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ESSENTIAL ELEMENTS OF A VALID CONTRACT

All agreements are not contracts. Only that agreements which is enforceable at law is a
contract. An agreement which is enforceable at law cannot be contract. Thus, the term
agreement is more wider in scope than contract. All Contracts are agreements but all
agreements are not contracts.

An agreement, to be enforceable by law, must posses the essential elements of a valid

contract as contained in section 10 of the Indian Contract Act. According to Section 10, "All
agreements are contract if they are made by the free consent of the parties, competent to
contract, for a lawful consideration and with a lawful object and are not expressly declared to
be void." As the details of these essentials form the subject-matter of our subsequent
chapters, it is proposed to dismiss them in brief here.

The following are the essential elements of a valid contract :

1. Offer and Acceptance. In order to create a valid contract, there must be a 'lawful offer'
by one party and 'lawful acceptance' of the same by the other party.

2. Intention to Create Legal Relationship. In case, there is no such intention on the part
of parties, there is no contract. Agreements of social or domestic nature do not contemplate
legal relations.
Case :- Balfour vs. Balfour(1919)

3.Lawful Consideration. Consideration has been defined in various ways. According to

Blackstone,"Consideration is recompense given by the party contracting to another." In
other words of Pollock, "Consideration is the price for which the promise of the another is
brought."
consideration is known as quid pro-quo or something in return.

4. Capacity of parties. The parties to an agreement must be competent t contract. If either

of the parties does not have the capacity to contract, the contract is not valid.
According the following persons are incompetent to contract.
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(a) Miners, (b) Persons of unsound mind, and
(c) persons disqualified by law to which they are subject.

5. Free Consent. 'Consent' means the parties must have agreed upon the same thing in the
same sense.
According to Section 14, Consent is said to be free when it is not caused by-

(1) Coercion, or (2) Undue influence, or (3) Fraud, or

(4) Mis-representation, or (5) Mistake.
An agreement should be made by the free consent of the parties.

6. Lawful Object. The object of an agreement must be valid. Object has nothing to do with
consideration. It means the purpose or design of the contract. Thus, when one hires a house
for use as a gambling house, the object of the contract is to run a gambling house.

The Object is said to be unlawful if-

(a) it is forbidden by law;

(b) it is of such nature that if permitted it would defeat the provision of any law;
(c) it is fraudulent;
(d) it involves an injury to the person or property of any other;
(e) the court regards it as immoral or opposed to public policy.

7. Certainity of Meaning. According to Section 29,"Agreement the meaning of which is not

Certain or capable of being made certain are void."

8. Possibility of Performance. If the act is impossible in itself, physically or legally, if

cannot be enforced at law. For example, Mr. A agrees with B to discover treasure by magic.
Such Agreements is not enforceable.

9. Not Declared to be void or Illegal. The agreement though satisfying all the conditions
for a valid contract must not have been expressly declared void by any law in force in the
country. Agreements mentioned in Section 24 to 30 of the Act have been expressly declared

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to be void for example agreements in restraint of trade, marriage, legal proceedings etc.

10. Legal Formalities. An oral Contract is a perfectly valid contract, expect in those cases
where writing, registration etc. is required by some statute. In India writing is required in
cases of sale, mortgage, lease and gift of immovable property, negotiable instruments;
memorandum and articles of association of a company, etc. Registration is required in
cases of documents coming within the scope of section 17 of the Registration Act.

All the elements mentioned above must be in order to make a valid contract. If any one
of them is absent the agreement does not become a contract.

QUASI CONTRACT:
Contractual obligations are voluntarily created by free consent through proposal
and acceptance. In some cases, some obligations though not contractual but treated as
contractual by law.
In fast there is no contract but there is one in contemplation of law i.e. quasi
contract law of quasi contract, is also known as the law of restitution.
Sec. 68 to 72 deals with five kind of quasi contractual obligations. They are as
follower:

1. Supply of Necessaries To a Minor or Lunatic :-

Necessaries means goods suitable to the condition in life of minor or lunatic person. If a
person is incapable to enter into a contract. Any one person who is legally bound t support,
provides the "Necessaries" according the life conditions of the minor or lunatic. He is also
entitled to recover the value from the property for such incapable person.

Example :- Mr. Jonny supplies Mr. Honny (a minor) with necessaries suitable to its
condition of life. Mr. Jonny is entitled to reimbursed the value of necessaries from the
property of Mr. Honny.

2. Finder of Goods :-
Sometimes a person finds the goods on the roads or on any place which belong to any other
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person. He takes them into his own custody. He is also entitled to recover compensation for
the trouble in taking the case of goods and finding the owner of the good.

3. Liability of One Person But Paid By Other Can Be Recovered :-

Sometimes one person pays the money for the other person but not as a free gift. Any
person on whose behalf money is paid enjoys benefits. So he is also bound to make
compensation to his benefactor.

Example :- Suppose Mr. Akram holds the factory of Mr. Nisar on lease. The tax payable by
Mr. Nisar to the government being in arrears, the factory is advertised for sale by the
government. Under the law it will also effect the benefits of Mr. Nisar's lease. Mr. Nisar to
prevent the sale pays tax to the government, the sum due from Mr. Akram. Mr. Akram is
bound to compensate to Mr. Nisar by paying the such amount.

4. Mistake and Coercion :-

If money or any other thing delivered by mistake or coercion to another person can be
recovered. It is the liability of that person to repay who has taken.

Example :- Suppose Mr. Nawab a salesman leaves a packet of Soap at the shop of Mr.
Riaz by mistake. Now it is the liability of Mr. Riaz that he should repay it.

5. Non Gratuitous Act :-

Contract section is says, " That when one person lawfully does any thing for another or
delivers any thing to him, not intending to give as a free gift, other person also enjoys
benefits, the later is bound to make compensation to the former.

