ is intended ‘Proviso’ is used to remove ‘Saving clause’ is used to
to restrain the enacting special cases from general preserve from destruction
clause to particular cases enactment and provide certain rights, remedies or
for them specially privileges already existing
260
Revision Questions
7: The normal function of a proviso is to except something out of the enactment or

to qualify something stated in the enactment which would be within its purview if
the proviso were not there. The effect of the proviso is to qualify the preceding
enactment which is expressed in terms which are too general. As a general rule, a
proviso is added to an enactment to qualify or create an exception to what is in the
enactment ordinarily a proviso is not interpreted as it stating a general rule.
It is a cardinal rule of interpretation that a proviso to a particular provision of a
statute only embraces the field which is covered by the main provision. It carves
out an exception to the provision to which it has been enacted as a proviso and not
to the other.
8: Preamble: It expresses the scope and object of the Act more comprehensively than
the long title. The preamble may recite the ground and the cause for making a
statute and or the evil which is sought to the remedied by it.
The preamble like the Long title can legitimately be used for construing it. However,
the preamble cannot override the provisions of the Act. Only if the wording of
the Act gives rise to doubts as to its proper construction (e.g., where the words
or a phrase has more than the one meaning and doubts arise as to which of the
two meanings is intended in the Act) the preamble can and ought to be referred
to arrive at the proper construction.
9: Principles of Grammatical Interpretation and Logical Interpretation: In order to

ascertain the meaning of any law/ statute the principles of Grammatical and Logical
Interpretation is applied to conclude the real meaning of the law and the intention
of the legislature behind enacting it.
Grammatical interpretation concerns itself exclusively with the verbal expression
of law. It does not go beyond the letter of the law, whereas Logical interpretation
on the other hand, seeks more satisfactory evidence of the true intention of the
legislature.
10: As per Indian the Evidence Act, 1872: ‘Document’: Generally understood, a document
is a paper or other material thing giving information, proof or evidence of anything.
The Law defines ‘document’ in a more technical form. As per Section 3 of the Indian
Evidence Act, 1872, ‘document’ means any matter expressed or described upon
any substance by means of letters, figures or marks or by more than one of those
means, intended to be used, or which may be used, for the purpose of recording
261
Revision Questions
that matter.
For Example: A writing is a document, any words printed, photographed are
documents.
11: Instrument’: In common parlance, ‘instrument’ means a formal legal document

which creates or confirms a right or records a fact. It is a formal writing of any kind,
such as an agreement, deed, charter or record, drawn up and executed in a technical
form. It also means a formal legal document having legal effect, either as creating
liability or as affording evidence of it. Section 2(14) of the Indian Stamp Act, 1899
states that ‘instrument’ includes every document by which any right or liability is or
purports to be created, transferred, extended, extinguished or recorded.
12: Principles of Grammatical Interpretation and Logical Interpretation: In order to

ascertain the meaning of any law/ statute the principles of Grammatical and Logical
Interpretation is applied to conclude the real meaning of the law and the intention
of the legislature behind enacting it.
Meaning: Grammatical interpretation concerns itself exclusively with the verbal
expression of law. It does not go beyond the letter of the law, whereas Logical
interpretation on the other hand, seeks more satisfactory evidence of the true
intention of the legislature.
Application of the principles in the court: In all ordinary cases, the grammatical
interpretation is the sole form allowable. The court cannot delete or add to modify
the letter of the law. However, where the letter of the law is logically defective on
account of ambiguity, inconsistency or incompleteness, the court is under a duty
to travel beyond the letter of law so as to determine the true intentions of the
legislature. So that a statute is enforceable at law, however, unreasonable it may
be. The duty of the court is to administer the law as it stands rather it is just or
unreasonable.
However, if there are two possible constructions of a clause, the courts may prefer
the logical construction which emerges from the setting in which the clause appears
and the circumstances in which it came to be enacted and also the words used
therein.
13: Interpretation of the words “Means” and “Includes” in the definitions- The definition
of a word or expression in the definition section may either be restricting of its
ordinary meaning or may be extensive of the same.
262
Revision Questions
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’
restrictive and exhaustive, we must restrict the meaning of the word to that given
in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima
facie’ extensive, here the word defined is not restricted to the meaning assigned to
it but has extensive meaning which also includes the meaning assigned to it in the
definition section.
Example—
Definition of Director [section 2(34) of the Companies Act, 2013]—Director means a
director appointed to the board of a company. The word “means” suggests exhaustive
definition.
Definition of Whole time director [Section 2(94) of the Companies Act, 2013]—Whole
time director includes a director in the whole time employment of the company. The
word “includes” suggests extensive definition. Other directors may be included in the
category of the whole time director.
14: (i) Proviso: The normal function of a proviso is to except something out of the
enactment or to qualify something stated in the enactment which would be
within its purview if the proviso were not there. The effect of the proviso is to
qualify the preceding enactment which is expressed in terms which are too
general. As a general rule, a proviso is added to an enactment to qualify or
create an exception to what is in the enactment. Ordinarily a proviso is not
interpreted as stating a general rule.
It is a cardinal rule of interpretation that a proviso to a particular provision of
a statute only embraces the field which is covered by the main provision.
(ii) Explanation: An Explanation is at times appended to a section to explain the
meaning of the text of the section. An Explanation may be added to include
something within the section or to exclude something from it. An Explanation
should normally be so read as to harmonize with and clear up any ambiguity
in the main section. It should not be so construed as to widen the ambit of the
section.
The meaning to be given to an explanation will really depend upon its terms and
not on any theory of its purpose.
15: Mischief Rule: Where the language used in a statute is capable of more than one
interpretation, principle laid down in the Heydon’s case is followed. This is known as
263
Revision Questions
‘purposive construction’ or ‘mischief rule’. The rule then directs that the courts must
adopt that construction which ‘shall suppress the mischief and advance the remedy’.
It has been emphasized by the Supreme Court that the rule in Heydon’s case is
applicable only when the words used are ambiguous and are reasonably capable
of more than one meaning.
It enables consideration of four matters in construing an Act:
(1) what was the law before the making of the Act;
(2) what was the mischief or defect for which the law did not provide;
(3) what is the remedy that the Act has provided; and
(4) what is the reason for the remedy.
264
Past Exam Question Papers
past exam question papers
NOTE: All the questions of the given question papers are

already covered in the respective chapters along with the
answers.
MAY 2018 PAPER
Roll No______________
Total No. of Questions – 6 Total No. of printed pages - 4
Time Allowed – 3 Hours Maximum Marks- 100
Answers to questions are to be given only in English except in the case of candidates
who have opted for Hindi Medium. If a candidate who has opted for Hindi Medium, his/
her answers in Hindi will not be valued.
Question No.1 is compulsory
Candidates are also required to answer any four questions from the remaining five
questions.
In case, any candidate answers extra question(s)/ sub question(s) over and above the
required number, then only the requisite number of questions first answered in the
answer book shall be valued and subsequent extra question (s) answered shall be
ignored.
Wherever necessary, suitable assumptions may be made and disclosed by way of note
Q.1. (a) MNP Private Ltd. is a company registered under the Companies Act, 2013 with
a Paid Up Share Capital of ` 45 lakh and turnover of ` 3 crores. Explain the
meaning of the “Small Company” and examine the following in accordance
with the provisions of the Companies Act, 2013 :
(i) Whether the MNP Private Ltd. can avail the status of small company?
265
(ii) What will be your answer if the turnover of the company is ` 1.50 crore?
(6 Marks)
(b) Rera Ltd. a company incorporated under the Companies Act, 2013 having
turnover of ` 100 crore, net profit ` 3 crore, accumulated loss of ` 50 crore and
securities premium ` 300 crore as per the audited accounts of the company of
the financial Year 2016 – 2017.
The CFO of the company informed the directors of the company that the
corporate Social Responsibility (CSR) committee is required to be constituted as
per the Companies Act, 2013. The directors seek your advice as a professional
regarding the criteria required to constitute CSR committee and whether it is
applicable to Rera Ltd. or not. (6 Marks)

