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LESSON : 1
MEANING, CHARACTERISTICS AND TYPES OF A COMPANY
STRUCTURE
1
...
1
Introduction
1
...
3
Characteristics of a Company
1
...
5
Types of Company
1
...
7
Keywords
1
...
9
Suggested Readings
1
...
(b)
Make a distribution between company and partnership firm
...
1
...
These organization require big investments and the risk involved is very
high
...
Joint Stock Company form
of business organization has become extremely popular as it provides a solution to
(1)
overcome the limitations of partnership business
...
The giant Indian Companies may include the names like Reliance, Talco
Bajaj Auto, Infosys Technologies, Hindustan Lever Ltd
...
,
and Larsen and Tubro etc
...
2
MEANING OF COMPANY
Section 3 (1) (i) of the Companies Act, 1956 defines a company as “a company
formed and registered under this Act or an existing company”
...
This definition does not reveal the distinctive
characteristics of a company
...
Being a mere creature of law, it possesses only those properties which the
character of its creation of its creation confers upon it either expressly or as incidental
to its very existence”
...
The common
stock contributed is denoted in money and is the capital of the company
...
The proportion of capital to
which each member is entitled is his share
...
(2)
According to Haney, “Joint Stock Company is a voluntary association of
individuals for profit, having a capital divided into transferable shares
...
From the above definitions, it can be concluded that a company is registered
association which is an artificial legal person, having an independent legal, entity with
a perpetual succession, a common seal for its signatures, a common capital comprised
of transferable shares and carrying limited liability
...
3
CHARACTERISTICS OF A COMPANY
The main characteristics of a company are :
1
...
A company is created when it is registered under
the Companies Act
...
It may be noted in this connection that Section 11 provides that an
association of more than ten persons carrying on business in banking or an association
or more than twenty persons carrying on any other type of business must be registered
under the Companies Act and is deemed to be an illegal association, if it is not so
registered
...
These persons will subscribe their names
to the Memorandum of association and also comply with other legal requirements of
the Act in respect of registration to form and incorporate a company, with or without
limited liability [Sec 12 (1)]
(3)
2
...
A company is an artificial person
...
It exists in the eyes of the law and cannot act on its own
...
It was rightly pointed out
in Bates V Standard Land Co
...
But for many purposes, a company is a legal person like a natural person
...
However, it is not a citizen as it cannot enjoy the rights under the Constitution
of India or Citizenship Act
...
T
...
It should be noted that though a company does not possess fundamental
rights, yet it is person in the eyes of law
...
Justice Hidayatullah once remarked that if all the members are citizens of India,
the company does not become a citizen of India
...
Separate Legal Entity : A company has a legal distinct entity and is independent
of its members
...
They cannot sue individual members
...
The property of the company is to be used for the benefit of the company and nor for
(4)
the personal benefit of the shareholders
...
At the same time the members of
the company can enter into contracts with the company in the same manner as any
other individual can
...
Where a company is required to pay Income-tax on its profits and
when these profits are distributed to shareholders in the form of dividend, the
shareholders have to pay income-tax on their dividend of income
...
The principal of separate of legal entity was explained and emphasized in the
famous case of Salomon v Salomon & Co
...
The facts of the case are as follows :
Mr
...
Ltd
...
The purchase consideration was paid by the
company by allotment of & 20,000 shares and $ 10,000 debentures and the balance in
cash to Mr
...
The debentures carried a floating charge on the assets of the
company
...
Saloman and his two sons became the directors of this company
...
After a short duration, the company went into liquidation
...
Thus its assets were running short of
its liabilities b $11,000
The unsecured creditors claimed a priority over the debenture holder on the
ground that company and Saloman were one and the same person
...
Saloman’s case established beyond doubt that in law a registered company is an
entity distinct from its members, even if the person hold all the shares in the company
...
In each case the
company is a separate legal entity
...
Lee’s Airforming Ltd
...
C
...
, Lee held 2999 shares
...
He died in an aircrash while working
for the company
...
Court held that Lee was a separate person from the company he formed,
and compensation was due to the widow
...
The principle of separate legal entity of a company has been, in fact recognized
much earlier than in Saloman’s case
...
(1886 ILR 13 Cal 43),
(6)
it was held by Calcutta High Court that a company was a separate person, a separate
body altogether from its Shareholders
...
Sheffield etc
...
The characteristic of separate corporate personality of a company was also
emphasized by Chief Justice Marshall of USA when he defined a company “as a person,
artificial, invisible, intangible and existing only in the eyes of the law
...
[Trustees of
Darmouth College v woodward (1819) 17 US 518)
4
...
A company is a stable form of business organization
...
Law creates it and law alone can dissolve it
...
“During the war all the member of one
private company , while in general meeting, were killed by a bomb
...
The company may be
compared with a flowing river where the water keeps on changing continuously, still
the identity of the river remains the same
...
5
...
As was pointed out earlier, a company being an artificial person
has no body similar to natural person and as such it cannot sign documents for itself
...
But having a legal personality,
(7)
it can be bound by only those documents which bear its signature
...
Any document bearing the common seal of the company
will be legally binding on the company
...
If
the Articles are silent, the provisions of Table-A (the model set of articles appended to
the Companies Act) will apply
...
6
...
In company limited by shares, the liability of members
is limited to the unpaid value of the shares
...
10 and a member has already paid Rs
...
3 per share during the lifetime of the company
...
7
...
In a public company, the shares are freely transferable
...
However, the articles shall prescribe the manner in which such transfer
of shares will be made and it may also contain bona fide and reasonable restrictions on
the right of members to transfer their shares
...
However, in the case of a private
company, the articles shall restrict the right of member to transfer their shares in
companies with its statutory definition
...
8
...
Although
its capital and assets are contributed by its shareholders, they are not the private and
joint owners of its property
...
9
...
Since it has a large number of members,
all of them cannot take part in the management of the affairs of the company
...
They look after the day-to-day working of the
company
...
Majority decision and centralized management compulsorily bring about unity of action
...
4
DISTINCTION BETWEEN COMPANY AND PARTNERSHIP
The difference between a company and partnership is as follows:
Company
1
...
2
...
separate entity;
uncertain life
3
...
Authority
Divorce between
Right to share mana
ownership and
gement, common and
management
ownership and
Representative
Management
...
5
...
-freely
Ordinarily no right of
transferable; transferee
transfer of share by a
gets all the rights of
partner-limited rights
the transferor
of transferee
(10)
6
...
public Co
...
7
...
Statutory books,
No legal formalities
Audit, Publication
Registration not
compulsory
...
lots of legal
no publication of
formalities
10
...
9
...
of the company
...
General
Large and unlimited
accounts etc
...
the court
...
(11)
1
...
The following are the important types
of company:
1
...
A
...
These are incorporated under a special charter by a
monarch
...
The powers and nature of business of a chartered
company are defined by the charter which incorporates it
...
It can deal with its property and bind itself to any contracts that any
ordinary person can
...
Such companies
do not exist in India
...
Statutory Companies
...
Reserve Bank of India, State Bank of India, Industrial
Finance Corporation, Unit Trust of India, State Trading corporation and Life Insurance
Corporation are some of the examples of statutory companies
...
They derive their powers from the
Acts constituting them and enjoy certain powers that companies incorporated under
the Companies Act have
...
(12)
The provisions of the Companies Act shall apply to these companies also except in
so far as provisions of the Act are inconsistent with those of such Special Acts [Sec
616 (d)]
These companies are generally formed to meet social needs and not for the purpose
of earning profits
...
Registered or incorporated companies
...
Such companies come
into existence only when they are registered under the Act and a certificate of
incorporation has been issued by the Registrar of Companies
...