Discharge of Contract

Discharge of contract means termination of the contractual relationship between the parties.
When the rights and obligations arising out of a contract are extinguished, the contract is
said to be discharged. A contract may be discharged either by the acts of the parties or the

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operation of law. Act of parties may take different forms like performance, agreement,
breach, etc. while operation of law includes death, insolvency, etc.

A contract may be discharged in any of the following ways:

1. Discharge by Performance:

This is most pleasant end of a contract when a contract is duly performed by both the
parties and nothing more remains to be done. But if only one party performs his promise, he
aloes is discharged and the guilty party may be taken to the task for breach of contract. The
performance may be, either actual or attempted i.e. tender.

Actual performance must be complete, precise and according to the terms of the agreement.
Most of the contracts are performed in this manner.

Where a promisor has made an offer of performance (tender), and the offer has not been
accepted, the promisor is not responsible for non-performance, nor does he thereby lose his
rights under the contract. If there are several joint promisors, the offer of performance to any
one of them shall be sufficient.

Performance shall be given by the promisor himself, in contracts requiring use of personal
skill, e.g. painting, dancing or promise to marry, etc. In such a case death of the promisor
puts an end to the contract. Unless a contrary intention appears from the contract, a promise
can be enforced against and only by the legal representatives of the parties. Ordinarily,
parties must perform their obligations at the stipulated time. But if the time is of the essence
of the contract, then a failure to perform at the time specified, renders the contract voidable
at the option of the opposite parties.

2. Discharge by Death:

Contracts of a personal nature come to an end by the death of the promisor. In other cases
the rights and liabilities pass on to the legal representatives of the deceased. But they are
liable to the extent of the property inherited by them.

3. Lapse of Time:

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The limitation act provides that a contract should be performed within a specified period i.e.
period of limitation. If the contract is not performed, and if no legal action is taken by the
promisee within the period of limitation, he is deprived of his remedy at law. In other words,
the contract in such a case is terminated. For example, for the price of goods sold and
delivered, where no fixed period of credit is agreed upon, the payment should be made or a
suit instituted to recover it within 3 years from the date of delivery of the goods. If the
payment is not made and the creditor does not file a suit against the buyer for the recovery
of the price within the period of 3 years, the debt becomes time-barred and irrecoverable.

4. Breach of Contract:

Breach of contract means refusal of performance by a party. Where a party to a contract has
refused to perform, or disabled himself from performing his promise in its entirety, the other
party or aggrieved party may put an end to the contract unless he has waived his right
expressly or impliedly. For instance, X, a singer enters into a contract with Y to sing at his
theatre every night during next month. Y agrees to pay him Rs. 250 for each night. On the
10th night, X willfully absents herself from the theatre. Y can put at an end to the contract.

Breach of contract may be of two kinds;

(1) Anticipatory breach; and

(2) Actual Breach.

'Actual Breach' occurs when a party fails to perform his obligation upon the date fixed for
performance by the contract, as for example, where on the appointed day, the seller does
not deliver the goods or the buyer refuses to accept the delivery. It is to be noted that actual
breach of contract due to non performance can only arise when the time for performance
has arrived. Actual breach entitled the party not in default to elect to treat the contract as
discharged and to sue the party at fault for damages for breach of contract.

Anticipatory breach of Contract:

Anticipatory breach of contract takes place before the date of actual performance. The
promisor may either inform the promisee that he will not perform the contract or may do an
act which is inconsistent with the contract or renders the performance impossible. For
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example, A agrees to employ B as a clerk, the service to commence from 2 nd February,
1989. On 27th January, 1989, he informs B that his services will not be required.

5. Impossibility of Performance:

A contract must be capable of being performed. Section 56 provides "agreement to do an

act impossible in itself is void". This rule is based on two principles:

1. Lex non cogit ad impossibilia i.e. Law does not recognize the impossible.

2. Impossibilia nulla obligation east i.e. An impossible act does not create any obligation.

Impossibility discharges the parties to a contract. Even if the act becomes impossible after
formation of contract, the contract is rendered void. Impossibility falls in the following two
categories:

1. Initial Impossibility:

Initial impossibility means impossibility at the time of formation of the contract. It may be
known or unknown to the parties. If impossibility is known to the parties, the agreement is
void ab initio. But where the impossibility is known to the parties, the contract would become
void because of mutual mistake of fact whenever such impossibility is discovered.

2. Subsequent Impossibility:

Sometimes a contract is capable of being performed when entered into, but some
subsequent event renders the performance impossible. In such a case also, the contract
become void. The subsequent impossibility may arise (i) by some event beyond the control
of the parties, or (ii) by some act of the promisor or promisee.

INDEMNITY AND GUARANTEE

Definition of Indemnity

A form of contingent contract, whereby one party promises to the other party that he will
compensate the loss or damages occurred to him by the conduct of the first party or any
other person, it is known as the contract of indemnity. The number of parties in the contract

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is two, one who promises to indemnify the other party is indemnifier while the other one
whose loss is compensated is known as indemnified.

The indemnity holder has the right to reimburse the following sums from the indemnifier:

 Damages caused, for which he was compelled.

 Amount paid for defending the suit.
 Amount paid for compromising the suit.

Let’s understand this by an example, Mr. Joe is a shareholder of Alpha Ltd. lost his share
certificate. Joe applies for a duplicate one. The company agrees, but on the condition that
Joe compensate for the loss or damage to the company if a third person brings the original
certificate.

One more common example of indemnity is the insurance contract where the insurance
company promises to pay for the damages suffered by the policyholder, against the
premiums.

Definition of Guarantee

When one person signifies to perform the contract or discharge the liability incurred to the
third party, on behalf of the second party, in case he fails, then there is a contract of
guarantee. In this type of contract, there are three parties, i.e. The person to whom the
guarantee is given is Creditor, Principal Debtor is the person on whose default the
guarantee is given and the person who gives guarantee is Surety.