(c) ABC Ltd. sells its products through some agents and it is not the custom in
their business to sell the products on credit Mr. Pintu, one of the agents sold
goods of ABC Ltd. to M/s. Parul Pvt. Ltd. (on credit) which was insolvent at the
time of such sale. ABC Ltd. sued Mr. Pintu for compensation towards the loss
caused due to sale of products to M/s. Parul Pvt. Ltd.. will ABC Ltd. succeed in
its claim?
(4 Marks)
(d) X owned a land with fifty tamarind trees. He sold his land and the timber
(obtained after cutting the fifty trees) to Y. X wants to know whether the sale of
timber tantamount to sale of immovable property. Advise him with reference
to provisions of “General Clauses Act, 1897”.
(4 Marks)
Q.2. (a) (i) PET Ltd., incurred loss in business upto current quarter of financial year
2017 – 2018. The company has declared dividend at the rate of 12%, 15%
and 18% respectively in the immediate preceding three years. Inspite of
the loss, the of Directors Board of the company have decided to declare
interim dividend @ 15% for the current financial year. Examine the decision
of PET Ltd. stating the provisions of declaration of interim dividend under
the Companies Act, 2013.
(4 Marks)
(ii) Alpha Ltd., A Section 8 company is planning to declare dividend in the
Annual General Meeting for the Financial Year ended 31-03-2018. Mr.
266
Chopra is holding 800 equity shares as on date. State whether the act
of the company is according to the provisions of the Companies Act,
2013.
(2 Marks)
(b) As per the provisions of the Companies Act, 2013, every company is required to
file with the Registrar of Companies, the Annual Return as prescribed in section
92, in Form MGT-7. Explain the particulars required to be contained in it.
(6 Marks)
(c) Mr. V draws a cheque of ` 11,000 and gives to Mr. B by way of gift. State with
reason whether -
(1) Mr. B is a holder in due course as per the Negotiable Instrument Act,
1881?
(2) Mr. B is entitled to receive the amount of ` 11,000 from the bank?
(4 Marks)
(d) Bholenath drew a cheque in favour of Surendar. After having issued the
cheque, Bholenath requested Surendar not to present the cheque for payment
and gave a stop payment request to the bank in respect of the cheque issued
to Surendar. Decide, under the provisions of The Negotiable Instruments Act,
1881 whether the said acts of Bholenath constitute an offence ?
(4 Marks)
Q.3. (a) TDL Ltd., a public company is planning to bring a public issue of equity shares
in June, 2018. The company has appointed underwriters for getting its shares
subscribed. As a Chartered Accountant of the company appraise the Board of
TDL Ltd. about the provisions of payment of underwriter’s commission as per
Companies Act, 2013. (6 Marks)
(b) (i) Rupa Limited, a listed company appointed M/s. VG & ASSOCIATES an
audit firm as Company’s auditor in the Annual General Meeting held on
30-09-2017. Explain the provisions of the Companies Act, 2013 relating
to the appointment or reappointment of an auditor in relation to the
tenure of an auditor. (3 Marks)
(ii) PKC Ltd., wants to appoint Mr. Praveen Kumar, a practicing Chartered
267
Accountant as the statutory auditor of the company and asked the

proposed auditor to give a certificate in this regard. What are the contents
of the certificate to be issued in accordance with the Companies (Audit &
Auditors Rules, 2014)? (3 Marks)

(c) Explain briefly any four effects by repeal of an existing Act by central legislation
enumerated in Section-6 of The General Clauses Act, 1897. (4 Marks)

(d) Differentiate Mandatory Provision from a Directory Provision. What factors
decide whether a provision is directory or mandatory ? (4 Marks)

Q.4. (a) Bazaar Limited called its AGM in order to lay down the financial 4 statements for
Shareholders’ approval. Due to .want of Quorum, the meeting was cancelled.
The directors did not file the annual returns with the Registrar. The directors
were of the idea that the time for filing of returns within 60 days from me date
of AGM would not apply, as AGM was cancelled. Has the company contravened
the provisions of Companies Act, 2013? If the company has contravened the
provisions of the Act, how will it be penalized? (4 Marks)
(b) Benson Limited issued a notice with the agenda for nine businesses to 4 be
transacted in the Annual General Meeting (two businesses were regarding
appointment of Mr. Sahu and Mr. Pranav as directors). The chairman decided
to move the resolutions for all the nine businesses together to save the time of
the members present. Examine the validity of the resolutions. (4 Marks)
(c) State any four contents of a Directors Responsibility Statement as required

under Section 134 of the Companies Act, 2013.
(4 Marks)
(d) (i) Define Grammatical Interpretation. What are the exceptions to,
grammatical interpretation? (4 Marks)
(ii) What is a Document as per the Indian Evidence Act, 1872 ? (2 Marks)
(e) What is the meaning of service by post as per provisions of The General Clauses
Act, 1897? (2 Marks)
268
Q.5. (a) (i) Harsh purchased 1000 shares of Singhania Ltd. from Pratik and sent those
shares to the company for transfer in his name. The company neither
transferred the shares nor sent any notice of refusal of transfer to any
party within the period stipulated in the Companies Act, 2013. What is
the time frame in which the company is supposed to reply to transferee
? Does Harsh, the transferee have any remedies against the company for
not sending any intimation in relation to transfer of shares to him ?
(4 Marks)
(ii) Xgen Limited has a paid-up equity capital and free reserves to the extent
of ` 50,00,000. The company is planning to buy-back shares to the
extent of ` 4,50,000.The company approaches you for advice with regard
to the following:
(i) Is special resolution required to be passed ?
(ii) What is the time limit for completion of buy-back ?
(iii) What should be ratio of aggregate debts to the paid-up capital and
free reserves after buy-back ? (3 Marks)
(b) M/s. Techno Ltd. maintains its Register of Members at its registered office in
Mumbai. A group of members residing in Kolkata want to keep the register of
members at Kolkata.
(i) Explain with provisions of Companies Act, 2013, whether the company can
keep the Registers and Returns at Kolkata.
(ii) Does Mr. Ranjit, Director (but not a shareholder) of the company have the
right to inspect the Register of Members? (5 Marks)
(c) Give four differences between Bailment and Pledge. (6 Marks)

(d) Mr. D was in urgent need of money amounting 5,00,000. He asked Mr. K for the
money. Mr, K lent the money on the sureties of A, B and N without any contract
between them in case of default in repayment of money by D to K. D makes
default in payment. B refused to contribute, examine whether B can escape
liability ? (4 Marks)
Q.6. (a) Can equity share with differential voting rights be issued? If yes, state the
conditions under which such shares may be issued. (6 Marks)
269
(b) Explain die terra ‘charge*. State the circumstances under which necessity to
create a charge arises. What is the time limit for registration of charge with the
registrar?
OR
Explain provisions for ‘Appointment of Trustee for Depositors’ under the
(c) Rahul, a transporter was entrusted with the duty of transporting tomatoes
from a rural farm to a city by Aswin. Due to heavy rains, Rahul was stranded
for more than two days. Rahul sold the tomatoes below the market rate in the
nearby market where he was stranded fearing that the tomatoes may perish.
Can Aswin recover the loss from Rahul on the ground that Rahul had acted
beyond his authority? (3 Marks)
(d) State the rules laid down by the Negotiable Instruments Act, 1881 for
ascertaining the date of maturity of a bill of exchange. (5 Marks)
270
NOV 2018 PAPER
Roll No __________________
Total No. of Questions – 6 Total No. of Printed Pages – 4
Time Allowed – 3 Hours Maximum Marks - 100
Answers to questions are to be given only in English except in the case of candidates who
have opted for Hindi Medium. If a candidate has not opted for Hindi Medium, his/her
answers in Hindi will not be valued.
Question No. 1 is compulsory.
Candidates are also required to answer any four questions from the remaining five
questions.
Q.1. (a) XYZ 2 One-Person Company (OPC) was incorporated during the year 2014 –
15 with an authorized capital of ` 45.00 lakhs (4.5 lakh shares of ` 10 each).
The capital was fully subscribed and paid up. Turnover of the company during
2014 – 15 and 2015-16 was ` 2.00 crores and ` 2.5 crores respectively. Promoter
of the company seeks your advice in following circumstances, whether XYZ
(OPC) can convert into any other kind of company during 2016 – 17. Please,
advise with reference to relevant provisions of the Companies Act, 2013 in the
below mentioned circumstances : (4 marks)
(i) If promoter increases the paid up capital of the company by ` 10.00 lakhs
during 2016-17
(ii) If turnover of the company during 2016 – 17 was ` 3.00 crores.
(b) ABC Ltd. has following balances in their Balance Sheet as on 31st March, 2018:
(1) Equity shares capital 30.00 lacs (2 marks)
(3.00 lakhs equity shares of ` 10 each)
(2) Free reserves 5.00 lacs
(3) Securities Premium Account 3.00 lacs
(4) Capital redemption reserve account 4.00 lacs
(5) Revaluation Reserve 3.60 lacs
Directors of the company seeks your advice in following cases :
271
(i) Whether company can give bonus shares in the ratio of 1:3 ?
(ii) What if company decide to give bonus shares in the ratio of 1:2 ?
(c) (i) YZ Ltd is a manufacturing company & has proposed a dividend 3 @ 10%
for the year 2017-18 out of the current year profits. The company has
earned a profit of ` 910 crores during 2017-18. YZ Ltd. does not intend
to transfer any amount to the general reserves of the company out of
current year profit Is YZ Ltd. allowed to do MJ? Comment.
(3 marks)
(ii) Karan was holding 5000 equity shares of ` 100 each of M/s. Future Ltd,
A final call of ` 10 per share was not paid by Karan. M/s. Future Ltd.
declared dividend of 10%. Examine with reference to relevant provisions
of the Companies Act, 2013, the amount of dividend Karan should receive.
(3 marks)
(d) Mr. Chetan was appointed as Site Manager of ABC Construe Company on a
two years contract at a monthly salary of ` 50,000. Mr. Pawan gave a surety
in respect of Mr. Chetan’s conduct. After six month the company was not
in position to pay ` 50,000 to Mr. Chetan because of financial constraints.
Chetan agreed for a lower salary of ` 30,000 from the company. This was not
communicated to Mr. Pawan. Three months afterwards it was discovered that
Chetan had been doing fraud since the time of his appointment. What is the
liability of Mr. Pawan during the whole duration of Chetan’s Appointment.
(4 marks)
(e) Komal Ltd. declares a dividend for its shareholders in its AGM held on 27th
September, 2018. Referring to provisions of the General Clauses Act, 1897 and
Companies Act. 2013, advice: (4 marks)
(i) The dates during which Komai Ltd. is required to pay the dividend?
(ii) The dates during which Komal Ltd. is required to transfer the unpaid or
unclaimed dividend to unpaid dividend account?
Q.2. (a) (i) CA. M is a partner in SM & Company (Chartered Accountants) and ML &
Company (Chartered Accountants). SM & Company are statutory auditors
of M/s. Global Ltd. (listed) for past seven years as on 1 – 04 – 2018. Advice
under relevant provisions of the Companies Act, 2013: (4 marks)
272
(1) For how many more years SM & Company can continue as statutory
auditors of M/s. Global Ltd. (listed)?
(2) Can ML & Company be appointed as statutory auditor of M/s. Global
Ltd. during cooling off period for SM & Company?
(ii) Mr. Ram brother of CA. Shyam. a practicing chartered accountant, acquired
securities of M/s. Cool Ltd. having market value of ` 1,20,000 (face value
` 95,000). State whether CA. Shyam is qualified to be appointed as a
statutory auditor of M/s. Cool Ltd. (2 marks)
(b) State the procedure to be followed by companies to accept deposits from its
members according to the Companies Act 2015. What arc the exemptions
available to the Private Limited Companies? (6 marks)
(c) Mr. Muralidharan drew a cheque payable to Mr. Vyas or order. Mr. Vyas lost the
cheque and was not aware of the loss of the cheque; the person who found the
cheque forged the signature of Mr. Vyas and endorsed it to Mr. Parshwanath
as the consideration for goods bought by him from Mr. Parshwanath. Mr.
Parshwanath encashed the cheque on the very same day from the drawee
bank. Mr. Vyas intimated the drawee bank about the theft of the cheque after
three days. Examine the liability of the drawee bank. (4 marks)
(d) Mr. S Venkatesh drew a cheque in favour of M who was sixteen years old. M
settled his rental due by endorsing the cheque in favour of Mrs. A the owner
of the house in which he stayed. The cheque was dishonoured when Mrs. A
presented it for payment on grounds of inadequacy of funds. Advise Mrs. A
how she can proceed to collect her dues. 4 marks)
Q.3. (a) What is a Shelf – Prospectus? State the important provisions relating to the
issuance of Shelf-Prospectus under the provisions of Companies Act, 2013?
(2 + 4 = 6)
(b) (i) A Housing Finance Led. is a housing finance company having a paid up
Share Capital of ` 11 crores and a turnover of ` 143 crores during the
Financial Year 2017 – 18. Explain with reference to the relevant provisions
and rules, whether it is necessary for A Housing Finance Ltd. to file its
financial statements in XBRL mode. (3 marks)
273
(ii) Members of ZA Ltd. holding less than ]% of total voting power want die
company to give a special notice to move a resolution for appointment
of an auditor other than retiring auditor. Explain whether members have
complied with relevant provisions of the Companies Act, 2013 in making
their request. (3 marks)
(c) Explain various provisions applicable to rules or bye-laws being made after
previous publications as enumerated in Section 23 of the Genera! Clauses Act,
1897. (4 marks)