Registered companies may further
be divided into three categories of the following
...
In other words, during the existence of
the company or in the event of winding up, a member can be called upon to pay the
amount remaining unpaid on the shares subscribed by him
...
A company limited by shares may be a public company or
a private company
...
ii) Companies Limited by Guarantee : These types of companies may or may not
have a share capital
...
The Articles of Association of the company state the number of member
with which the company is to be registered [Sec 27 (2)]
...
Such companies depend for their existence on entrance
and subscription fees
...
The liability of the
member is limited to the extent of the guarantee and the face value of the shares
subscribed by them, if the company has a share capital
...
The amount of guarantee of each member is in the nature of reserve capital
...
Nontrading or non-profit companies formed to promote culture, art, science, religion,
commerce, charity, sports etc
...
iii) Unlimited Companies : Section 12 gives choice to the promoters to form a
company with or without limited liability
...
An unlimited company
may or may not have a share capital
...
If the company has a share capital, the article shall state the
amount of share capital with which the company is to be registered [Sec 27 (1)]
The articles of an unlimited company shall state the number of member with
which the company is to be registered
...
On the Basis of Number of Members
On the basis of number of members, a company may be :
(1) Private Company, and (2) Public Company
...
Private Company
According to Sec
...
Where two or more persons hold share jointly, they are treated as a single member
...
A private company must use the word “Pvt” after its
name
...
The main features of a private
of a private company are as follows :
i)
A private company restricts the right of transfer of its shares
...
The articles generally state that whenever a shareholder of a
Private Company wants to transfer his shares, he must first offer them to
the existing members of the existing members of the company
...
It is done so as to preserve
the family nature of the company’s shareholders
...
Where two or more persons hold share jointly they are treated as a single
member
...
iii)
A private company cannot invite the public to subscribe for its capital or
shares of debentures
...
B
...
1956 “A public
company which is not a Private Company”,
If we explain the definition of Indian Companies Act
...
iii)
It invites the general public to purchase the shares and debentures of the
companies
(Differences between a Public Company and a Private company)
1
...
It is 2 in case of a private company
...
Maximum number : There is no restriction on maximum number of members
in a public company, whereas the maximum number cannot exceed 50 in a private
company
...
Number of directors
...
252)
4
...
In the case of a public company, the
directors must file with the Register a consent to act as directors or sign an
undertaking for their qualification shares
...
Restriction on invitation to subscribe for shares
...
A public company invites the general
public to subscribe for the shares or the debentures of the company
...
6
...
7
...
A public company may do so
...
Issue of prospectus : Unlike a public company a private company is not expected
to issue a prospectus or file a statement in lieu of prospectus with the Registrar
before allotting shares
...
Transferability of Shares
...
82)
...
10
...
A private company enjoys some special privileges
...
11
...
If the Articles of a company do not provide for a larger quorum
...
It is 2 in the case of a private company (Sec
...
Managerial remuneration
...
198)
...
13
...
A private company may commence its business
immediately after obtaining a certificate of incorporation
...
Special privileges of a Private Company
Unlike a private a public company is subject to a number of regulations and
restrictions as per the requirements of Companies Act, 1956
...
These privileges can be
studied as follows :
a)
Special privileges of all companies
...
A private company may be formed with only two persons as member
...
12(1)]
2
...
69)
...
It is not required to either issue a prospectus to the public of file statement in
lieu of a prospectus
...
Restrictions imposed on public companies regarding further issue of capital do
not apply on private companies
...
Provisions of Sections 114 and 115 relating to share warrants shall not apply to
it
...
14)
6
...
(Sec
...
It can commence its business after obtaining a certificate of incorporation
...
[Sec
...
It need not hold statutory meeting or file a statutory report [Sec
...
Unless the articles provide for a larger number, only two persons personally
present shall form the quorum in case of a private company, while at least five
member personally present form the quorum in case of a public company (Sec
...
10
...
Similarly, the provisions of the Act regarding undertaking to take up qualification
shares and pay for them are not applicable to directors of a private companies
[Sec
...
Provisions in Section 284 regarding removal of directors by the company in
general meeting shall not apply to a life director appointed by a private company
on or before 1st April 1952 [Sec
...
In case of a private company, poll can be demanded by one member if not more
than seven members are present, and by two member if not more than seven
member are present
...
179)
...
It need not have more than two directors, while a public company must have at
least three directors (Sec
...
e
...
The following special privileges and exemptions are available to an
independent private company
...
It may give financial assistance for purchase of or subscription for shares in the
company itself
...
It need not, like a public company, offer rights shares to the equity shareholders
of the company
...
The provisions of Sec
...
4
...
5
...
Some
provisions of these Sections are, however made expressly applicable
...
Many provisions relating to directors of a public company are not applicable to
an independent private company, e
...
(20)
a)
it need not have more than 2 directors
...
of directors who are to retire by rotation and the procedure relating,
there to are not applicable to it
...
d)
The provisions relating to the manner of filing up casual vacancies among
directors and the duration of the period of office of directors and the
requirements that the appointment of directors should be voted on
individually and that the consent of each candidate for directorship should
be filed with the Registrar, do not apply to it
...
f)
It may, by its Articles, Provide special disqualifications for appointment
of directors
...
h)
Sec
...
(21)
i)
An interested director may participate or vote in Board’s proceedings
relating to his concern of interest in any contract of arrangement
...
The restrictions as to the number of companies of which a person may be
appointed managing director and the prohibition of such appointment for more
than 5 years at a time, do not apply to it
8
...
9
...
When a Private company becomes a Public company
A private company shall become a public company in following cases :
i)
By default : When it fails to comply with the essential requirements of a private
company provided under Section 3 (1) (iii) Default in complying with the said
three provisions shall disentitle a private company to enjoy certain privileges
(Sec
...
ii)
A private company which is a subsidiary of another public company shall be
deemed to be a public company
...
Section 43-A
a)
Where not less than 25% of the paid-up share capital of a private company
is held by one or more bodies” corporate such a private company shall
(22)
become a public company from the data in which such 25% is held by
body corporate [Sec
...
10 crores during the relevant period, such a private company shall
become a public company after the expiry of the period of three months
from the last day of the relevant period when the accounts show the said
average annual turnover [Sec
...
c)
When a private company holds not less than 25% of the paid up share
capital of a public company the private company shall become a public
company from the date on which the private company holds such 25%
[Sec
...
d)
Where a private company accepts, after an invitation is made by an
advertisement of receiving deposits from the public other than its
members, directors or their relatives, such private company shall become
a public company [Sec
...
iv)
By Conversion : When the private company converts itself into a public
company by altering its Articles in such a manner that they no longer include essential
requirements of a private company under Section 3 (1) (iii)
...
It shall comply with the procedure of
converting itself into a public company [Sec
...
The Articles of Association of such a public company may continue to have the
three restrictions and may continue to have two directors and less than seven members
...
Registrar of Companies shall be intimated
...
III
...
2
...
Holding companies, and
Subsidiary Company
Holding Company [Sec
...
A company is known as the holding company
of another company if it has control over the other company
...
A company may become a holding company of another company in either of the
following three ways :a)
by holding more than fifty per cent of the normal value of issued equity
capital of the company; or
b)
By holding more than fifty per cent of its voting rights; or
c)
by securing to itself the right to appoint, the majority of the directors of the
other company , directly or indirectly
...
Though
the two companies remain separate legal entities, yet the affairs of both the companies
are managed and controlled by the holding company
...
The annual accounts of the holding company are required to
disclose full information about the subsidiaries
...
Subsidiary Company
...
4 (I)]
...
Where a company (company S) is subsidiary of
another company (say Company H), the former (Company S) becomes the subsidiary
of the controlling company (company H)
...