Three contracts will be there, first between the principal debtor and creditor, second
between principal debtor and surety, third between surety and the creditor. The contract can
be oral or written. There is an implied promise in the contract, that the principal debtor will
indemnify the surety for the sums paid by him as an obligation of the contract provided they
are rightfully paid. The surety is not entitled to recover the amount paid by him wrongfully.

Here we have an example of the contract of guarantee, Mr. Harry takes a loan from the
bank for which Mr. Joesph has given guarantee that if Harry default in the payment of the
said amount he will discharge the liability. Here Joseph plays the role of surety, Harry is
principal debtor and Bank is the creditor.
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Key Differences Between Indemnity and Guarantee

The following are the major differences between indemnity and guarantee:

1. In the contract of indemnity one party makes promise to the other that he will
compensate for any loss occurred to the other party because of the act of the
promisor or any other person. In the contract of guarantee, one party makes promise
to the other party that he will perform the obligation or pay for the liability, in case of
default by a third party.
2. Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section
126, Guarantee is defined.
3. In indemnity there are two parties, indemnifier and indemnified but in the contract of
guarantee there are three parties i.e. debtor, creditor and surety.
4. The liability of the indemnifier in the contract of indemnity is primary whereas if we
talk about guarantee the liability of surety is secondary because the primary liability is
of the debtor.
5. The purpose of the contract of indemnity is to save the other party from suffering loss.
However, in case of a contract of guarantee, the aim is to assure the creditor that
either the contract will be performed or liability will be discharged.
6. In the contract of indemnity, the liability arises when the contingency occurs while in
the contract of guarantee, the liability already exists.

Conclusion

After having a deep discussion on the two, now we can say that these two types of contract
are different in many respects. In indemnity, the promisor cannot sue the third party, but in
case of guarantee the promisor can do so because after discharging the creditor’s debts he
gets the position of the creditor

DEFINE PARTNERSHIP. WHAT ARE THE ESSENTIALS OF PARTNERSHIP.

1. Introduction:
A partnership is mean of bringing together the person who can contributes capital skill for
expansion of business. This type of business is very popular in our country.
2. Definition:
According to Sec. 4
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“Partnership is the relation between persons who have agreed to share the profits of
a business carried on by all or any one of them acting for all”.
3. Elements of partnership:
Following are the features of partnership.
(i) It is the result of an agreement.
(ii) Agreement is between two or more persons.
(iii) It is organized to carry on some business.
(iv) Persons should be agree to share the profit of business.
(v) Business is to be carried on by all or any of them acting for all.
4. Feature of partnership:
Following are the essentials of partnership.
(I) Agreement:
Partnership is the result of agreement without it partnership can not be formed. It may be
written or oral.
(II) Registration:
Registration of partnership is not necessary.
(III) Number of patners:
There must be two member.
(IV) Business:
The object of partnership is to carry on business.
(V) Unlimited liability:
The liability of partner is unlimited to the invested.
(VI) Profit and loss distribution:
Profits is distributed among the partners according to their agreement in case of loss all the
partners share in it.
Case law
P. L. D 1971 Lah. 396
It was held that where a partnership deed instead of fixing the shares of the partners
incorporates the provisions of partnership act in the deed, the shares of the partners will be
governed by he partnership act.
(VII) Legal entity:
Partnership has not separate entity from its member.
(VIII) Management:

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All the partner can participate activity in the affairs of business.
(IX) Payment of tax:
Each partner pays tax on his share of profit individually.
(X) Co-operation:
The success of the business depends upon mutual trust and confidence.
(XI) Share in capital:
Capital of the firm is supplied by the all partners according to the agreement.
(XII) No audit:
In the business of partnership no audit is necessary.
(XIII) Mutual agency:
Business may be carried on by all or any of them acting for all. Each is a principal and an
agent.
(XIV) Transfer of interest:
A partner cannot transfer his interest with out the consent of other partners.
(XV) Dissolution:
Partnership is dissolved easily. It operates the pleasure of partner.
5. Kinds of partnership:
Following are the kinds of partnership.
(I) Partnership at will:
If no provision is made in the agreement regarding the duration of the partnership it is called
partner ship at will.
(II) Particular partnership:
Such partnership is formed to do a particular business.
(III) Limited partnership:
The liability of limited partner is limited to the extent of his investment in the business.
(IV) Registered partnership:
The registration of partnership is not compulsory when a partnership is registered. It is
called registered partnership.
(V) Un-registered partnership:
Partnership which is not registered. It is called unregistered partnership.
6. Conclusion:
To conclusion it can be said that, A partnership is a form of business. It has at least
two member. Who joined capital or services for prosecuting of some business.

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Following are the important kinds or types of partners :

1. Active Partner :-
A person who provides his share in capital and also takes active part in the management.
The development of business depends upon the active partners.

2. Sleeping or Dormant Partners :-

These partners only provide capital and also share the profit and loss of the business. A
sleeping partner does not take part in the management of a firm. These are not know to
public as a partner.

3. Silent Partner :-
A silent partner is known to the public as a partner. He does not participate in the affairs of
the management. But be is liable to pay debts of the firm.

4. Secret Partner :-
He takes active part in the business but public does not know him as a partner of the firm.
He is liable to pay all the debts of the firm.

5. Nominal Partner :-
These partners do not share the profit and loss the firm. These do not participate in the
management of a firm. A firm only uses the name and goods reputation of the partners. So
these are called nominal partners.

6. Minor Partner :-
A minor may become partner with the consent all the partners. A minor is only admitted in
the profits of the business only. He has no liability of loss.

7. Senior Partner :-
A person who is playing important role in the management according to his ability,
experience and capital, is called senior partner.

8. Junior Partner :-

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A person who has small investment in the firm and has a limited experience of business is
called junior partner.