(d) Write short note on;
(i) Proviso (4 marks)
(ii) Explanation, with reference to interpretation of Statutes, Deeds and

Documents. (4 marks)
Q.4. (a) KMN Ltd. Scheduled its annual general meeting to be held on 11th March,
2018 at 11:00 A.M. The company has 900 members. On 11th March, 2018
following persons were present by 11:30 AM. (4 marks)
(1) P1, P2 A P3 shareholders
(2) P4 representing ABC Ltd.
(3) P5 representing DEF Ltd.
(4) P6 & P7 as proxies of the shareholders
(i) Examine with reference to relevant provisions of the Companies Act, 2013,
whether quorum was present in the meeting.
(ii) What will be your answer it P4 representing ABC Ltd., read; in the meeting
after 11:30 A.M.?
(iii) In case lack of Quorum, discuss the provisions as applicable an adjourned
meeting in terms of date, time & place.
(iv) What happens if there is no Quorum in the Adjourned meeting?

(b) ‘X’ a member of LKM Ltd. is holding 250 shares, which are partly paid. The
company held its general meeting where voting right was denied to ‘X’ claiming
he has not paid the calls on the shares held by him. Examine the validity
of company’s denial to ‘X’ with reference to the relevant provisions of the
Companies Act, 2013, assuming that Articles of association of the Company
274
do not restrict the voting right of such members. (4 marks)

(c) What does the term Financial Statements include in relation to accompany
under the Companies Act, 2013? Which companies need not prepare a cash
flow statement? (4 marks)
(d) (i) Explain ‘Mischieve Rule’ for interpretation of statute. Also, give four
matters it considers in construing an Act. (4 marks)
(ii) Explain how ‘Dictionary Definitions’ can be of great help in interpreting
constructing an Act when the statute is ambiguous. (2 marks)

(e) ‘Repeal’ of provision is different from ‘deletion” of provision. Explain. (2 marks)
Q.5. (a) Teresa Ltd. is a company registered in New York (U.S.A.). The company has no
place of business established in India, but it is doing online business through
data interchange in India. Explain with reference to relevant provisions
of the Companies Act, 2013 whether Teresa Ltd. will be treated as Foreign
Company. (6 marks)
(b) Discuss the provisions relating to private placement of shares under the
Companies Act, 2013. (5 marks)
(c) Due to heavy rains and floods Chennai Handloom Limited was unable to
convene annual general meeting upto 30th September. 2017. The company has
not filed the annual financial statements, or the annual return as the directors
of the company are to the view that since the annual general meeting did not
take place, die period of 60 days for filing of annual return is not applicable
and thus, there is no contravention of Section 92 of the Companies Act 2013.
Discuss “whether the contention of directors is correct. (3 marks)
(d) What are the rights available to the finder of lost goods under Section 168 and
Section 169 of the Indian Contract Act, 1872. (3 marks)
(e) Amar bailed 50 kg of high quality sugar to Srijith, who owned a kirana shop,
promising to give ` 200 at the time of taking back the bailed goods. Srijith’s
employee, unaware of this, mixed the 50 kg of sugar belonging to Amar with
the sugar in the shop and packaged it for sale when Srijith was away. This
275
came to light only when Amar came asking for the sugar he had bailed with
Srijith, as the price of the specific quality of sugar had trebled. What is the
remedy available to Amar ? (3 marks)
Q.6. (a) The persons (not being members) dealing with the company are always
protected by the doctrine of Indoor management. Explain. Also, explain when
doctrine of Constructive Notice will apply. (6 marks)
(b) Explain the conditions and the manner in which a company may issue Global
Depository Receipts in a foreign country. (6 marks)
OR
What is the time limit for registration of charge with the registrar? Where
should the company’s Register of charges be kept? State the persons who have
the right to inspect the Company’s Register of charges.

(c) Azar consigned electronic goods for sale to Aziz. Aziz employed Rahim a
reputed auctioneer to sell the goods consigned to him through auction. Aziz
authorized Rahim to receive the proceeds and transfer those proceeds once in
45 days. Rahim sold goods on auction for ` 2,00,000 but before transferring the
proceeds of the auction, became insolvent. Assess the liability of Aziz according
to the provisions of the Indian Contract Act, 1872. (3 marks)

(d) What are the circumstances under which a bill of exchange can be dishonoured
by non-acceptance? Also, explain the consequence if a cheque gets dishonoured
for insufficiency of funds in the account. (5 marks)
276
MAY 2019 PAPER
Roll No______________
Total No. of Questions – 5 Total No. of printed pages - 5
GENERAL INSTRUCTIONS TO CANDIDATES
1. The question paper comprises two parts. Part I and Part II