On the basis of Ownership of companies
a)
Government Companies
...
It includes a company subsidiary to a government company
...
The auditors of the government company are appointed by
the government on the advice of the Comptroller and Auditor General of
India
...
Some of the examples of government
companies are - Mahanagar Telephone Corporation Ltd
...
, State Trading Corporation Ltd
...
Bharat Heavy Electricals Ltd
...
etc
...
All other companies, except the
Government Companies, are called non-government companies
...
V
...
1956 and have their registered office in India
...
b)
Foreign Companies : It means any company incorporated outside India which
has an established place of business in India [Sec
...
A company has an
(25)
established place of business in India if it has a specified place at which it carries
on business such as an office, store house or other premises with some visible
indication premises
...
1
...
A company formed and registered under the Companies Act
has certain special features, which reveal the nature of a company
...
Companies can be classified
into five categories according to the mode of incorporation on the basis of number of
members, on the basis of control, on the basis of ownership and on the basis of nationality
of the company
...
7
KEYWORDS
Company: A company means a body of individuals associated together for a common
objective, which may be business for profit or for some charitable purposes
...
Public Company: A public company means a company which is not a private company
...
Holding Company: A company shall be deemed to be the holding company to another
if that other is its subsidiary
...
(26)
1
...
Define ‘Company’
...
Explain the special privileges of a private company as compared to a public
company
...
Bring out the difference between partnership and company form of organization
...
Write notes on :
a)
Chartered Companies
b)
Government Companies
5
...
1
...
P
...
Gogna, Mercantile Law, S
...
N
...
Kapoor, Company Law, Sultan Chand & Sons, New Delhi
...
C
...
S
...
Aggarwal, Business Law, Galgotia Publishing Company, New Delhi
...
K
...
, New Delhi
...
0
2
...
2
2
...
4
2
...
6
2
...
8
2
...
2
...
2
...
2
...
2
...
10
Suggested Readings
2
...
(b)
Explain the different clauses of memorandum of association and the alterations
thereof
...
(d)
highlight the importance of constructive notice of memorandum and articles
of association
...
1
INTRODUCTION
We know that a company is a separate legal entity which is formed and registered
under the Companies Act
...
e
...
Such persons have to decide various questions such as (a) which
business they should start, (b) whether they should form a new company or take over
he business of some existing company, (c) if new company is to be started, whether
they should start a private company or pubic company, (d) what should be the capital of
the company etc
...
Thereafter, they
start their business
...
2
...
Before
a company is formed, a lot of preliminary work is to be performed
...
However, a private company can start business as soon as it obtains the
certificate of incorporation
...
The reason is
that a private company cannot invite public to subscribe to its share capital
...
These four stages are discussed as follow :
(2)
2
...
1 Promotion
The term ‘promotion’ is a term of business and not of law
...
Haney defines promotion as “ the process of organizing and planning the
finances of a business enterprise under the corporate form”
...
” First of all the idea of carrying on a business is conceived
by promoters
...
Next, the promoters make detailed study to assess the feasibility of the
business idea and the amount of financial and other resources required
...
Law does not require any qualification for the
promoters
...
From the fiduciary position of promoters, the following important results
follow:
1
...
If any secret profit is
made in violation of this rule, the company may, on discovering it, compel the
promoter to account for and surrender such profit
...
The promoter is not allowed to derive a profit from the sale of his own property
to the company unless all material facts are disclosed
...
(3)
3
...
Promoter’s Remuneration
A promoter has no right to get compensation from the company for his services
in promoting it unless the company, after its incorporation, enters into a contract with
him for this purpose
...
Promoter’s Liability
If a promoter does not disclose any profit made out of a transaction to which
the company is a party, then the company may sue the promoter and recover the
undisclosed profit with interest Otherwise, the company may set aside the transaction
i
...
, it may restore the property to promoter and recover its money
...
Section
62 also provides certain grounds on which a promoter can avoid his liability
...
Promoter’s Contracts
Preliminary contracts are contracts made on behalf of a company yet to be
incorporated
...
The company, when it comes into existence, is not bound by any contract made
on its behalf before its incorporation
...
(4)
2
...
Like the company, the other party to the contract is also not bound by
such a contract
...
The agents of a proposed company may sometimes incur personal liability under
a contract made on behalf of the company yet to be formed
...
R
...
P
...
A hotel company was about to be formed
and promoters signed an agreement for the purchase of stock on behalf of the proposed
company
...
The promoters were held personally liable to the plaintiff
...
So far as ratification of a pre-incorporation contract is concerned, a company
cannot ratify a contract entered into by the promoters on its behalf before its
incorporation
...
2
...
2 Incorporation
This is the second stage of the company formation
...
A company is legally constituted on being duly
registered under the Act and after the issue of Certificate of Incorporation by the
Registrar of Companies
...
To take approval of the name,
an application has to be made in the prescribed form along with requisite fee;
(5)
ii)
To get a letter of Intent under Industries (Development and Regulation) Act,
1951, if the company’s business comes within the purview of the Act
...
e
...
iv)
to prepare preliminary contracts and a prospectus or statement in lieu of a
prospectus
...
The application should be accompanied by the following documents:
1
...
2
...
3
...
4
...
5
...
The Registrar will scrutinize these documents
...
The certificate of incorporation is the birth certificate of a company
...
Further, the
(6)
certificate is ‘conclusive evidence that all the requirements of this Act in respect of
registration and matters precedent and related thereto have been fulfilled and that the
association is a company authorized to be registered and duly registered under this
Act
...
The certificate of
incorporation, even if it contains irregularities, cannot be cancelled
...
2
...
In the capital subscription
stage, the company makes necessary arrangements for raising the capital of the company
...
The company
making a public issue of share capital must comply with these guidelines before making
a public offer for sale of shares and debentures
...
On the scheduled date the prospectus will be issued to the public
...
The bankers will then forward all applications to
the company and the directors will consider the allotment of shares
...
However,
if the company does not receive applications which can cover the minimum subscription
(7)
within 120 days of the issue of prospectus, no allotment can be made and all money
received will be refunded
...
The contents of a prospectus and a statement in lieu of a prospectus are almost
alike
...
2
...
The certificate for commencement of
business is issued by Registrar of Companies, subject to the following conditions
...
Shares payable in cash must have been allotted upto the amount of minimum
subscription
2
...
3
...
4
...
The certificate to commence business granted by the Registrar is a conclusive
evidence of the fact that the company has complied with all legal formalities and it is
legally entitled to commence business
...
433 (3)]
2
...
Two of basic documents are :
1
...
Articles of Association
The preparation of Memorandum of Association is the first step in the formation
of a company
...
It is the charter of the company
...
Its purpose is to enable
shareholders, creditors and those who deal with the company to know what exactly is
its permitted range of activities
...
Memorandum of Association enable the parties
dealing with the company to know with certainty as whether the contractual relation to
which they intend to enter with the company is within the objects of the company
...
14)
Companies Act has given four forms of Memorandum of Association in Schedule
I
...
Table E
Memorandum of an unlimited company
Every company is required to adopt one of these forms or any other form as
near there to as circumstances admit
...
15)
...
Each subscriber must sign for his/her name, address,
description and occupation in the presence of at least one witness who shall attest the
signature and shall likewise add his address, description and occupation, if any
...
Name clause
Promoters of the company have to make an application to the registrar of
Companies for the availability of name
...
20)
...
N
...
, and W
...
O
...
(10)
Where the name of the company closely resembles the name of the company
already registered, the Court may direct the change of the name of the company
...
Where the word’
Limited” forms part of a company’s name, omission of this word shall make the name
incorrect
...