9. Limited Partner :-
A partner whose loss responsibility is restricted to his share only is called limited partner. He
cannot take post in the management of a firm.

10. Unlimited Partner :-

When the liability of the partner is unlimited he is called unlimited partner. The debts of firm
can be paid even by the personal property of the partner.

If there is written partnership deed rights and duties of partners will be in accordance to it. In
the absence of partnership deed, mutual rights and duties of partners are governed by
partnership act. According to partnership act, the rights and duties of partners are as
follows:

RIGHTS OF PARTNERS
(1) Right to Take Part in Management : Every partner has the right to take active part in the
management and operation of the business of the firm.
(2) Right to Express Opinion : Every partner has right to express his views and give advice
to other partners for the benefits of business. These opinion and advises may be accepted
or rejected by the other partners. However, no major business decisions can be taken
without the unanimous will of all the partners.
(3) Right to Inspect and Take Copies of Accounts ; Every partner has right to inspect the
books of accounts of the firm. They can also obtain copies of account.
(4) Right to Share Profit ; Every partner right to share the profit of business. They can share
the profit equally or in the agreed ratio.
(5) Right to have Interest : Partners cannot demand any interest on their capital investment.
But they have right to get up to 10% interest on loans and advances made by them to the
partnership firm.
(6) Right to be Indemnified ; Every partner is entitled to get compensation from the
partnership firm is respect of liabilities incurred and payment made by him. He should also
be compensated for the losses caused by other partners.
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(7) Right to Property ; Every partner has right to use the property of the partnership firm for
the benefit of the firm. They should not use the business property for their personal
purposes.
(8) Right to Leave the Firm ; Every partner has right to leave the firm with the consent of
other partners.
(9) Right to Ownership : Every partner has right on the property of the firm. Thus, property of
the firm cannot be sold by one partner without the consent of other partners.
(10) Right to Dissolve : A partner has the right to dissolve the partnership with the consent of
all partners. Even, if other partners refuse then also he can dissolve the partnership by
informing other partners.

DUTIES OF PARTNERS
(1) To share Losses : In case of loss, it is the duty if every partner to bear the loss equally or
in the profit sharing ratio.
(2) To Work Faithfully : Partnership is based on mutual trust and confidence of the partners.
It is the duty of every partner to be honest and loyal to other partners as well as to the firm.
(3) To Compensate : It is the duty of every partner to compensate the losses or damage to
the firm or to others due to his negligence or deliberate misconduct.
(4) To Work Without Remuneration ; Partnership is operated either by all partners or by any
of them acting for all. It is the duty of every partner to work in the firm without charging and
expecting remuneration. However, the partner can demand remuneration if it is mentioned in
the agreement.
(5) To Act Within Authority : It is the duty of every partner to act within the scope of the
authority entrusted to him.
(6) To Maintain Current Account : It is the duty of every partner to maintain proper and
correct books of accounts, so that they may give true and fair view of the business.
(7) Not to Run Competitive Business : A partner should not make any secret profit by way of
commission from the partnership business. Similarly, the property of the firm including
goodwill should not be used for personal purposes.

If there is written partnership deed rights and duties of partners will be in accordance to it. In
the absence of partnership deed, mutual rights and duties of partners are governed by
partnership act. According to partnership act, the rights and duties of partners are as
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follows:

RIGHTS OF PARTNERS

 Right to Take Part in Management :

 Right to Express Opinion :
 Right to Inspect and Take Copies of Accounts ;
 Right to Share Profit ;
 Right to have Interest :
 Right to be Indemnified ;
 Right to Property ;
 Right to Leave the Firm ;
 Right to Ownership :
 Right to Dissolve :

DUTIES OF PARTNERS

 To share Losses :
 To Work Faithfully :
 To Compensate :
 To Work Without Remuneration ;
 To Act Within Authority :
 To Maintain Current Account :
 Not to Run Competitive Business :

PROCEDURE FOR THE REGISTRATION AND DISSOLUTION OF A PARTNERSHIP

FIRM

Registration of Firm:

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Under the Indian Partnership Act, 1932, the registration of the firm is not compulsory.
Because an unregistered firm suffers from certain limitations, hence the registration of the
firm is desirable. Registration can be done at any time.

The registration of partnership firm involves the following procedure:

The firm will have to apply to the Registrar of Firms of the respective State Government in a
prescribed application form. The form should be duly signed by all the partners.

The application form should contain the following information:

1. The firm-name.

2. The name of business place.

3. Names of other places, if any, where the firm is carrying on its business.

4. Date of commencement of business.

5. Date when each partner joined the firm.

6. Full names and permanent addresses of all the partners.

7. The duration of the firm, if any.

When the Registrar of Firms is satisfied that all formalities relating to registration have been
fully complied with, he makes an entry in the Register of Firms. Thus, the firm is considered
to be registered. The Registrar issues a certificate called ‘Registration Certificate’ to the firm.
The Register of Firm remains open for inspection on payment of prescribed fee for the
purpose.

Dissolution of Firm:

There is a difference between the dissolution of partnership and dissolution of firm.

Dissolution of partnership occurs when a partner ceases to be associated with the business,
whereas dissolution of firm is the winding up the business.

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In other words, in case of dissolution of partnership, the business of the firm does not come
to an end but there is a new agreement between the remaining partners. But in case of
dissolution of firm, the business of the firm is closed up. In brief, dissolution of partnership
does not imply the dissolution of firm. But, dissolution of firm implies dissolution of
partnership also.

Following are the various ways in which a firm may be dissolved:

1. Dissolution by Agreement:

The partnership firm may be dissolved in accordance with a contract already made between
the partners.

2. Compulsory Dissolution:

A firm stands compulsorily dissolved under the following circumstances:

(a) By the adjudication of all the partners or of all the partners but one as insolvent, or

(b) By the happening, of any such event that makes the business unlawful.