2. Part I comprises Multiple Choice Questions (MCQs).
3. Part II comprises questions which require descriptive type answers.
4. Ensure that you receive the question paper relating to both the parts, if you have
not received both; bring it to the notice of the invigilator.
5. Answers to Questions in Part I are to be marked on the OMR answer sheet only.
Answers to questions in Pan IT are to be written on the descriptive type answer
buck. Answers to MCQs, if written in the descriptive type answer book, will not be
evaluated.
6. OMR answer sheet will be in English only for all candidates, including for Hindi
medium candidates.
7. The bar coded sticker provided in the attendance register, is to be affixed only on the
descriptive type answer book No bar code sucker is to be affixed on the OMR answer
sheet.
8. You will be allowed to leave the examination hall only after the conclusion of the
exam. If you have completed the paper before time, remain in your seat till the
conclusion of the exam.
9. Duration of the examination is 3 hours. You will be required to submit (a) Pan 1
of the question paper containing MCQs, (b) OMR answer sheet thereon and (c) the
answer book in respect of descriptive type answer book to the invigilator before
leaving the exam hall, after the conclusion of the exam.
10. The invigilator will give you acknowledgement on Page 2 of the admit card, upon
receipt of the above-mentioned items.
11. Candidate found copying or receiving or giving any help or defying instructions of
the invigilators will be expelled from the examination and will also be liable for
further punitive action.
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PART - II 70 marks
1. Question paper comprises 5 questions. Answer Question No. 1 which is compulsory
and any 3 out of the remaining 4 questions.
2. Working notes should form pan of the answer.
3. Answers to the questions are to be given only in English except in the ease of
candidate* who have opted for Hindi Medium. If a candidate has not opted for Hindi
Medium, his/her answers in Hindi will not be evaluated.
1. (a) As at 31” March; the paid up share capital of S Ltd. is 1.00,00,000 divided into
10,00,000 equity shares of `10 each. Of this, H Ltd. is holding 6,00,000 equity
shares and 4,00,000 equity shares are held by others. Simultaneously. S Ltd.
is holding 5% equity shares of H Ltd. out of which1% shares are held as a
legal representative of a deceased member of H Ltd. On the basis of the given
information, examine and answer the following queries with reference to the
provisions of the Companies Act, 2013 :
(i) Can S Ltd. make further investment in equity shares of H Ltd. during 2018-
19?
(ii) Can S Ltd. exercise voting rights at Annual general meeting of H Ltd.?
(iii) Can H Ltd. allot or transfer some of its shares to S Ltd? (4 marks)
(b) (i) Modem Jewellery Ltd. decides to pay 5% of the issue price gap of shares
as underwriting commission to the underwriters, but the Articles of the
company authorize only 4% underwriting commission on shares. Examine
the validity of the above decision under the provision of the Companies
Act, 2013. (2 marks)
(ii) PQ Ltd. declared and paid 10% dividend to all its shareholders
except Mr. Kumar, holding 500 equity shares, who instructed the company
to deposit the dividend amount directly in bis bank account. The company
accordingly remitted the dividend, but the bank returned the payment on
the ground that the account number as given by Mr.Kumar doesn’t tally
with the records of the bank. The company, however, did not inform Mr.
Kumar about this discrepancy. Comment on this issue with reference to
the provisions of the Companies Act, 2013 regarding failure to distribute
dividend. (2 marks)
(c) The Government of India is holding 51% of the paid-up equity share
278
capita) of Sun Ltd. The Audited financial statements of Sun Ltd. for the financial
year 2017-18 were placed at its annual general meeting held on 31st August,
2018. However, pending the comments of the Comptroller and Auditor General
of India (CAG) on the said accounts the meeting was adjourned without
adoption of the accounts. On receipt of CAG comments on the accounts, the
adjourned annual general meeting was held on 15th October, 2018 whereat
the accounts were adopted. Thereafter, Sun Ltd. filed its financial statements
relevant to the financial year 2017-18 with the Registrar of Companies on
12a November, 2018. Examine, with reference to the applicable provisions of
the Companies Act, 2013, whether Sun Ltd. has complied with the statutory
requirement regarding filing of accounts with the Registrar? (4 marks)
(d) Manoj guarantees for Ranjan, a retail textile merchant, for an amount of 7
1,00,000, for which Sharma, the supplier may from time to time supply goods
on credit basis to Ranjan during the next 3 months. After 1 month, Manoj
revokes the guarantee, when Sharma had supplied goods on credit for ? 40,000.
Referring to the provisions of the Indian Contract Act, 1872, decide whether
Manoj is discharged from all the liabilities to Sharma for any subsequent credit
supply.
What would be your answer in case Ranjan makes default in paying back
Sharma for the goods already supplied on credit i.e. 40,000 ? (4 marks)
(e) Ram purchases some goods on credit from Singh, payable within 3 months.
After 2 months, Ram makes out a blank cheque in favour of Singh, signs and
delivers it to Singh with a request to fill up the amount due, as Ram does not
know the exact amount payable by him. Singh fills up fraudulently the amount
larger than the amount payable by Ram and endorses the cheque to Chandra
in full payment of Singh’s own due. Ram’s cheque is dishonoured. Referring to
the provisions of the Negotiable Instruments Act, 1881, discuss the rights of
Singh and Chandra. (3 marks)
2. (a) State, with reasons, whether the following statements are True or False ?
(i) ABC Private Limited may accept the deposits from its members to the
extent of ? 50.00 Lakh, if die aggregate of its paid-up capital, free reserves
and security premium account is ? 50.00 Lakh. (1 marks)
(ii) A Government Company, which is eligible to accept deposits under Section
279
76 of the Companies Act, 2013 cannot accept deposits from public

exceeding 25% of the aggregate of its paid-up capital, free reserves and
security premium account (1 marks)
(iii) The Registrar of Companies is not bound to issue notice to the holder of
charge, if the company gives intimation of satisfaction of charge in the
specified form and signed by the holder of charge. (1 marks)
(iv) The Registrar of Companies may allow the company or holder of
charge to file intimation within a period of 300 days of the satisfaction of
charge on payment of fee and additional fees as may be prescribed.
(1 marks)
(b) (i) The Income Tax Authorities in the current financial year 2019-20
observed, during the assessment proceedings, a need to re-open the
accounts of Chetan Ltd. for the financial year 2008-09 and, therefore,
filed an application before the National Company Law Tribunal (NCLT) 10
issue the order to Chetan Ltd. for re-opening of its accounts and recasting
the financial statements for the financial year 2008-09. Examine the
validity of the application filed by the Income Tax Authorities to NCLT.
(3 marks)
(ii) The Board of Directors of A Ltd. requested its Statutory Auditor to accept
the assignment of designing and implementation of suitable Financial
information system to strengthen the internal control mechanism of the
Company. How will you approach to this proposal, as an Statutory Auditor
of A Ltd., taking into account the consequences, if any. Of accepting this
proposal? (3 marks)
(c) Aarthi is the wife of Naresh. She purchased some sarees on credit from M/s
Rainbow Silks, Jaipur.
M/s Rainbow Silks, Jaipur demanded the amount from Naresh. Naresh refused.
M/s Rainbow Silks, Jaipur filed a suit against Naresh for the said amount.
Decide in the light of provisions of the Indian Contract Act, 1872, whether MYs
Rainbow Silks, Jaipur would succeed?
(d) Explain the concept of ‘Noting’, ‘Protest’ and ‘Protest for better security’ as per
the Negotiable Instruments Act, 1881. (3 marks)
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3. (a) Which fund may be utilized by a public limited company for purchasing (buy
back) its own shares? Also explain the provisions of the Companies Act, 2013
regarding the circumstances in which a company is prohibited to buy back its
own shares. (5 marks)

(b) (i) Alex limited is facing loss in business during the financial year 2018-
2019. In the immediate preceding three financial years, the company had
declared dividend at the rate of 7%, 11 % and 12% respectively. The
Board of Directors has decided to declare 12% interim dividend for the
current financial year atleast to be in par with the immediate preceding
year. Is the Act of the Board of Directors valid? (3 marks)
(ii) The Directors of East West Limited proposed dividend at 15% on equity
shares for the financial year 2017-2018. The same was approved in the
Annual general body meeting held on 24th October 2018. The Directors
declared the approved dividends. (2 marks)
Mr. Binoy was the holder of 2000 equity of shares on 31st March, 2018, but
he transferred the shares to Mr. Mohan, whose name has been registered
on 18th June, 2018. Who will be entitled to the above dividend?
(c) (i) ‘M’ draws bill on ‘N’. ‘N’ accepts the bill without any consideration. The
bill is transferred to ‘O’ without consideration. ‘O’ transferred it to ‘F’ for
10,000. On dishonor of the bill, ‘P’ sued ‘O’ for recovery of the value of
10.000.
Examine whether ‘O* has any right to action against M and N? (2 marks)
(ii) A Bill of Exchange was made without mentioning any time for payment.
The holder added the words ‘on demandM on the face of the instrument.
Does mis amount to any material alteration ? Explain. (2 marks)
(d) ‘Preamble does not over-ride the plain provision of the Act Comment. Also
give suitable example, (3 marks)
4. (a) Explain various instances which make the allotment of securities as irregular
allotment under the Companies Act, 2013. (4 marks)
(b) Madurai Ltd. issued a notice for holding of its Annual general meeting on7th
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November 2018. The notice was posted to the members on 16th October 2018.
Some members of the company allege that the company had not complied
with the provisions of the Companies Act, 2013 with regard to the period of
notice and as such the meeting was valid. Referring to the provisions of the
Act, decide: (5 marks)
(i) Whether the meeting has been validly called ?
(ii) If there is a shortfall, state and explain by how many days does the notice
fall short of the statutory requirement ?
(iii) Can the delay in giving notice be condoned ?
(c) (i) The Companies Act, 2013 provides that the amount of dividend remained
unpaid / unclaimed on expiry of 30 days from the date of declaration of
dividend shall be transferred to unpaid dividend account within 7 days
from the date of expiry of such period of 30 days. If the expiry dale of
such 30 days is 30.10.2018, decide the last date on or before which the
unpaid/unclaimed dividend amount shall be required to be transferred
to a separate bank account in the light of the relevant provisions of the
General Clauses Act, 1897? (2 marks)
(ii) Referring to the provisions of the General Clauses Act, 1897, find out the
day/ date on which the following Act/Regulation comes into force. Give
reasons also,
(1) An Act of Parliament which has not specifically mentioned a particular
date.
(2) The Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) (Fifth Amendment) Regulations. 2015 was
issued by SEBI vide Notification dated 14th August, 2015 with effect
from 1st January, 2016. (2 marks)
(d) How will you understand whether a provision in a statute is ‘mandatory’ or
‘directory’? (3 marks)
5. (a) A group of individuals intend to form a club namely. ‘Budding Pilots Flying Club’
as limited liability company to impart class room teaching and aircraft flight
training to trainee pilots. It was decided to form a limited liability company for
charitable purpose under Section 8 of the Companies Act, 2013 for a period of
ten years and thereafter the club will be dissolved and the surplus of assets
over the liabilities, if any, will be distributed amongst the members as a usual
282
procedure allowed under the Companies Act.