Note the following case in this regard:
Dermatine Co
...
v Ashworth, (1905) 21 T
...
R
...
A bill of exchange drawn
upon a limited company in its proper name was duly accepted by 2 directors of the
company
...
Held, the company was liable to pay and the directors were not personally liable
...
(Sec
...
In Osborn v The Bank of U
...
E
...
The name should be properly
and correctly mentioned
...
2
...
It will fix up the domicile of the
company
...
Registered Office of a
company is the place of its residence for the purpose of delivering or addressing any
communication, service of any notice or process of court of law and for determining
question of jurisdiction of courts in any action against the company
...
Notice of the situation of the registered office and every change shall be given
to the Registrar within 30 days after the date of incorporation of the company or after
the date of change
...
50 per during which the default continues
...
Object Clause
This is the most important clause in the memorandum because it not only shows
the object or objects for which the company is formed but also determines the extent
of the powers which the comapany can exercise in order to achieve the object or objects
...
It is essential that
the public who purchase its shares should know clearly what are the objects for which
(12)
they are paying
...
1965, the object clause has simply
to state the objects of the company
...
i)
Main Objects : This sub-clause has to state the main objects to be pursued by
the company on its incorporation and objects incidental or ancillary to the
attainment of main objects
...
Further, in case of a non-trading company, whose objects are not confined to
one state, the objects clause must mention specifically the States to whose territories
the objects extend
...
13)
A company, which has a main object together with a number of subsidiary objects,
cannot continue to pursue the subsidiary objects after the main object has come to an
end
...
Re (1890) 44 Ch D
...
A company’s objects clause enabled it to
act as a bank and further to invest in securities land to underwrite issue of securities
...
Held, the company was not entitled to do so
...
The powers specified in the Memorandum must not be construed
strictly
...
Anything reasonable incidental to the attainment or pursuit of any of the express objects
of the company will, unless expressly prohibited, be within the implied powers of the
(13)
company
...
i)
The objects of the company must not be illegal, e
...
to carry on lottery business
...
77), declaring dividend out of capital
etc
...
g
...
iv)
The objects must be stated clearly and definitely
...
v)
The objects must be quite elaborate also
...
The narrower the objects expressed in the memorandum, the less is the
subscriber’s risk, but the wider such objects the greater is the security of those who
transact business with the company
...
Capital Clause
In case of a company having a share capital unless the company is an unlimited
company, Memorandum shall also state the amount of share capital with which the
company is to be registered and division there of into shares of a fixed amount [Sec
...
The capital with which the company is registered is called the authorized or nominal
share capital
...
The amount of nominal or authorized capital of the company
would be normally, that which shall be required for the attainment of the main objects
(14)
of the company
...
No subscriber to the memorandum shall take less than one share
...
5
...
It implies that a shareholder cannot be called upon to pay any time amount more then
the unpaid portion on the shares held by him
...
The Memorandum of Association of a company limited by guarantee must further
state that each member undertakes to contribute to the assets of the company if wound
up, while he is a member or within one year after he ceased to be so, towards the debts
and liabilities of the company as well as the costs and expenses of winding up and for
the adjustment of the rights of the contributories among themselves not exceeding a
specified amount
...
(Sec 38)
...
(Sec
...
6
...
No subscriber will take
less than one share
...
The signature of each subscriber must be attested by at least one witness who
cannot be any of the subscribers
...
This clause generally runs in this form : “we, the
several person whose names and addresses are subscribed, are desirous of being formed
into a company in pursuance of the number of shares in the capital of the company, set
opposite of our respective name”
...
Alteration of Memorandum of Association
Alteration of Memorandum of association involves compliance with detailed
formalities and prescribed procedure
...
Alterations should not be
prejudicial to the members or creditors of the comapany and should not have the effect
of increasing the liability of the members and the creditors
...
Change of name
A company may change its name by special resolution and with the approval of
the Central Government signified in writing
...
(Sec
...
If through inadvertence or otherwise, a company is
registered by a name which, in the opinion of the Central Government, is identical with
or too nearly resembles the name of an existing comapany, it may change its name by
an ordinary resolution and with the previous approval of the Central Government
signified in writing
...
22(1) (a)]
...
Within 30 days passing of the resolution, a
copy of the order of the Central Government’s approval shall also be field with the
Registrar within 3 months of the order
...
The change of name shall be complete
and effective only on the issue of such certificate
...
23)
The change of name shall not affect any right or obligations of the company or
render defective any legal proceeding by or against it
...
23)
...
Change of Registered Office
This may involve :
a)
Change of registered office from one place to another place in the same city,
town or village
...
b)
Change of registered office from one town to another town in the same State
...
The within 30 days of the removal of the office
...
c)
Change of Registered Office from one State to another State to another State
...
According to it, a company may alter the provision of its
memorandum so as to change the place of its registered office from one State to another
State for certain purposes referred to in Sec 17(1) of the Act
...
Special Resolution
For effecting this change a special resolution must be passed and a copy there
of must be filed with the Registrar within thirty days
...
Confirmation by Central Government
The alteration shall not take effect unless the resolution is confirmed by the
Central Government
...
The Central
Government may then issue the confirmation order on such terms and conditions as it
may think fit
...
Alteration of the Object Clause
The Company may alter its objects on any of the grounds (I) to (vii) mentioned
in Section 17 of the Act
...
Limits of alteration of the Object Clause
(18)
The limits imposed upon the power of alteration are substantive and procedural
...
Alterations in the objects is to be confined within the above limits for otherwise
alteration in excess of the above limitations shall be void
...
Registrar shall register the same and certify the registration
...
18]
...
If the documents required
to be filed with the Registrar are not filed within one month, such alteration and the
order of the Central Government and all proceedings connected therewith shall at the
expiry of such period become void and inoperative
...
19]
4
...
If the alteration is authorized by
the Articles, the following changes in share capital may take place :
1
...
Reduction of capital [Section 100-105]
3
...
Variation of the rights of shareholders [Section 106-107]
5
...
Alteration of Liability Clause
Ordinarily the liability clause cannot be altered so as to make the liability of
members unlimited
...
It lays down that a member cannot by changing the
memorandum or articles, be made to take more shares or to pay more the shares already
taken unless he agrees to do so in writing either before or after the change
...
This rule
applies to future appointees only
...
[Section 323]
...
The registration of an unlimited company as a limited
company under this section shall not affect any debts, liabilities, obligations or contracts
incurred or entered into by the company before such registration
...
4
ARTICLES OFASSOCIATION
(20)
Every company is required to file Articles of Association along with the
Memorandum of Association with the Registrar at the time of its registration
...
They also include, so far as they apply to the company, those in the Table A in Schedule
I annexed to the Act or corresponding provisions in earlier Acts
...
They may be described as the internal regulation of
the company governing its management and embodying the powers of the directors and
officers of the company as well as the powers of the shareholders
...
In framing Articles of Association care must be taken to see that regulations
framed do not go beyond the powers of the company it self as contemplated by the
Memorandum of Association nor should they be such as would violate any of the
requirements of the companies Act, itself
...
Article of Association are to be printed, divided into paragraphs, serially
numbered and signed by each subscriber to Memorandum with the address, description
and occupation
...