3. Dissolution due to Contingencies:

A firm stands dissolved on the happening of the any of the following contingencies:

(a) On expiry of partnership period, if constituted for a fixed period.

(b) On completion of the firm’s venture for which the firm was formed.

(c) On the death of a partner.

(d) On the adjudication of a partner as an insolvent.

4. Dissolution by Court:

Under any of the following cases, a court may order the dissolution of a firm:

(a) Any partner has become of unsound mind.

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(b) Any partner has become permanently incapable of performing his duties as a partner.

(c) A partner’s misconduct is likely to affect prejudicially the business of the firm.

(d) A partner willfully commits breach of the partnership agreement.

(e) A partner transfers his interest in the firm, but unauthorized, to a third party.

(f) The business of the firm can be carried on at loss only.

(g) It is just and equitable, on the basis of any other reasonable ground, that the firm should
be dissolved.

Definition and nature of a company

A company can be defined as a group of persons associated together for the purpose of
carrying on a business, with a view to earn profits. The word ‘Company’ is an amalgamation
of the Latin word ‘Com’ meaning “with or together” and ‘Pains’ meaning “bread”. Thus, a
company is nothing but a group of persons who have come together or who have
contributed money for some common person and who have incorporated themselves into a
distinct legal entity in the form of a company for that purpose.
There is very good definition by Lord Justice Lindey, “A company is an association of many
persons who contribute money or money’s worth to a common stock and employ it in some
trade or business and who share the profit and loss arising there from. The common stock
so contributed is denoted in money and is the capital of the company. The persons who
contribute it or to whom it belongs are members. The proportion of capital to which each
member is entitled is his share. The shares are always transferable although the right to
transfer is more or less restricted.”
Characteristics of a Company
A company as an entity has several distinct features, which together make it a unique
organization. The following are the defining characteristics of a company: -
1. Separate Legal Entity
On incorporation under law, a company becomes a separate legal entity as compared to its
members. The company is different and distinct from its members in law. It has its own
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name and its own seal, its assets and liabilities are separate and distinct from those of its
members. It is capable of owning property, incurring debt, borrowing money, having a bank
account, employing people, entering into contracts and suing and being sued separately.
The importance of the separate entity of the company was however firmly established in the
following case.
Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots business to a newly
formed company for £ 30,000. His wife, one daughter and four sons took up one share of £
1 each. S took 23,000 shares of £1 each and £ 10,000 debentures in the company. The
debentures gave S a charge over the assets of the company as the consideration for the
transfer of the business. Subsequently when the company was wound up, its assets were
found to the worth £ 6,000 and its liabilities amounted to £ 17,000 of which £ 10,000 were
due to S (secured by debentures) and £ 7,000 due to unsecured creditors, the unsecured
creditors claimed that S and the company were one and the same person and that the
company was a mere agent for S and was hence they should be paid in priority to S. Held,
the company was, in the eyes of the law, a separate person independent from S and was
not his agent. S, though virtually the holder of all the shares in the company, was also a
secured creditor and was entitled to repayment in priority to the unsecured creditors.
2. Limited Liability
The liability of the members of the company is limited to contribution to the assets of the
company up to the face value of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him when called upon to pay and nothing more, even
if liabilities of the company far exceeds its assets. On the other hand, partners of a
partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay
the liabilities of the firm, the creditors can force the partners to make good the deficit from
their personal assets. This cannot be done in case of a company once the members have
paid all their dues towards the shares held by them in the company. For example, if the face
value of the share in a company is Rs. 10 and a member has already paid Rs. 5 per share,
he can be called upon to pay not more than Rs. 5 per share during the lifetime of the
company.
3. Perpetual Succession
A company does not die or cease to exist unless it is specifically wound up or the task for
which it was formed has been completed. Membership of a company may keep on changing

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from time to time but that does not affect life of the company. Death or insolvency of
member does not affect the existence of the company.
4. Separate Property
A company is a distinct legal entity. The company’s property is its own. A member cannot
claim to be owner of the company’s property during the existence of the company.
5. Transferability of Shares
Shares in a company are freely transferable, subject to certain conditions, such that no
shareholder is permanently or necessarily wedded to a company. When a member transfers
his shares to another person, the transferee steps into the shoes of the transferor and
acquires all the rights of the transferor in respect of those shares.
6. Common Seal
A company is a artificial person and does not have a physical presence. Therefore, it acts
through its Board of Directors for carrying out its activities and entering into various
agreements. Such contracts must be under the seal of the company. The common seal is
the official signature of the company. The name of the company must be engraved on the
common seal. Any document not bearing the seal of the company may not be accepted as
authentic and may not have any legal force.
7. Capacity to sue and Being Sued
A company can sue or be sued in its own name as distinct from its members.
8. Separate Management
A company is administered and managed by its managerial personnel i.e. the Board of
Directors. The shareholders are simply the holders of the shares in the company and need
not be necessarily the managers of the company.

COMPANY LAW
The word company is derived from a Latin word `companies`
it means a group of persons who took their need together.
In India law relating to companies are contained in The companies Act 1956.
Meaning and definition
A company is a voluntary association of persons formed for some common purpose with
capital divisible into parts known as shares .

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Justice Lindlay defines company “as an association of many persons who contribute money
or money’s worth to a common stock and employ it in some trade or business and who
share the profits arising there from”
According to companies act a company means a company formed and registered under
companies act.
Features of a Registered comapny
1. Voluntary Association
A company is voluntary association of persons who have come together for a common
object which generally is to earn profit.
The activities of this association are governed by the law and are limited by its
memorandum of association
2. Incorporated association
A company comes into existence on incorporation or registration under the companies act.
Minimum number of persons required for the purpose of incorporation is seven in case of a
public company and two in case of a private company.
3. Separate legal entity
On incorporation company gets personality which is separate and distinct from those of its
members. Company is an artificial person created by law.
4. Separate property
The company can own , enjoy and dispose off its property in its own name.