Examine the feasibility of the proposal and advise the promoters considering
the provisions of the Companies Act, 2013. (5 marks)
OR
Give the points of distinction between ordinary resolution and special resolution.
(b) (i) Explain the provisions of the Companies Act, 2013 relating to quorum for
general meeting of a public company having total 30 members, of which,
two members are bodies corporale and one member is the President of
India.
Whether the representatives appointed by body corporate and President
of India to participate in the general meeting shall be counted for quorum
and can such representatives cast vote at that general meeting? (3 marks)
(a) If a member of a listed company who has casted his vote through
electronic voting can attend general meeting of the company and
change his vote subsequently and can he appoint a proxy? (2 marks)
(c) (i) “An agent is neither personally liable nor can he personally enforce the
contract on behalf of the principal.” Comment (4 marks)
(ii) What is the liability of a bailee making unauthorized use of goods
bailed? (4 marks)

(d) If it is defined as : (3 marks)
(i) “Company means a company incorporated under the Companies Act, 2013
or under any previous company Law”.
(ii) “Person” includes. under the Consumer Protection Act, 1986.
How would you interpret/construct the nature and scope of the above definitions ?
283
NOV 2019 PAPER
Roll No __________________

and any 3 out the remaining 4 questions.
2. Working notes should form part of the answer.
3. Answers to the questions are to be given only in English except in the case of
candidates who have opted for Hindi Medium. If a candidate has opted for hindi
Medium, his/her answers in hindi will not be evaluated.
Question 1
(a) (i) Herry Limited is a company registered in Thailand. It has no place of business
established in India, yet it is doing online business through telemarketing in
India having its main server for online business outside India. State the status
of the Company under the provisions of the Companies Act, 2013.
(ii) SKP Limited (Registered in India), a wholly owned subsidiary company of
Herry Limited decided to follow different financial year for consolidation of its
accounts outside India. State the procedure to be followed in this regard.
(iii) Naveen incorporated a “One Person Company” making his sister Navita as the
nominee. Navita is leaving India permanently due to her marriage abroad.
Due to this fact, she is withdrawing her consent of nomination in the said One
Person Company. Taking into considerations the provisions of the Companies
Act, 2013 answer the questions given below.
(A) If Navita is leaving India permanently, is it mandatory for her to withdraw
her nomination in the said One Person Company?
(B) If Navita maintained the status of Resident of India after her marriage,
then can she continue her nomination in the said One Person Company?
(6 Marks)
(b) Examine whether the following persons are eligible for being appointed as auditor
under the provisions of the Companies Act, 2013 :
284
(i) “Mr. Prakash” is a practicing Chartered Accountant and “Mr. Aakash”, who i s a
relative of “Mr. Prakash” is holding securities of “ABC Ltd.” having face value of
` 70,000/- (market value ` 1, 10,000/-). Directors of ABC Ltd. want to appoint
Mr. Prakash as an auditor of the company:
(ii) Mr. Ramesh is a practicing Chartered Accountant indebted to MNP Ltd. for ` 6
lacs. Directors of MNP Ltd. want to appoint Mr. Ramesh as an auditor of the
company.
(iii) Mrs. KVJ spouse of Mr. Kumar, a Chartered Accountant, is the store keeper of
PRC Ltd. Directors of PRC Ltd. want to appoint Mr. Kumar as an auditor of the
company. (6 Marks)
(c) (i) Srushti acquired valuable diamond at a very low price by a voidable contract
under the provisions of the Indian Contract Act, 1872. The voidable contract
was not rescinded. Srushti pledged the diamond with Mr. VK. Is this a valid
pledge under the Indian Contract Act, 1872?
(ii) Whether a Pawnee has a right to retain the goods pledged. (4 Marks)
(d) ‘A’ draws a bill amounting ` 5,000 of 3 month’s maturity period on ‘B’ but signs it
in the fictitious name of ‘C’. Bill is payable to the order of ‘C’ and it is duly accepted
by ‘B’. ‘D’ obtains the bill from ‘A’ and thus becomes its ‘Holder-in-Due course. On
maturity ‘D’ presents bill to ‘B’ for payment. Is ‘B’ bound to make the payment of
the bill? Examine it referring to the provisions of the Negotiable Instruments Act,
1881. (3 Marks)
Question 2
(a) Om Limited served a notice of General Meeting upon its members. The notice stated
that the following resolutions will be considered at such meeting:
(i) Resolution to increase the Authorised share capital of the company.
(ii) Appointment and fixation of the remuneration of Mr. Prateek as the auditor.
A shareholder complained that the amount of the proposed increase and the
remuneration was not specified in the notice. Is the notice valid under the provisions
of the Companies Act, 2013. (4 Marks)
(b) (i) Ravi Limited maintained its books of accounts under Single Entry System of
Accounting. Is it permitted under the provisions of the Companies Act, 2013?
(ii) State the person responsible for complying with the provisions regarding
285
maintenance of Books of Accounts of a Company.

(iii) Whether a Company can keep books of Accounts in electronic mode accessible
only outside India. (6 Marks)
(c) Bhupendra borrowed a sum of ` 3 lacs from Atul. Bhupendra appointed Atul as his
agent to sell his land and authorized him to appropriate the amount of loan out of
the sale proceeds. Afterward, Bhupendra revoked the agency.
Decide under the provisions of the Indian Contract Act, 1872 whether the revocation
of the said agency by Bhupendra is lawful. (4 Marks)
(d) Mr. X is the payee of an order cheque. Mr. Y steals the cheque and forges Mr. X
signature and endorses the cheque in his own favour. Mr. Y then further endorses the
cheque to Mr. Z, who takes the cheque in good faith and for valuable consideration.
Examine the validity of the cheque as per the provisions of the Negotiable Instruments
Act, 1881 and also state whether Mr. Z can claim the privileges of holder-in-due
course. (3 Marks)
Question 3
(a) Mahima Ltd. was incorporated by furnishing false informations. As per the
Companies Act, 2013, state the powers of the Tribunal (NCLT) in this regard.
(5 Marks)
(b) Referring to the provisions of the Companies Act, 2013, examine the validity of the
following :
(i) The Board of Directors of Anand Ltd. proposes to declare dividend at the rate
of 20% to the equity shareholders, despite the fact that the company has
defaulted in repayment of public deposits accepted before the commencement
of this Act.
(ii) Whether a Company can declare dividend for the financial year in which it
incurred loss. (5 Marks)
(c) State whether the following alteration is material alteration under the provisions of
the Negotiable Instruments Act, 1881.
A promissory note was made without mentioning any time for payment. The holder
added the words “on demand” on the face of the instrument. (4 Marks)
286
(d) How will you interpret the term “Instrument” used in a statutes? (3 Marks)
Question 4
(a) The Board of Directors of Chandra Ltd. proposes to issue the prospectus inviting
offers from the public for subscribing the shares of the Company. State the reports
which shall be included in the prospectus for the purposes of providing financial
information under the provisions of the Companies Act, 2013. (4 Marks)
(b) Define the term ‘deposit’ under the provisions of the Companies Act, 2013 and
comment with relevant provisions that the following amount received by a company
will be considered as deposit or not;
(i) ` 5,00,000 raised by Rishi Ltd. through issue of non-convertible debenture not
constituting a charge on the assets of the company and listed on a recognised
stock exchange as per applicable regulations made by Securities and Exchange
Board of India.
(ii) ` 2,00,000 received from Mr. T, an employee of the company who is drawing
annual salary of ` 1,50,000 under a contract of employment with the company
in the nature of non-interest bearing security deposit.
(iii) Amount of ` 3,00,000 received by a private company from a relative of a
Director, declared by the depositor as out of gift received from his mother.
(6 Marks)
(c) What do you understand by the term ‘Good Faith’. Explain it as per the provisions
of the General Clauses Act, 1897. Mr. X purchased a watch from Mr. Y carelessly
without proper enquiry. Whether the purchase made could said to be made in good
faith. (4 Marks)
(d) At the time of interpreting a statutes what will be the effect of ‘Usage’ or ‘Practice’?
(3 Marks)
Question 5
(a) X Ltd. issued a notice on 1st Feb, 2018 to its existing shares holders offering to
purchase one extra share for every five shares held by them.
The last date to accept the offer was 15th Feb, 2018 only. Mr. Kavi has given an
application to renounce the shares offered to him in favour of Mr. Ravi, who is not
a shareholder of the company. Examine the validity of application of Mr. Kavi under
287
the provisions of the Companies Act, 2013. Would your answer differ if Mr. Kavi is a
shareholder of X Ltd.? (5 Marks)
OR
(a) XYZ unlisted company passed a special resolution in a general meeting on January
5th, 2019 to buy back 30% of its own equity shares. The Articles of Association
empowers the company to buy back its own shares. Earlier the company has also
passed a special resolution to buy back its own shares on January 15th, 2018.
The company further decided that the payment for buyback be made out of the
proceeds of the company’s earlier issue of equity share. In the light of the provisions
of the Companies Act, 2013,
(i) Decide, whether the company’s proposal is in order.
(ii) What will be your answer if buy back offer date is revised from January 5 th,
2019 to January 25th 2019 and percentage of buyback is reduced from 30% to
25% keeping the source of purchase as above? (5 Marks)
(b) DN Limited hypothecated its plant to a Nationalised Bank and availed a term loan.
The Company registered the charge with the Registrar of Companies. The Company
settled the term loan in full, The Company requested the Bank to issue a letter
confirming the settlement of the term loan. The Bank did not respond to the request.
State the relevant provisions of the Companies Act, 2013 to register the satisfaction
of charge in the above circumstance. State the time frame up to which the Registrar
of Companies may allow the Company to intimate satisfaction of charges.
(5 Marks)
(c) ‘C’ advances to ‘B’, ` 2,00,000 on the guarantee of ‘A’. ‘C’ has also taken a further
security for the same borrowing by mortgage of B’s furniture worth ` 2,00,000
without knowledge of ‘A’. C’ cancels the mortgage. After 6 months ‘B’ becomes
insolvent and ‘C’ ‘sues ‘A’ his guarantee. Decide the liability of ‘A’ if the market value
of furniture is worth `80,000, under the Indian Contract Act, 1872.
(4 Marks)
(d) Define the term “Affidavit” under the General Clauses Act, 1897. (3 Marks)
288
NOV 20 PAPER
Roll No __________________