Contents of Articles of Association
Articles generally contain provision relating to the following matters; (1) the
exclusion, whole or in part of Table A; (ii) share capital different classes of shares of
shareholders and variations of these rights (iii) execution or adoption of preliminary
agreements, if any; (iv) allotment of shares; (v) lien on shares (vi) calls on shares; (vii)
(21)
forfeiture of shares; (viii) issue of share certificates; (ix) issue of share warrants; (x)
transfer of shares; (xi) transmission of shares; (xii) alteration of share capital; (xiii)
borrowing power of the company; (xiv) rules regarding meetings; (xv) voting rights of
members; (xvi) notice to members; (xvii) dividends and reserves; (xviii) accounts and
audit; (xix) arbitration provision, if any; (xx) directors, their appointment and
remuneration; (xxi) the appointment and reappointment of the managing director,
manager and secretary; (xxii) fixing limits of the number of directors (xxiii) payment
of interest out of capital; (xxiv) common seal; and (xxv) winding up
...
The
schedule is divided into following tables
...
Table B contains a model form of Memorandum of Association of a company
limited by shares
...
Table D gives model forms of Memorandum and Articles of Association of
a company limited by guarantee and having a share capital
...
Table E contains the model forms of memorandum and Articles of
Association of an unlimited company
...
If it does not
(22)
have its own Articles, it may adopt Table A given in Schedule I to the Act
...
There are 3 alternative
forms in which a public company may adopt Articles :
1
...
It may wholly exclude Table A, and set out its own Articles in full
3
...
In other words, unless the Articles of a public company expressly exclude
any or all provisions of Table A shall automatically apply to it
...
An alteration is not invalid simply because it changes the company’s
constitution
...
, A company was allowed by changing
articles to issue preference shares when its memorandum was silent on the point
...
However, there are various limitations under the Companies
Act to the powers of the shareholders to alter the articles
...
The power are now vested with the Registrar of Companies
...
It
must be made bonafide the benefit of the company
...
Alteration must not contain anything illegal and shall not constitute
fraud on the minority
...
The Court may even restrain an alteration where is likely to cause a damage
which cannot be adequately compensated in terms of money
...
Any alteration so made
shall be valid as if originally contained in the articles
...
2
...
Articles of Association
It is character of company indicating
1
...
for the internal management
It also defines the company’s rela-
of the company and
tionship with outside world
are subsidiary to the memorandum
...
It defines the scope of the
2
...
go
...
It, being the charter of the
3
...
If there
document
...
Any act of the company which
4
...
holders if it is intra vires
the memorandum
...
Every company must have its
5
...
In such
A case, Table A Applies
...
There are strict restrictions
6
...
Some of the
conditions of incorporation
extent, provided they do
contained in it cannot be altered
not conflict with the
except with the sanction of the
Memorandum and the
Central Government
...
6
special resolution, to any
Companies Act
...
These are the public documents and open to public inspection,
...
On registration the memorandum and articles of association become public
documents
...
610)
...
Therefore, the
knowledge of these documents and their contents is known as the constructive notice
of memorandum and articles of association
...
Where a person deals with the company in a manner, which is inconsistent
with the provisions of memorandum or articles, or enters into a transaction which
is beyond the powers of the company, shall be personally liable to bear the
consequences regarding such dealings
...
7
SUMMARY
The whole process of formation of a company can be divided into four distinct
stages namely promotion incorporation, capital subscription and commencement
of business
...
The memorandum of Association of a company tells us
the objects of the company's formation and the utmost possible scope of its
(26)
operations beyond which its actions cannot go
...
It can be altered only
by following the procedure prescribed in the Companies Act
...
The company may alter its articles of association any time by following
the procedure as prescribed in the Companies Act
...
This is known as doctrine of constructive
notice
...
8
KEYWORDS
Promotion: Promotion means the discovery of business opportunities and the
subsequent organization of funds, property and managerial ability into a business
concern for the purpose of making profits therefrom
...
Preliminary Contract: Preliminary contract refers to those agreements or
contracts entered into between different parties on behalf and for the benefit of the
company prior to its incorporation
...
(27)
Memorandum of Association: It is the document which defines the objects and
lays down the fundamental conditions upon which along the company is allowed to
be incorporated
...
2
...
Explain the process of formation of a company under the Companies Act,
1956
...
“A certificate of in corporation is conclusive evidence that all the
requirements of the Companies Act have been complied with”
...
3
...
How the alteration in the different clauses of Memorandum of Association
can be made?
5
...
Distinguish between Memorandum of Association and Articles of
Association
...
10 SUGGESTED READINGS
S
...
Aggarwal, Business Law, Galgotia Publishing Company, New Delhi
...
K
...
, New Delhi
...
H
...
M
...
Ltd
...
S
...
Davar, Mercantile Law, Progressive Corporation Pvt
...
, Mumbai
...
R
...
(28)
LESSON : 3
PROSPECTUS AND COMMENCEMENT OF BUSINESS
STRUCTURE
3
...
1
3
...
3
3
...
5
3
...
7
3
...
9
3
...
11
3
...
13
Objective
Introduction
Definition of Prospectus
Objects of Prospectus
Requirements regarding issue of Prospectus
Contents of Prospectus
Mis-statement in Prospectus
Statement in lieu of Prospectus
Minimum Subscription
Commencement of Business
Summary
Keywords
Self Assessment Questions
Suggested Readings
3
...
(b)
Describe the contents of the prospectus
...
(d)
Discuss the conditions to be fulfilled by a public company to get certificate of commencement of business
...
1
INTRODUCTION
The promoters of a public company will have to take steps to raise the
necessary capital for the company, after having obtained the Certificate of Incorporation
...
Prospectuses are to be issued for this purpose
...
If the promoters of the company are
confident of raising the required capital privately from their friend or relatives,
they need not issue a prospectus
...
A private company is not allowed to issue a
prospectus since it cannot invite the general public to subscribe to its shares and
debentures
...
3
...
In
simple words, a prospectus may be defined as an invitation to the public to
subscribe to a company’s shares or debentures
...
The word “Prospectus” means a document which
invites deposits from the public or invites offers from the public to buy shares
or debentures of the company
...
According to Section 67 the term “public” is defined as, “It includes any section of the public, whether selected as members or debenture
holders of the company concerned or as clients of the person issuing the prospectus or in any other manner”
...
The ‘public’ is a general word
...
The point is that the offer makes the shares and debentures available for subscription to any one who brings his money and applies in
due form, whether the prospectus was addressed to him on behalf of the company
or not
...
Where directors make an offer to a few of their friends, relatives or
customers by sending them a copy of the prospectus marked “not for publication” it is not considered an offer to the public
...
Issued means issued to the public
...
The
leading case of this point is Nash v Lynde (1929) A
...
158
...
A copy of the document along with application forms was
(3)
sent to a solicitor who in turn sent it to the plaintiff
...
In the case Re South of England Natural Gas and Petroleum Co
...
(1911) 1 Ch
...
One may note
that under Section 67 an offer or invitation to any section of the public, whether
selected as members or debenture holders of the company or as clients of the
person making the invitation, will be deemed to be an invitation to the public
...
Any document to be called a prospectus must have the
following ingredients :
I
...
The invitation must be or on behalf of the company or in relation to an
intended company;
III
...
IV
...
3
...
To bring to the notice of public that a new company has been formed
...
To preserve an authentic record of the terms of allotment on which the
public have been invited to but its shares or debentures
...
The secure that the directors of the company accept responsibility of the
statement in the prospectus
...
4
REQUIREMENTS REGARDING ISSUE OF PROSPECTUS
The relevant requirements regarding issue of prospectus are given below:
1
...
A prospectus may be issued by or on behalf of the company
...
2
...
Date of issue of
the prospectus may be different from the date of publication
...
Registration of Prospectus
A copy of every prospectus must be delivered to the Registrar for regis-
tration before it is issued to the public
...
The copy sent for registration must be signed by every
person who is named in the prospectus as a director or proposed director of the
(5)
company or by his agent authorized in writing
...