5. Legal restrictions
The formation, working and winding up of a company are strictly governed by laws, rules
and regulations
6. Perpetual succession
unlike a person a company never dies. Its existence is not affected in any way by the
death or insolvency of any shareholder. Members may come and members may go , but the
company continues its operations until it is wound up.
7. Common seal
As a company is an artificial person it cannot sign its name on a contract. So it function with
the help of seal. All contract entered into by the members will be under the common seal of
the company.
8. Share capital

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A company mobilizes its capital by selling its shares. Those persons who buy these shares
become its share holders and thereby become members in it
9. Limited Liability
In case of limited companies liability of members will be limited to the amount unpaid on the
shares.
10. Transferability of shares.
Members can freely transfer and sell their shares .The right to transfer share is a statutory
right of members.
Ownership and management
The owners of a company are its share holders.
The affairs of the company are managed by their representatives known as Directors

Distinction between public company & private company.

No. Private Co. Public Co.
1. Minimum no of members is 2 Minimum no of members is 7

2. Maximum no members is 50 No maximum limit

3. Minimum paid up capital is Rs 1 lakh Minimum paid up capital is 5 lakh

4. Name must end with the word ‘Pvt Ltd’ Name must end with the word ‘Ltd’

5. Can commence business immediately It shall have to wait until it receive

after incorporation the certificate for commencement
of business.

6. It cannot invite public to subscribe its It can invite public to subscribe its
shares and debentures shares and debentures

7. Minimum subscription is not required for Minimum subscription is required

allotment of shares. for allotment of shares.

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9

8. Need not hold statutory meeting of the It has to hold a statutory meeting
members. and file a stat: report.

9. Quorum required for a meeting is 2. Quorum required for a meeting is 5

10. There is restriction of transfer of shares Shares can be freely transferred.

11. Not required to issue prospectus. Must issue prospectus.

13. Two directors Three directors

Formation of a company
The procedure or formation of a company may be divided into four stages;
1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business
I. Promotion
It is the first stage in the formation of a company.
In this stage the idea of carrying on a business is conceived by a person or a group of
persons called promoters. They make detailed investigation about the workability of the
idea, amt of capital required, operating expense etc etc..
Before a company an be formed, there must be some persons who have an intention to
form a company and who take the necessary steps to carry that intention into operation.
Such persons are called promoters.
The promoter is the person who brings a company into existence.
II. Incorporation
A company is said to be incorporated when it is registered with the registrar under the
companies act. The certificate of incorporation is the birth certificate of the company. A
company comes into existence from the date mentioned in the certificate.
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Procedure for registration
The promoter has to first decide the proposed form of company as whether it is to be a
public company or a private company.
They may form the company with limited liability , unlimited liability or limited by guarantee.
They have to decide the name of the company agreeable and desirable to all. For eg if the
name proposed is identical with or closely resembles the name of an existing company , it is
undesirable.
For getting registration an application has to be made to the registrar. The application shall
be accompanied by the following documents:
1. Memorandum of association
2. Articles of association
3. A statement of nominal capital
4. A notice of address of the registered office of the company.
5. A list of directors and their consent to a act signed by them
6. A declaration that all the requirements of the act have been complied with. Such
declaration shall be signed by an advocate of high court or supreme court or a chartered
accountant who is engaged in the formation of company
Certificate of incorporation
If the registrar is satisfied that all the requirements of the act have been complied with he
shall register the company and issue a certificate of incorporation.
Conclusive proof
Once a company is registered incorporation cannot be challenged subsequently. The
certificate of incorporation is a conclusive evidence of the fact that-
1. all the requirements of the act have been complied with.
2. company is duly registered.
3. company came into existence on the date of certificate.
Advantages of incorporation
1. Transferability of shares
2. Separate legal entity
3. Perpetual succession
4. Common seal
5. Separate property
6. Capacity to sue

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III. Raising of capital
After incorporation a company can raise capital by issuing shares. A private company
cannot issue shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be issued
to the public. Those who are intended in purchasing share are required to send their
application money to company's banker.
On the last date fixed for the receipt of application if the company has received application
equal to minimum subscription the directors will start with allotment of shares.
IV. Commencement of business
A private company may commence its business immediately after incorporation.
But a public company cannot commence business immediately after incorporation but it has
to obtain a certificate of commencement from the registrar.
MEMORANDUM OF ASSOCIATION
Memorandum of association for a company is like the constitutional law for a country. It is
the document which contains the rules regarding constitution and activities of the company.
It is a fundamental charter of the company.
It defines the extent of powers of the company, beyond that it cannot go. It is a document
filed at the time of incorporation.
It is a public document ie any interested public can get a copy on payment of prescribed
fees.
Contents of memorandum
1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.
1. Name clause
The first clause of memorandum requires a company to state its name
Rules:-Should not adopt identical with or resembles that of an existing company. Ltd for
public company and Pvt Ltd for private company. Should not use a name prohibited by the
Name and Emblems Act.
2. Registered office clause

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The memorandum must specify the state in which the registered office of the company is to
be situated.
3. Object clause
This is the most important clause of the memorandum of association. It defines the object of
the company and the extent of its powers. The object of the company must be state very
clearly and a company cannot do anything beyond object clause. The objects of the
company shall not be illegal or against public policy.
4. Liability clause
This clause state the nature of liability of members.
5. Capital clause
This clause contains the total amount of capital with which the company is registered. This
capital is known as authorized capital or nominal capital or registered capital.
6. Association clause or subscription clause
The memorandum concludes with subscription clause. The memorandum must be
subscribed by at least 7 persons in case of public company and 2 in case of private
company. Each subscriber must sign the document and write the number of shares taken by
him.