Question 1
1. (a) Mr. Raja along with his family members is running successfully a trading
business. He is capable of developing his ideas and participating in the market
place, to achieve this, Mr Raja formed a single person economic entity in the
form of One Person Company with his brother Mr. King as its nominee. On
4th May 2020, Mr. King withdrew his consent as Nominee of the One Person
Company. Can he do so under the provisions of the Companies Act, 2013?
Examine whether the following individuals are eligible for being nominated as
Nominee of the One Person Company as on 5th May 2020 under the above said
Act.
(i) Mr. Shyam son of Mr. Raja who is 15 years old as on 5th May 2020.
(ii) Ms. Devki an Indian Citizen, sister of Mr. Raja stays in Dubai and India. She
stayed in India during the period from 2nd January 2019 to 16th August
2019. Thereafter she left for Dubai and stayed there.
(iii) Mr. Ashok, an Indian Citizen residing in India who is presently a member
of a ‘One Person Company’. (6 Marks)
(b) The Board of Directors of Moon Light Limited, a listed company appointed
Mr. Tel , Chartered Accountant as its first auditor within 30 days of the date
of registration of the Company to hold office from the date of incorporation
to conclusion of the first Annual General Meeting (AGM) . At the first AGM, Mr.
289
Tel was re-appointed to hold office from the conclusion of its first AGM till the
conclusion of 6th AGM. In the light of the provisions of the Companies Act, 2013,
examine the validity of appointment / reappointment in the following cases:
(i) Appointment of Mr. Tel by the Board of Directors.
(ii) Re-appointment of Mr. Tel at the first AGM in the above situation.
(iii) In case Mr. Bell, Chartered Accountant, was appointed as auditor at
the first AGM to hold office from the conclusion of its first AGM till the
conclusion of 5th AGM. ie., 4 years tenure. (6 Marks)
(c) X has made an agency agreement with Y to authorize him to purchase goods
on the behalf of X for the year 2020 only. The agency agreement was signed
by both and it contains all the terms and conditions for the agent. It has a
condition that Y is allowed to purchase goods maximum upto the value of `
10 lakhs only. In the month of April 2020, Y has purchased a single item of `2
lakhs from Z as an agent of X. The market value of the item purchased was 14
lakhs but a discount of 2 lakhs was given by Z. The agent Y has purchased this
item due to heavy discount offered and the financially benefit to X.
After delivery of the item Z has demanded the payment from X as Y is the
agent of X. But X denied to make the payment stating that Y has exceeded his
authority as an agent therefore he is not liable for this purchase. Z has filed a
suit against X for payment.
Decide whether Z will succeed in his suit against X for recovery of payment as
per provisions of The Indian Contract Act, 1872. (3 Marks)
(d) State with reasons whether each of the following instruments is an Inland
Instrument or a Foreign Instrument as per The Negotiable Instruments Act,
1881:
(i) Ram draws a Bill of Exchange in Delhi upon Shyam a resident of Jaipur
and accepted to be payable in Thailand after 90 days of acceptance.
(ii) Ramesh draws a Bill of Exchange in Mumbai upon Suresh a resident of
Australia and accepted to be payable in Chennai after 30 days of sight.
(iii) Ajay draws a Bill of Exchange in California upon Vijay a resident of Jodhpur
and accepted to be payable in Kanpur after 6 months of acceptance.
(iv) Mukesh draws a Bill of Exchange in Lucknow upon Dinesh a resident of
China and accepted to be payable in China after 45 days of acceptance.
(4 Marks)
290
Question 2
(a) The Authorized share capital of SSP Limited is `5 crore divided into 50 Lakhs equity
shares of `10 each. The Company issued 30 Lakhs equity shares for subscription
which was fully subscribed. The Company called so far `8 per share and it was paid
up. Later on the Company proposed to reduce the Nominal Value of equity share
from `10 each to `8 each and to carry out the following proposals:
(i) Reduction in Authorized Capital from `5 crore divided into 50 Lakhs equity
shares of `10 each to `4 crore divided into 50 Lakhs equity shares of `8 each.
(ii) Conversion of 30 Lakhs partly paid up equity shares of ` 8 each to fully paid
up equity shares of `8 each there by relieving the shareholders from making
further payment of `2 per share.
State the procedures to be followed by the Company to early out the above
proposals under the provisions of the Companies Act, 2013. (5 Markks)
(b) PQ Limited is a public company having its registered office in Mumbai. It has 3680
members. The company sent notice to all its members for its Annual general Meeting
to be held on 2nd September 2019 (Monday) at 11:00 AM at its registered office. On
the day of meeting there were only 12 members personally present upto 11:30 AM.
The Chairman adjourned the meeting to same day in next week at the same time
and place.
On the day of adjourned meeting only 10 members were personally present. The
Chairman initiated the meeting after 11:30 AM and passed the resolutions after
discussion as per the agenda of the meeting given in the notice. Comment whether
the AGM conducted after adjournment is valid or not as per the provisions of
section 103 of Companies Act 2013 by explaining the relevant provisions in this
regard.
What would be your answer in the above case, if PQ Limited is a Private company?
(2+2= 4 Marks)
(c) S Ltd acquired 10% paid up share capital of H Ltd on 15th March 2017. H Ltd
acquired 55% paid up share capital of S Ltd on 10th March 2018. H Ltd on 25th
September 2020 decided to issue bonus shares in the ratio of 1:1 to the existing
shareholders. Accordingly bonus shares were allotted to S Ltd. Examine under the
provisions of the Companies Act, 2013 and decide
(i) The validity of holding of shares by S Ltd. in H Ltd.
(ii) Allotment of Bonus shares by H Ltd. to S Ltd. (4 Marks)
291
(d) (i) Mr. CB was invited to guarantee an employee Mr. BD who was previously
dismissed for dishonesty by the same employer. This fact was not told to Mr. CB.
Later on, the employee embezzled funds. Whether CB is liable for the financial
loss as surety under the provisions of the Indian Contract Act, 1872?
(ii) Mr. X agreed to give a loan to Mr. Y on the security of four properties. Mr. A gave
guarantee against the loan. Actually Mr. X gave a loan of smaller amount on
the security of three properties. Whether Mr. A is liable as surety in case Mr. Y
failed to repay the loan? (2+2= 4 Marks)
Question 3
(a) Explain the following in brief with reference to Companies Act 2013:
(i) National Financial Reporting Authority (NFRA)
(ii) Corporate Social Responsibility (CSR) Committee (3+3 = 6 Marks)
(b) (i) Mrs. K went to a Jewellary shop to purchase diamond ornaments. The owners
of jewellary shop are notorious and indulging in smuggling activities. Mrs. K
purchased diamond ornaments honestly without making proper enquiries. Was
the purchase made in Good faith as per the provisions of the General Clauses
Act, 1897 so as to convey good title?
(ii) There are two ways to reach city A from city B. The distance between the two
cities by roadways is 100 kms and by water ways 80 kms. How is the distance
measured for the purpose of any Central Act under the provisions of the General
Clauses Act, 1897? (2+2 =Marks)
(c) Sun Light Limited was incorporated on 22nd January 2019 with the objects of
providing software services. The Company adopted its first financial year as from
22nd January 2019 to 31st March 2020. The financial statement for the said period,
after providing for depreciation in accordance with Schedule II of the Companies
Act, 2013 revealed net profit. The Board of Directors declared 20% interim dividend
at their meeting held on 7th July 2020, before holding its first Annual General
Meeting. In the light of the provisions of the Companies Act, 2013 and Rules made
thereunder
(i) Whether the Company has complied due diligence in declaring interim dividend?
(ii) Whether the Company can declare dividend in case it was registered under
Section 8 of the Companies Act, 2013?
292
(iv) What are the penal consequences in case of failure to pay the interim dividend?
(4 Marks)
(d) Vikram accepts a Bill of Exchange for `50,000 which is an accommodation bill drawn
by A on 1st January 2020 to be payable at Mumbai on 1st July 2020. A transfers
the bill to B on 1st February 2020 without any consideration. B further transfers it
to C on 1st March 2020 for value. Then C transfers it again to D on 1st April 2020
without consideration. D holds the bill till maturity and on the due date of payment
he presented the bill for payment but the bill is dishonoured by Vikram.
Discuss the rights of A, B, C and D to recover the amount of this bill as per the
provisions of The Negotiable Instruments Act, 1881. (3 Marks)
Question 4
(a) Viki Limited engaged in the business of consumer durables. It is managed by a
team of professional managers. The Company has not made default in payment
of statutory dues, and repayment of debenture/Institutional loan with interest.
The Company advertised a circular in the newspaper dated 20th September 2020
inviting the deposits from the members and public for the first time. The latest
audited financial statement of the Company revealed the following data, as on
31.3.2020
Paid up share capital ` 70 Crores
Securities Premium ` 20 Crores
Free Reserves ` 20 Crores
Long — term borrowings ` 50 Crores
The Company in the advertisement invited public deposit for a period of 4 Months
Plan A and Plan B for 36 Months.
(i) Explain the term ‘eligible company’ and calculate the Maximum amount of
Deposit that can be accepted from Public (Non —Member) for Plan A and Plan
B based on latest audited Financial Statement under the provisions of the
Companies Act, 2013.
(ii) Calculate the maximum amount of deposit Viki Limited can accept from the
public under Plan B in case it is a wholly owned Government Company under
the provisions of the said Act. (6 Marks)
(b) AB Limited is a public company having its registered office in Coimbatore. The
company has incurred a net loss of `20 lakhs in the Financial Year (FY) 2019-
293
20. The Board of Directors (BOD) wants to declare dividend for the FY 2019-20.
The balances of the company as per the latest audited financial statements
are as follows:
1. Equity Share Capital (`10 each) - 100 lakhs
2. General Reserve - 150 lakhs
3. Debenture redemption Reserve - 50 lakhs
The company has not declared any dividend in the preceding three financial years.
Decide whether AB Limited is allowed to declare dividend or not for the FY 2019-20
by explaining the relevant provisions of the Companies Act in this regard.
If allowed to declare dividend then state the maximum amount of dividend that can
be paid by AB Limited as per the Section 123 of Companies Act 2013.
(2+2 = 4 Marks)
(c) Define the following terms with reference to the General Clauses Act, 1897:
(i) Affidavit
(ii)
Good Faith (2+2 = 4 Marks)
(d) Write a short note on “Proviso” with reference to the rules of interpretation.
(3Marks)
Question 5
(a) (i) ABC Limited is a public company incorporated in New Delhi. The Board of
Directors (BOD) of the company wants to bring a public issue of 100000 equity
shares of ` 10 each. The BOD has appointed an underwriter for this issue for
ensuring the minimum subscription of the issue. The underwriter advised the
BOD that due to current economic situation of the Country it would be better
if the company offers these shares at a discount of ` 1 per share to ensure full
subscription of this public issue. The Board of Directors agreed to the suggestion
of underwriter and offered the shares at a discount of ` 1 per share. The issue
was fully subscribed and the shares were allotted to the applicants in due
course.
Decide whether the issue of shares as mentioned above is valid or not as per
Section 53 of Companies Act 2013. What would be your answer in the above
case if the shares are issued to employees as Sweat equity shares?
(2+1=3 Marks)
(ii) Ram draws a cheque of ` 1 lakh. It was a bearer cheque. Ram kept the cheque
with himself. After some time Ram gives this cheque to Shyam as a gift on his
294
birthday. Decide whether Shyam is having a valid title over the cheque and
whether Shyam is a holder in due course or not in relation to this cheque as
per the Section 9 of the Negotiable Instruments Act 1881. (3 Marks)
OR
(a) (i) Are the following instruments signed by Mr. Honest is valid promissory Notes?
Give the reasons.
(a) I promise to pay D’s son `10000 for value received (D has two sons)
(b) I promise to pay `5000/- on demand at my convenience
(ii) Who is the competent authority to issue a promissory note `payable to bearer’?
Your answers shall be in a accordance with the provisions of the Negotiable
Instruments Act, 1881. (3 Marks)
(iii) The Articles of Association of a Company may contain provisions for