This copy must be accompanied with the following
documents:
a)
If the report of an expert is to be published, his written consent to such
publication;
b)
a copy of every contract relating to the appointment and remuneration of
managerial personnel;
c)
a copy of every material contract unless it is entered in the ordinary
course of business or two years before the date of the issue of prospectus;
d)
a written statement relating to adjustments; if any, made by the auditors or
accountants in their reports relating to profits and losses, assets and liabilities or the rates of dividends, etc
...
A copy of the prospectus along with specific documents must been field
with the Registrar
...
A prospectus issued after the said period shall be deemed to be a
prospectus, a copy of which has not been delivered to the Registrar for registration
...
(6)
4
...
unless the expert is a person
who has never been engaged or interested in the formation or promotion as in the
management of the company (Section 57)
...
Further, this
consent should not be withdrawn before delivery of the prospectus for registration Section (58)
...
Terms of the contract not to be varied
The terms of any contract stated in the prospectus or statement in lieu of
prospectus cannot be varied after registration of the prospectus except with the
approval of the members in the general meeting (Section 61)
...
Application Forms to be Accompanied with the Copy of Prospectus
Every from of application for subscribing the shares or debentures of a com-
pany shall not be issued unless it is accompanied by a copy of prospectus except
when it is issued in connection with a bona fide invitation to a person to enter into
an underwriting agreement with respect to shares or debentures or in relation to
shares or debentures which were not offered to the public [(Section 56(3)]
...
7
...
of Shares
The provision, consequences of applying for shares in fictitious names to
be prominently displayed must be reproduced in every prospectus and every
application form issued by the company to any person
...
[Section 68(a)]
...
Contents as per Schedule II
Every prospectus must disclose the matters as required in Schedule II of
the Act
...
If a prospectus is issued without a copy thereof, the necessary documents
or the consent of the experts the company and every person, who is knowingly
a part to the issue of the prospectus, shall be punishable with fine which may
extend to Rs
...
3
...
Every person wants to invest his money in some
sound undertaking
...
Thus, the prospectus must disclose the true nature of company's
activities which enable the public to decide whether or not to invest money in the
company
...
Therefore, everything should be stated
with strict accuracy, and the complete and true position of the company should
be disclosed to the public
...
State the matters specified in Part I of Schedule II, and
...
Set out the reports specified in Part II or Schedule II both Part I and II
shall have effect subject to the provisions contained in Part III of that
Schedule II
...
The main objects of the company with names, descriptions, occupations
and addresses of the signatories to the Memorandum of association, and
number of shares subscriber by them
...
The number and classes of shares, and the nature and extent of the interests of the shareholders in the property and profits of the company
...
The number of redeemable preference shares intended to be issued with
(9)
particulars as regards their redemption
...
The number of shares fixed by the articles of company as the qualification
of a director
...
The names, addresses, description and occupation of directors, managing
director or manager or any of those proposed person
...
Any provisions in the articles or any contract relating to appointment,
remuneration and compensation for loss of office of directors, managing
director or manager
...
The amount of minimum subscription
...
The time of the opening of the subscription list cannot be earlier than the
beginning of the fifth day after the publication of prospectus
...
Amount payable on application and allotment on each share shall be stated
...
10
...
11
...
12
...
13
...
14
...
15
...
16
...
17
...
18
...
19
...
20
...
21
...
22
...
23
...
If the company proposes to acquire a business
which has been carried on for less than three years, the length of time
during which the business had been conducted
...
If any reserves or profits of the company or any of its subsidiaries have
been capitalized, particulars of the capitalization and particulars of the
surplus arising from any revaluation on the assets of the company
...
A reasonable time and place at which copies of all balance sheets and
profits and loss accounts, if any, on which the report of the auditors under
part II below is based, may be inspected
...
Names and address of the Company Secretary, Legal Adviser, Lead Man(12)
agers, Co-managers, Auditors, Bankers to the company
...
2
...
3
...
4
...
5
...
6
...
II
...
Report by the Auditors
A report by the auditors of the company as regards (a) its profits and
losses and assets and liabilities of the company and (b) the rates of dividend, if
paid by the company during the preceding 5 financial years
...
2
...
This report is required to be given, if the
proceeds of the issue of the shares or debentures are to be applied directly on the purchase of any business
...
(c)
Principal terms of loans and assets charged as security
...
Statutory and other Information
Statutory and other information minimum subscription, underwriting com-
mission and brokerage; date of allotment, closing date, date of refund, option to
subscribe, material contracts and inspection of documents, etc
...
Part III of Schedule II
Part III of the schedule consists of provisions applying to Part I and II of
the said schedule
...
Every person shall, for the purpose of this schedule, be deemed to be a
vendor who has entered into any contract, absolute or conditional, for the
sale or purchase of any property to be acquired by the company, in any
case where (a) the purchase money is not fully paid at the date of the issue
(14)
of the prospectus (b) the purchase money is to be paid or satisfied, wholly
or in part, out of the proceeds of the issue offered for subscription by the
prospectus; (c) the contract depends for its validity or fulfillment on the
result of that issue
...
In the case of a company which has been carrying on business for less than
5 financial years, reference to 5 financial years means reference to that
number of financial years for which business has been carried on
...
Reasonable time and place at which copies of all balance sheets and profit
and loss accounts on which the report of the auditors is based, and material contracts and other documents may be respected
...
Declaration
That all the relevant provision of the Companies Act, 1956 and the guide
lines issued by the Government have been complied with and no statement
made in the prospectus is contrary to the provisions of the Companies
Act, 1956 and rules thereunder
...
Statement by Experts
1
...
Where a prospectus includes a statement made by an expert,
he shall not be engaged or interested in the formation, promotion or management of the company
...
2
...
A prospectus including a statement made by an expert shall not
be issued, unless (a) he has given his written consent to be issued of the
prospectus with the statement included in the form and context in which
it is included and; (b) statement that he has given and has not withdrawn his
consent as aforesaid appears in a prospectus
...
Penalty [Section 59 (1)], if any, prospectus is issued in contravention of Section 57 or 58, the company, and every
person who is knowingly a party to the issue thereof, shall be punishable
with fine which may extent to Rs
...
6
MIS-STATEMENT IN THE PROSPECTUS
A prospectus is an invitation to the public to subscribe to the shares or
debentures of a company
...
People invest in the company on the basis of the information published in the
prospectus
...
Prospectus must give a full, accurate and a fair picture of material
facts without concealing or omitting any relevant fact
...
Co
...
(16)
Muggeridge [(1860) 3 LT 651]
...
The statements which do not qualify to the particulars mentioned in
the prospectus or any information is intentionally and willfully concealed by the
directors of the company, would be considered as mis-statement
...
It includes not only false statements which produce a impression of actual
facts
...
A statement included in a prospectus shall be deemed to be untrue, if
•
The statement is misleading in the form and context in which it is included; and
•
the omission from a prospectus of any matter is calculated to mislead
(Section 65)
...
Civil Liability
2
...
Civil Liability
A person who has induced to subscribe for shares (or debentures) on the
faith of a misleading prospects has remedies against the company, directors,
(17)
promoters, and experts
...
a)
Compensation
The above persons shall be liable to pay compensation to every person
who subscribes for any shares or debentures for any loss or damage sustained by
him by reason of any untrue statement included therein [Section 62(1)]
...
Wright (1903 1 Ch 5460 it has been held that the measure
of the damages is the loss suffered by reason of the untrue statement, omissions,
etc
...
b)
Recession of the Contract for Misrepresentation
Avoiding the contract is recession
...
The contract can be rescinded if the following conditions are satisfied:
1)
The statement must b a material misrepresentation of fact
2)
It must have induced the shareholder to take the shares
...