Doctrine of ultra vires

Memorandum contains the rules regarding constitution and activities of the company. It is
a fundamental charter of the company. It defines the extent of powers of the company,
beyond that it cannot go.
A co can act and function within the limits of memorandum. Any act which is beyond the
memorandum is ultra vires the company. Such acts are void .
Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.
The purpose of this doctrine is to helps the shareholders , creditors and every third person
dealing with the company to ensure that their investment are not diverted to unauthorized
objects.

ARTICLES OF ASSOCIATION
Articles of association are the internal regulations of the company and are for the benefit of
shareholders. These are the rules and regulation relating to the internal management of a

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company. The article define the mode and form on which the business of the company is to
be carried on.

DIFFERENCE BETWEEN MOA AND AOA

The fundamental points of distinction between MOA and AOA are as follows:

BASIS FOR MEMORANDUM OF

ARTICLES OF ASSOCIATION
COMPARISON ASSOCIATION

Memorandum of Association
Articles of Association (AOA) is
(MOA) is a document that contains
a document containing all the
Definition all the fundamental data which are
rules and regulations that
required for the company
governs the company
incorporation.

MOA must be registered at the time The articles may or may not be
Registration
of incorporation. registered.

The articles demonstrate

The Memorandum is the charter, obligations, rights and powers of
which characterizes and limits individuals, who are endowed
Scope
powers and constraints of the with the responsibility of running
organization. the organization and
administration.

It is subordinate to the
Status Supreme document.
memorandum.

The articles are constrained by

The memorandum cannot give the
the act, but they are also
company power to do anything
Power subsidiary to the memorandum
opposed to the provision of the
and cannot exceed the powers
companies act.
contained therein.

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The articles can be drafted
A memorandum must contain six
Contents according to the decision of the
clauses.
Company.

The articles provide the

The memorandum contains the
regulations by which those
Objectives objectives and powers of the
objectives and powers are to be
company.
conveyed into impact.

Any provision, as opposed to

The memorandum is the dominant
Validity memorandum of association, is
instrument and controls articles.
invalid.

TYPES OF COMPANIES

There are different types of company, which can be classified on the basis of formation,
liability, ownership, domicile and control.

1. Types Of Companies On The Basis Of Formation Or Incorporation

a. Chartered Companies
Companies which are incorporated under special charter or proclamation issued by the
head of state, are known as chartered companies. The Bank Of England, The East India
Company, Chartered Bank etc. are the examples of chartered companies.

b. Statutory Companies
Companies which are formed or incorporated by a special act of parliament, are known as
statutory companies. The activities of such companies are governed by their respective acts
and are not required to have any Memorandum or Articles Of Association.

c. Registered Companies
Registered companies are those companies which are formed by registration under the
Company Act. Registered companies may be divided into two categories.
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* Private Company
A company is said to be a private company which by its Memorandum of Association
restricts the right of its members to transfer shares, limits the number of its members and
does not invite the public to subscribe its shares or debentures.
* Public Company
A company, which is not private, is known as public company. It needs minimum seven
persons for its registration and maximum to the limit of its registered capital. There is no
restriction on issue or transfer of its shares and this type of company can invite the public to
purchase its shares and debentures.

2. Types Of Companies On The Basis Of Liability

Registered companies are divided into two types, namely, companies having limited liability
and companies having unlimited liability.

a. Companies Having Limited Liability

This liability can be limited in two ways:
* Liability Limited By Shares
These are those companies in which the capital is divided into shares and liability of
members (share holders) is limited to the extent of face value of shares held by them. This
is the most popular class of company.
* Liability Limited By Guarantee
These are such companies where shareholders promise to pay a fixed amount to meet the
liabilities of the company in the case of liquidation.

b. Companies Having Unlimited Liability

A company not having any limit on the liability of its members as in the case of a partnership
or sole trading concern is an unlimited company. If such a company goes into liquidation,
the members can be called upon to pay an unlimited amount even from their private
properties to meet the claim of the creditors of the company.

3. Types Of Companies On The Basis Of Ownership

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a. Government Companies
A government company is a company in which at least 51% of the paid up capital has been
subscribed by the government.

b. Non-government Companies
If the government does not subscribe a minimum 51% of the paid up capital, the company
will be a non-government company.

4. Types Of Companies On The Basis Of Domicile

a. National Companies
A company, which is registered in a country by restricting its area of operations within the
national boundary of such country is known as a national company.

b. Foreign Companies
A foreign company is a company having business in a country, but not registered in that
country.

c. Multinational Companies
Multinational companies have their presence and business in two or more countries. In other
words, a company, which carries on business activities in more than one country, is known
as multinational company.

5. Types Of Companies On The Basis Of Control

a. Holding Companies
A holding company is a company, which holds all, or majority of the share capital in one or
more companies so as to have a controlling interest in such companies.

b. Subsidiary Company
A company, which operates its business under the control of another company (i.e holding
company), is known as a subsidiary company.

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WINDING UP OF A COMPANY

Winding up of a Company by Tribunal

As per companies act 2013, a company can be wound up by a Tribunal, if:

 The company is unable to pay its debts.

 The company has by special resolution resolved that the company be wound up by
the Tribunal.

 The company has acted against the interest of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign states, public order,
decency or morality.

 If the company has not filed financial statements or annual returns for the
preceding five consecutive financial years.

 If the Tribunal is of the opinion that it is just and equitable that be company should
be wound up.

 If the affairs of the company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purposes or the persons
concerned in the formation or management of its affairs have been guilty of fraud,
misfeasance or misconduct in connection therewith and it is proper that the
company be wound up.

A Petition can be filed by

- Creditor or creditors
- Any contributor
- Registrar
- Central Government

Voluntary Winding up of a Company

The winding up of a company can also be done voluntarily by the members of the Company,
if:

 If the company passes a special resolution for winding up of the Company.