entrenchment under Section 5 of the Companies Act, 2013. What is meant by
entrenchment provisions in this context? Also State the relevant provisions of
the said Act dealing with entrenchment provisions. (3 Marks)
(b) Rose (Private) Limited on 3rd April 2019 obtained ` 30 Lakhs working capital loan
by offering its Stock and Accounts Receivables as security and ` 5 Lakhs adhoc
overdraft on the personal guarantee of a Director of Rose ( Private) Limited , from a
financial institution.
(i) Is it required to create charge for working capital loan and adhoc overdraft in
accordance with the provisions of the Companies Act, 2013 ?
(ii) State the provisions relating to extension of time and procedure for registration
of charges in case the above charge was not registered within 30 days of its
creation (4 Marks)

(c) Distinguish between a contract of Indemnity and a contract of Guarantee as per The
Indian Contract Act, 1872. (4 Marks)
(d) “Associate words to be understood in common sense manner.” Explain this statement
with reference to rules of interpretation of statutes. (3 Marks)
295
JAN 21 PAPER
Roll No __________________

Question 1
(a) A Ltd. issued 1,00,000 equity shares of ` 100 each at par to the public by issuing
a prospectus. The prospectus discloses the minimum subscription amount of `
15,00,000 required to be received on application of shares and share application
money shall be payable at ` 20 per share. The prospectus further reveals that A
Ltd. has applied for listing of shares in 3 recognized stock exchanges of which 1
application has been rejected. The issue was fully subscribed and A Ltd. received an
amount of ` 20,00,000 on share application. A Ltd., then proceeded for allotment
of shares.
Examine the three disclosures in the above case study which are the deciding factors
in an allotment of shares and the consequences for violation, if any under the
provisions of the Companies Act, 2013. (6 Marks)
(b) (i) Three chartered accountants, Mr. Robert, Mr. Ram and Mrs. Rohini, formed a
Limited Liability Partnership under the Limited Liability Partnership Act, 2008
in the name of ‘R & Associates LLP’, practicing chartered accountants. SR Ltd.
intends to appoint ‘R & Associates LLP’ as auditors of the company.
Examine the validity of the proposal of SR Ltd. to appoint ‘R & Associates LLP’,
a body corporate, as an auditor of the company as per the provisions of the
(ii) A company received a proxy form 54 hours before the time fixed for the start of
296
the meeting. The company refused to accept the proxy form on the ground that
the Articles of the company provided that a proxy form must be filed 60 hours
before the start of the meeting. Define proxy and decide under the provisions of
the Companies Act, 2013, whether the proxy holder can compel the company
to admit the proxy in this case? (3 Marks)
(c) Radheshyam borrowed a sum of ` 50,000 from a Bank on the security of gold on
1.07.2019 under an agreement which contains a clause that the bank shall have
a right of particular lien on the gold pledged with it. Radheshyam thereafter took
an unsecured loan of ` 20,000 from the same bank on 1.08.2019 for three months.
On 30.09.2019 he repaid entire secured loan of ` 50,000 and requested the bank to
release the gold pledged with it. The Bank decided to continue the lien on the gold
until the unsecured loan is fully repaid by Radheshyam. Decide whether the decision
of the Bank is valid within the provisions of the Indian Contract Act, 1872 ?
(4 Marks)
(d) Referring to the provisions of the Negotiable Instruments Act, 1881, examine the
validity of the following:
A Bill of Exchange originally drawn by R for a sum of ` 10,000 but accepted by S
only for` 7,000. (3
Marks)
Question 2
(a) RS Ltd. received share application money of ` 50.00 Lakh on 01.06.2019 but failed
to allot shares within the prescribed time limit.
The share application money of ` 5.00 Lakh received from Mr. Khanna, a customer of
the Company, was refunded by way of book adjustment towards the dues payable
by him to the company on 30.07.2019. The Company Secretary of RS Ltd. reported
to the Board that the entire amount of ` 50.00 Lakh shall be deemed to be ‘Deposits’
as on 31.07.2019 and the Company is required to comply with the provisions of
the Companies Act, 2013 applicable to acceptance of deposits in relation to this
amount.
You are required to examine the validity of the reporting of the Company Secretary
in the light of the relevant provisions of the Companies Act, 2013. (4 Marks)
(b) (i) The Board of Directors of Dilip Telelinks Ltd. consists of Mr. Choksey, Mr. Patel
297
(Directors) and Mr. Shukla (Managing Director). The company has also employed
a full time Secretary. The Profit and Loss Account and Balance Sheet were
signed by Mr. Choksey and Mr. Patel. Examine whether the authentication of
financial statements of the company is in accordance with the provisions of the
Companies Act, 2013 ? (3 Marks)
(ii) X Ltd. is a listed company having a paid-up share capital of ` 25 crore as at
31st March, 2019 and turnover of ` 100 crore during the financial year 2018-
19. The Company Secretary has advised the Board of Directors that X Ltd. is not
required to appoint ‘Internal Auditor’ as the company’s paid up share capital
and turnover are less than the threshold limit prescribed under the Companies
Act, 2013. Do you agree with the advice of the Company Secretary? Explain
your view referring to the provisions of the Companies Act, 2013. (3 Marks)
(c) Explain whether the agency shall be terminated in the following cases under the
(i) A gives authority to B to sell A’s land, and to pay himself, out of the proceeds,
the debts due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A’s agent to sell A’s land. B, under the authority of A, appoints
C as agent of B. Afterwards, A revokes the authority of B but not of C. What is
the status of agency of C ? (4 Marks)
(d) A promissory note specifies that three months after, A will pay ` 10,000 to B or his
order for value received. It is to be noted that no rate of interest has been stipulated
in the promissory note. The promissory note falls due for payment on 01.09.2019
and paid on 31.10.2019 without any interest. Explaining the relevant provisions
under the Negotiable Instruments Act, 1881, state whether B shall be entitled to
claim interest on the overdue amount? (3 Marks)
Question 3
(a) State the reasons for the issue of shares at premium or discount. Also write in brief
the purposes for which the securities premium account can be utilized? (5 Marks)
(b) Mr. R, holder of 1000 equity shares of ` 10 each of AB Ltd. approached the Company
in the last week of September, 2019 with a claim for the payment of dividend of
` 2000 declared @ 20% by the Company at its Annual General Meeting held on
31.08.2011 with respect to the financial year 2010-11. The Company refused to
298
accept the request of R and informed him that his shares on which dividend has
not been claimed till date, have also been transferred to the Investor Education
And Protection Fund.Examine, in the light of the provisions of the Companies
Act, 2013, the validity of the decision of the Company and suggest the remedy, if
available, to him for obtaining the unclaimed amount of dividend and re-transfer
of corresponding shares in his name. (5 Marks)
(c) Gireesh, a legal successor of Ripun, the deceased person, signs a Bill of Exchange
in his own name admitting a liability of ` 50,000 i.e. the extent to which he inherits
the assets from the deceased payable to Mukund after 3 months from 1st January,
2019. On maturity, when Mukund presents the bill to Gireesh, he (Gireesh) refuses
to pay for the bill on the ground that since the original liability was that of Ripun,
the deceased, therefore, he is not liable to pay for the bill.
Referring to the provisions of the Negotiable Instruments Act, 1881 decide whether
Mukund can succeed in recovering ` 50,000 from Gireesh. Would your answer be still
the same in case Gireesh specified the limit of his liability in the bill and the value
of his inheritance is more than the liability ? (4 Marks)
(d) Sohel, a director of a Company, not being personally concerned or interested,