4)
The omission of material fact must be misleading before recession is
granted
...
c)
Damages for Deceit as Fraud
Any person induced to invest in the company by fraudulent statement in a
prospectus can sue the company and person responsible for damages
...
Fraud occurs when any statement is made without belief in the truth or
carelessly
...
In the leading case on the point - Derry V
...
It has been held that if the person making the statement honesty believes it to be
true, he is not guilty of fraud even if the statement is not true
...
The plants of the
company are approved honesty
...
Prospectus was issued wherein the
directors stated that the consent to use steam power was obtained by the company
...
On
the action by plaintiffs for deceit it was held that the directors were not liable
for fraud as they honesty believed that the consent would be obtained, though the
statement was untrue
...
e)
Damages for Fraud under General Law
Any person responsible for the issue of prospectus may be held liable
under the general law or under the Act for misstatements or fraud
...
5,000/-
...
Defence against Civil Liability
Every person made liable to pay compensation for any loss or damages
may escape such liability by proving that :
I
...
II
...
III
...
IV
...
, has reasonable ground to believe that the statement was
true and he, in fact, believed it to be true up to the time of allotment, he
is not liable
...
V
...
, is not liable
...
2
...
5,000/- or with both [Section 63(1)]
...
10,000/- or with both
...
statement was immaterial; or
•
he had a reasonable ground to believe and did upto the time of the issue
of prospectus that the statement was true [Section 63(i)]
...
7
STATEMENT IN LIEU OF PROSPECTUS (SECTION 70)
A company having a share capital which does not issue a prospectus or
which has issued a prospectus but has not proceeded to allot any of the shares
offered to the public for subscription, shall not allot any of its shares or debentures, unless at least three days before the allotment of shares or debentures, this
has been delivered to the Registrar for registration a ‘statement in lieu of prospectus’ signed by every person who is named therein as a director or a proposed
director of the company or by his agent authorized in writing, in the form and
(22)
containing the particulars set out in Part I of Schedule III and setting out the
reports specified in Part II of Schedule III subject to the provisions contained in
Part III of that Schedule (Section 70)
...
If the company acts in contravention of the provisions, the company and
every director who is at fault shall be punishable with fine which may extent to
Rs
...
If the ‘statement in lieu of prospectus’ include any untrue statement, any
person who authorized the delivery of the statement in lieu of prospectus shall
be, punishable with imprisonment up to two years or with fine which may extent
to Rs
...
He can avoid liability if he proves either that the
statement was immaterial or that he had reasonable ground to believe that the
statement was immaterial or that he had reasonable ground to believe that the
statement was true
...
3
...
It means the amount which, in the
opinion of the directors, is enough to meet the purchase price of any property,
(23)
preliminary expenses and working capital
...
If the minimum subscription has
not been received within 120 days, of the issue of the prospectus, the money
received from the applicants must be repaid without interest
...
3
...
A public company has to, however, comply with certain additional formalities before it can commence its business
...
1
...
The certificate of commencement of business will be issued after
the following formalities are complied with a)
At least minimum subscription has been raised;
b)
every director of the company has paid to the company, on each of the
shares taken by him or agree to be taken by him the amount payable by him
on application and allotment of the shares;
(24)
c)
Obtain or apply for permission for dealing of the shares or debentures on
the recognized stock exchange so that no money is repayable to application for an shares of debentures offered for public subscription by reason
of any failure to apply for, or to obtain stock exchange permission;
d)
A duly verified declaration has been filed with the Registrar by one of the
director or the secretary or of the secretary in whole time practice that
the above provisions have been complied with [Section 149(1)]
...
Public Company Not Issuing a Prospectus
Where a company having a share capital has not issued a prospectus invit-
ing the public subscribe for its shares, it can commence business or exercise any
borrowing powers if the following conditions are fulfilled:
•
A statement in lieu of prospectus has been filled in the Registrar
...
•
There has been filed with the Registrar a duly verified declaration by one
of the directors or the secretary, a secretary in whole time practice, in the
prescribed form, that the above provisions have been complied with
...
Any contract made by a public company after incorporation but before the
(25)
date on which it is entitled to commence business shall be provisional only and
shall not be binding on the company until the certificates is obtained [Section
149(4)]
...
3
...
3
...
Section 55 states that every prospectus must be dated, and that date is
deemed to be the date of publications of the prospectus, prospectus should neither contain any mis-statement i
...
untrue or misleading nor omit to disclose any
material fact
...
The company can also allot shares or
(26)
debentures without issuing the prospectus
...
3
...
Minimum Subscription: Minimum subscription is the amount which, in the
opinion of the board of directors, must be raised by the issue of share capital
...
Civil Liability: It means the liability to pay damages or compensation
...
3
...
What is a prospectus? Explain the requirements regarding issue of prospectus
...
Is it compulsory for a company to issue prospectus?
3
...
(27)
4
...
Minimum subscription
Statement in lieu of prospectus
Explain the conditions that a public company is required to fulfil in order
to obtain a certificate of commencement of business
...
13 SUGGESTED READINGS
S
...
Davar, Mercantile Law, Progressive Corporation Pvt
...
, Mumbai
...
R
...
eeh
S
...
Gulshan & G
...
Kapoor, Business Law, New Age International Publishers,
New Delhi
...
C
...
Nirmal Singh, Business Law, Deep and Deep Publication Pvt
...
, New Delhi
...
C
...
Ltd
...
(28)
1
LESSON -4
ALLOTMENT OF SHARES AND DEBENTURES;
TRANSFER AND TRANSMISSION OF SHARES; SHARE
WARRANT AND SHARE CERTIFICATE
STRUCTURE
4
...
1
Introduction
4
...
3
Rules of Allotment
4
...
5
Share warrant and share certificate
4
...
7
Summary
4
...
9
Self assessment questions
4
...
0
OBJECTIVE
After reading this lesson, you will be conversant with
a)
b)
c)
Rules of allotment of shares and debentures
...
d)
Transmission of shares
...
1
General principles regarding allotment
...
INTRODUCTION
When a company issue a prospectus inviting the public to
subscribe for the shares of a company, it is merely an invitation rather than
2
an offer
...
Such offers are made on
application forms supplied by the company
...
Allotment is the acceptance by the company of the
offer made by the applicant
...
The term allotment has not been defined in the Companies Act
...
v
...
, (1963), allotment of shares was explained by the Supreme
Court as "the appropriation, out of the previously unappropriated capital of
the company, of a certain number of shares to a person
...
Reissue of forfeited shares is
not an allotment'
...
2
GENERAL PRINCIPLES REGARDING ALLOTMENT
The provisions of the law of contract regarding the acceptance
of an offer apply to the allotment of shares by a company
...
Proper Authority
Allotment must be made by a resolution of the Board of
Directors or by a committee authorised to allot shares on behalf of the
Board if permitted by the articles
...
Absolute and unconditional
The allotment must be absolute and unconditional
...
In case that
condition is not fulfilled, the applicant is not bound to take the shares
...
Within a reasonable time
The allotment must be made within a reasonable time after the
receipt of the application
...
In Ramasgate Victoria Hotel Co
...
Monterfiore, Monterfiore
applied for shares on June 28
...
In this case it was held that the offer had
lapsed and the applicant was not liable to pay for the allotment
...
Must be communicated
The allotment must be communicated to the person making the
application so that it is legally complete
...
Whatever is the mode of communication, it must be made to the applicant
or his agent who is duly authorised to receive it
...
v
...
5
...
H applied for shares in a company which were allotted to him
...
Before the delivery of the letter of allotment, H withdrew his
application
...
[Re
National Savings Bank Association (1867) L
...
4E9
...
4
...