 The company in general meeting passes a resolution requiring the company to be

wound up voluntarily as a result of the expiry of the period of its duration, if any,
fixed by its articles of association or on the occurrence of any event in respect of
which the articles of association provide that the company should be dissolved.

Procedure for Compulsory Winding up

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1. Petition to be filed in High Court

2. Petition to be filed with affidavit showing ground for appointing provisional liquidator
3. Advertised within 14 days in the newspaper
4. Certified copy of winding up order passed by court should be filed with concerned
ROC along with prescribed fees within 30 days
5. Winding up proceedings will be carried out by official liquidator till dissolution.

Procedure for Voluntary Winding up

1. All director or ateleast majority of directors have to make declaration within 5 weeks
preceding date of General Meeting, that company has no debts at all or it will be able
to pay all debts within 3 years from the date of commencement of winding up
proceeding.
2. Declaration should be filed with ROC before date of General Meeting along with
Auditor report on Profit and Loss account and balance sheet
3. One or more liquidators are to be appointed and their remuneration should be fixed
4. Not ice of such resolution by advertisement should be published within 14 days in
official gazette and also in some newspaper.
5. Notice of appointment of liquidator to be given to ROC
6. Voluntary winding up commences at time when resolution for voluntary winding up is
passed.

POWERS OF DIRECTOR

Statutory Power

1. Power to make call on shares in respect of unpaid money

2. Power to authorize lack of shares
3. Power to issue debenture whether in or outside India
4. Power to invest funds
5. Power to borrow money otherwise than on debenture.
6. Power to make loan or give guarantee in respect of loans but a banking company
does not require any resolution by the board
7. Power to approve the financial statement and boards report
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8. Power to diversify the business of the company
9. Power to approve amalgamation merger or reconstruction
10. Power to take over a company or acquire a company or substantial stake in another
company

Other Power

1. Power to fill casual vacancy

2. Power to appoint first auditor of the computer
3. Power to make political contribution
4. Power to appoint alternate directos
5. Power to appoint additional director
6. Power to declare interim dividend
7. Power to appoint or remove key managerial personnel.
8. Power to declare solvency, where the company winds up voluntarily.
9. Power to recommend the rate of dividend on the shares of the company subjected to
approval by shareholder of the company.

Power Only With A Resolution

1. To sell or lease any assets of the company.

2. To allow time to the director for the repayment of the loan.
3. To borrow money in excess of paid up capital and free reserves
4. To appoint a sole agent for more than 5 years
5. To issue bonus shares and for reoprganisation of share capital
6. To contribute money for charitable purpose exceeding Rs. 50000/- or 5% of the
average profits of 3 years whichever is greater.

Manager Power Of Director

1. Power to contract with the third party

2. Power to recommend dividend
3. Power to allot, forgeit or transfer shares of a company
4. Power to take decision regarding terms and condition for the issue of debenture.
5. Power to form policy to issue instructions for the efficient running of business
6. Appoint managing director and secretary.

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Duties Of Director

1. To form policy and determine objectives of a company

2. To delegate power to any committee of the article permit
3. To issue instruction to subordinates for the implementation of policy to review
company’s progress.
4. To appoint their subordinate officer, M.D, Manager, Secretary, other employees
5. To act in accordance with article of the company
6. To act in good faith in order to promote the objects of the company. However the
promotion of the object should be for the benefits of a company
7. To perform duties with due and reasonable care and diligence.
8. Duty to not achieve or attempt to achieve any undue gain or advantage either to
himself or to his relatives

Specific Duties

1. Must disclose his shareholding in a company

2. Disclose his interest in contract of the company
3. Disclose name, address and occupation
4. Duty to take up qualification shares within 2 months after his appointment
5. Decide minimum subscription and issue prospects/ It must not contain any false or
misleading statement.
6. Board of Director or requisition must be ready to cal on an extraordinary general
meeting.
7. Duty to call statutory and annual general meeting of the company.
8. To ensure full and correct disclosure in prospectus of all matters as required by law.
9. To sign the prospectus before it has been delivered to the Registrar.
10. To deliver the prospectus of the Registrar before the prospectus is issued to the
public.
11. To deposit application money in a scheduled bank. They shall not utilize the money
other than purpose mentioned in the Act.
12. To file return of allotment of securities with the registrar.
13. To declare dividend and arrange for the payment
14. To file with registrar the reports and resolution as required by the act.
15. To issue forfeit and transfer shares
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16. To perform all other duties as assigned by the Act.

Liabilities Of Director

The directors will have to make good for any loss on account of –

1. An ultra vires act where the director have entered into a contract beyond their power.
In such case directors are personally liable for the loss caused to the company.
2. Breach of trust where the director make a secret profit out of the business
3. For negligence or for not performing his duties honestly and carefully
4. For dishonest act to make personal profits or the activity of the co director

Liability Towards 3rd Parties

The director will be personally liable towards 3rd parties :

1. For any mis statement in the prospectus for acting fraudulently the director shall be
liable to pay compensation to every person who subscribe for shares on the faith of
such prospectus.
2. For the failure to repay applicable money on non receipt of min subscription.
3. Failure to repay application money on refusal to list shares by the stock exchange.
4. For acting in their own name without mentioning the name of the company
5. For acting beyond the power of the company
6. When the liability has been made unlimited by the memorandum of association.
7. For any liability at the company at the time of winding up.

Criminal Liability

Will be liable with a fine and imprisonment or both for fraud of non compliance of any
statutory provision.

1. For misstatement in prospectus

2. Failureto file return on allotment with the registrar
3. Failure to give the notice to the registrar for conversion of share into stock.
4. Failure to issue share certificate and debenture certificate.
5. Failure to maintain register of the members and register of debenture holder
6. Default in holding annual General Meeting
7. Failure to provide annual account and Balance sheet
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8. For holding the office of director in more than 15 companies.

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