financially or otherwise, in a matter of a proposed motion placed before the Board
Meeting, did not disclose his interest although he has knowledge that his sister is
interested in that proposal. He restrains from making any disclosure of his interest
on the presumption that he is not required by law to disclose any interest as he is not
personally interested or concerned in the proposal. He made his presumption relying
on the ‘Rule of Literal Construction’. Explaining the scope of interpretation under this
rule in the given situation, decide whether the decision of Sohel is correct?
(3 Marks)
Question 4
(a) CDS Ltd. is planning to make a private placement of securities. The Managing
Director arranged to obtain a brief note from some source explaining the salient
features of the issue of private placement that the Board of Directors shall keep
in mind while approving the proposal on this subject. The brief note includes, inter
alia, the information / suggestions on the following points:
(i) A private placement shall be made only to a select group of identified persons
not exceeding 200 in a financial year.
299
The aforesaid ceiling of identified persons shall not apply to the offer made
to the qualified institutional buyers but is applicable to the employees of the
Company who will be covered under the Company’s Employees Stock Option
Scheme.
(ii) The offer on private placement basis shall be made only once in a financial
year for any number of identified persons not exceeding 200.
The Company solicits your remarks on the points referred above as to whether
they are valid or not? Reasoned remarks should be given in accordance with
the provisions of the Companies Act, 2013. (4 Marks)
(b) (i) Referring to the provisions of the Companies Act, 2013, examine the validity of
the following:
Safar Limited having a net worth of ` 130 crore wants to accept deposits
from its members. It has approached you to advise whether it falls within the
category of an eligible company? What special care has to be taken while
accepting such deposits from members? (3 Marks)
(ii) Moon Light Ltd. is having its establishment in USA. It obtained a loan there
creating a charge on the assets of the foreign establishment. The Company
received a notice from the Registrar of Companies for not filing the particulars
of charge created by the Company on the property or assets situated outside
India. The Company wants to defend the notice on the ground that it shall not
be the duty of the company to register the particulars of the charge created
on the assets not located in India. Do you agree with the stand taken by the
Company? Give your answer with respect to the provisions of the Companies
Act, 2013. (3 Marks)
(c) (i) PK and VK had a long dispute regarding the ownership of a land for which
a legal suit was pending in the court. The court fixed the date of hearing
on 29.04.2018, which was announced to be a holiday subsequently by the
Government. What will be the computation of time of the hearing in this case
under the General Clauses Act, 1897? (2 Marks)
(ii) Income Tax Act, 1961 provides that the gratuity paid by the government to its
employees is fully exempt from tax. You are required to explain the scope of
the term ‘government’ and clarify whether the exemption from gratuity income
will be available to the State Government Employees? Give your answer in
accordance with the provisions of the General Clauses Act, 1897. (2 Marks)
300
(d) What is External Aid to interpretation? Explain how the Dictionary definitions are
the External Aids to Interpretations? (3 Marks)
Question 5
(a) (i) London Limited, at a general meeting of members of the company, passed an
ordinary resolution to buy-back 30 percent of its equity share capital. The
articles of the company empower the company for buy-back of shares.
Explaining the provisions of the Companies Act, 2013, examine:
(A) Whether company’s proposal is in order?
(B) Would your answer be still the same in case the company instead of 30
percent, decides to buy-back only 20 per cent of its equity share capital?
(3 Marks)
(ii) The Board of Directors of Rajesh Exports Ltd., a subsidiary of Manish Ltd.,
decides to grant a loan of ` 3 lakh to Bhaskar, the finance manager of Manish
Ltd., getting salary of ` 40,000 per month, to buy 500 partly paid-Up equity
shares of ` 1,000 each of Rajesh Exports Ltd. Examine the validity of Board’s
decision with reference to the provisions of the Companies Act, 2013.
(2 Marks)
OR
(a) The role of doctrine of ‘Indoor management’ is opposed to that of the role of
‘Constructive notice’. Comment on this statement with reference to the Companies
Act, 2013. (5 Marks)
(b) Veena Ltd. held its Annual General Meeting on September 15, 2018. The meeting
was presided over by Mr. Mohan Rao, the Chairman of the Company’s Board of
Directors. On September 17, 2018, Mr. Mohan Rao, the Chairman, without signing
the minutes of the meeting, left India to look after his father who fell sick in London.
Referring to the
16 INTERMEDIATE (NEW) EXAMINATION: JANUARY, 2021
provisions of the Companies Act, 2013, state the manner in which the minutes of the
above meeting are to be signed in the absence of Mr. Mohan Rao and by whom?
(5 Marks)
(c) Satya has given his residential property on rent amounting to ` 25,000 per month
301
to Tushar. Amit became the surety for payment of rent by Tushar. Subsequently,
without Amit’s consent, Tushar agreed to pay higher rent to Satya. After a few
months of this, Tushar defaulted in paying the rent.
(i) Explain the meaning of contract of guarantee according to the provisions of the
Indian Contract Act, 1872.
(ii) State the position of Amit in this regard. (4 Marks)
(d) “The act done negligently shall be deemed to be done in good faith.”
Comment with the help of the provisions of the General Clauses Act, 1897.
(3 Marks)
302

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Inter CA

ABOUT THE BOOK

Contents of the book How to use this book

Note: The book does not cover Nov 2021 &

HOW TO STUDY EFFECTIVELY FOR THE EXAM?

2 Chapter-wise marks distribution of Previous Exams..................04

4 The Negotiable Instruments Act, 1881.......................................83-148

5 The General Clauses Act, 1897....................................................149-183

8 Past Exam Question Papers..........................................................265-302

Topic Name May’18 Nov’18 May’19 Nov’19 Nov’20 Jan’21

The Indian Contract Act,1872

UNIT 1: CONTRACT OF INDEMNITY AND GUARANTEE

1.1: Meaning of Indemnity Contract (Section 124)

God is not covered.

1.2 Rights of indemnity holder (Section 125)

1.3 Meaning of Guarantee Contract (Section 126)

1.4 Consideration for Guarantee (Section 127)

1.5 Nature of Surety’s Liability (Section 128)

Specific guarantee Continuing guarantee

2. Continuing guarantee (Section 129)

A continuing guarantee can be revoked as to future transactions in the following manner:

1.7 Discharge of Surety

Section133 Section 134 Section 135 Section 139

Example: Ajit becomes surety to Chintan for Bhairav’s conduct as a manager

2. By release or discharge of principal debtor (Section 134): The surety is discharged if

1.8 Non-Discharge of Surety

Section136 Section 137 Section 138

1.9 Rights of Surety

Rights against the Rights against the

A. Rights against the Principal Debtor

(b) Implied promise to indemnify surety (Section 145): In every contract of

B. Rights against the Creditor

1.10 Invalid Guarantee (Section 142 To 144)

1.11 Contribution of Co-Sureties

Rules for Co-Sureties: -

1.12 Distinction between Indemnity and Guarantee

Point of distinction Contract of Indemnity Contract of Guarantee

Right to sue third party Indemnifier cannot sue a Surety can p r o c e e d

UNIT 2: BAILMENT AND PLEDGE

1.13 Meaning of Bailment

1.14 Essential elements of Bailment

• The change of possession does not lead to change of ownership. In bailment,

1.15 Forms and Classification of Bailment

Gratuitous Bailment Non-Gratuitous Bailment

1.16 Duties and Rights of Bailor

Duties of Bailor Rights of Bailor

2. Duty to pay necessary expenses [Section 158]:

3. Duty to indemnify the Bailee for premature termination (Section 159):

4. Bailor’s responsibility to bailee (Section 164):

2. Right to demand back the goods at any time (Section 159):

4. Right to sue the bailee:

1.17 Duties and Rights of Bailee

Duties of Bailee Rights of a Bailee

1. Take reasonable Care of the goods (Section 151 & 152)

3. Not to mix the goods (Section 155, 156 and 157):

the bailee for loss of the goods (Section 157).

4. Return the goods (Section 160 & 161):

5. Return an accretion from the Goods (Section 163):

6. Not to setup Adverse Title:

2. Right to indemnity (Section 166):

3. Right to claim compensation in case of faulty goods (Section 150):

4. Right to claim extraordinary expenses (Section 158):

6. Right of particular lien for payment of services (Section 170):