However, the Companies Act prescribes certain restrictions
regarding the allotment of shares and debentures by public companies
...
(B)
When public offer is made
...
The statement must be signed by every person who is
a director or proposed director of the company or by his agent authorised
in writing
...
Further, the
company, and every director of the company who willfully authorises or
permits the contravention, shall be punishable with fine which may extend
to Rs
...
[Section 70(4)]
5
(B)
When public offer is made
In the case of public company offering shares or debentures
to the public for subscription, the provisions relating to allotment may be
discussed under the following three heads :
1
...
2
...
3
...
1
...
It must be signed by every director or proposed director of the
company or by his agent authorised in writing
...
60(1)]
(ii)
Minimum subscription : No allotment shall be made of any share
capital of the company offered to the public for subscription unless the
amount stated in the prospectus as the minimum amount has been subscribed
and the sum payable on application for such amount has been paid to or
received by the company
...
69(1)]
The amount stated in the prospectus shall be reckoned
exclusively of any amount payable otherwise than in cash
...
69(2)]
A company making any rights or public issue of shares,
debentures etc
...
If the amount of minimum subscription is not received within 120
days of the issue of the prospectus, all amounts received from the applicants
shall be refunded to them immediately without interest
...
a
...
( i i i ) Application money : The amount payable on application for each
share shall not be less than 5% of the nominal amount of the share
[Sec
...
SEBI guidelines prescribe that in the case of mega issues
(exceeding Rs
...
All moneys received from the applicants for shares shall be
deposited and kept deposited in a scheduled bank :
(a)
until the certificate of commencement of business is obtained, or
(b)
where such certificate has already been obtained, until the entire
amount payable on application for shares in respect of the minimum
subscription has been received by the company
...
69 (4)]
If the conditions aforesaid have not been complied with, all
moneys received from the applicants for shares shall be forthwith repaid to
them without interest
...
a
...
A director shall not be liable if
he proves that default in the repayment of the money was not due to any
misconduct or negligence on his part
...
69 (4)]
7
Any condition which requires or binds any applicant for shares
not to comply with any requirement of Section 69 shall be void
...
69(6]
(iv)
Subscription list : No allotment shall be made until the beginning
of the 5th day after a date on which the prospectus is issued or such later
time as may be specified in the prospectus
...
Where after the issue of the prospectus, a public notice is given
by some responsible person, disclaiming his responsibility for the issue of
the prospectus, no allotment shall be made until the beginning of the fifth
day after that on which such public notice is first given [Sec
...
In case of listed shares, however, the subscription
list must be kept open for at least 3 days under the rules of recognised
stock exchanges
...
The allotment of shares in contravention
of these provisions is valid
...
5,000 [Section 72(3)]
...
[Section
72 (5)]
...
(v)
Shares and debentures to be dealt on a stock exchange : Where a
prospectus states that an application has been, or will be, made for
permission for the shares or debentures offered thereby to be dealt in one
or more recognised stock exchanges, the allotment made under such
prospectus be void :
8
(i)
if the permission has not been applied for before the 10th day after
the issue of the prospectus, or
(ii)
if permission has not been granted by the stock exchange, as the case
may be, before the expiry of 10 weeks from the date of the closing
of the subscription list
...
73(2)]
...
If such money is not repaid within eight days from the day the
company becomes liable to repay it, the company and every director of the
company who is an officer in default shall, on and from the expiry of the
eighth day, be jointly and severally liable to repay that money with interest
at such rate, not less than 4% and not more than 15%, as may be prescribed,
having regard to the length of the period of delay in making the repayment
of such money
...
73(2A)]
If default is made in complying with the provisions of Section
73(2A), the company and every officer of the company who is in default
9
shall be punishable with fine which may extend to Rs
...
[73(2B)]
All moneys to be kept in a separate bank account in a scheduled bank
Where a prospectus states that an application has been made
to stock exchange for permission for the shares to be dealt in on the stock
exchange, all moneys received shall be kept in a separate bank account
maintained with a Scheduled Bank until the permission has been granted
and where an appeal has been preferred against the refusal to grant such
permission, until the disposal of the appeal
...
If default is made in
complying with this Section, the company and every officer of the company
who is in default, shall be punishable with fine which may extend to
Rs
...
[Sec
...
Subsequent allotment of shares
In case of subsequent allotment of shares all the 'statutory
provisions' regarding 'first allotment of shares' apply equally, except :
(a)
minimum subscription [Sec
...
[Sec 69(4)]
3
...
69(1)];
(b)
the amount payable on application; [Sec
...
[Sec
...
4
TRANSFER AND TRANSMISSION OF SHARES
A
...
A private
company with a share capital, by its very nature as provided by Section
3(1)(iii) of the Act restricts the right of transfer in shares by its articles
...
In a public company, every shareholder has right to transfer
his shares to any person without the consent of other shareholders subject
to such express restrictions as are found in the articles of the company
...
A transfer of share is valid if
it is not forbidden under the articles of the company, even if it has been
made with the object of escaping liability on the shares
...
As per
Section 109, a legal representative of a deceased member, although not a
member at the time of transfer, can also transfer shares
...
The instrument of transfer must be in
the prescribed form
...
11
The instrument of transfer shall then be executed by the
transferor and the transferee and completed in all respects
...
(ii)
In any other case, the instrument of transfer shall be presented to the
company within 2 months of the date of presentation to the prescribed
authority
...
But the transferee
becomes a member only when the transfer is registered
...
The
transferor continues to be the holder of the shares until his name is struck
off the register and that of the transferee substituted in its place
...
The application for transfer of shares may be made either by
the transferor or the transferee
...
No such notice needs to be given where fully paid
shares are transferred or where the application for the registration of
transfer is made by the transferee
...
The transferor or the transferee may prefer an appeal to the
Central Government within 2 months of the receipt of such notice of
refusal
...
On its appeal, the Central
Government must give an opportunity to the company, the transferor and
the transferee to make their representation before issuing any order
...
Issue of new share certificate (Sec
...
Normally, it is done by making an endorsement on the back of
the share certificate
...
It should be noted that the seller
13
of the shares is not bound to procure registration
...
Power of Directors to refuse transfer
Where the articles do not contain any clause, allowing the
directors to reject the transfer, the shareholder may freely transfer his share
and can compel the directors for registering of shares
...
(b)
For rejection, the conditions given in the articles must be followed
...
(d)
Refusal must be exercised by the board and not by one of the
directors
...
The following are the grounds on which the board may refuse
registration of transfer :
(a)
If partly paid up shares are being transferred and transferee is known
to be financially incapable of paying balance calls
...
(c)
When the transferor is a debtor of the company and the company has
lien on such shares
...
(e)
Where the instrument of transfer is incomplete, irregular and
defective and not properly stamped
...
Grounds on which the company may refuse to register transfer in the
case of the listed companies
The Companies Act does not specify the grounds on which the
board of directors may refuse to register a transfer of shares
...
Thus in the case of listed securities, the absolute powers with
the directors to refuse registration of transfer are no longer available
...
The four grounds under Sec
...
e
...
This is a technical ground on which
15
transfer of shares can be refused
...
(c)
The transfer of shares is in contravention of any law
...
Certification of transfer
Where a person purchases a number of shares, only one
certificate of shares is issued in respect of the whole lot of shares so that
when he desires to transfer a part of his shares, he is required to produce
before the company his certificate of shares along with the instrument of
transfer for the purpose of certification
...
The company will cancel the old certificate and prepare
two new share certificates to be delivered to the transferor and the
transferee
...
The certification of shares amounts to a representation by the
company that the document which evidences the title to the transferor has
been produced to the company
...
Forged Transfer
A forged document never has any legal effect
...
(ii)
If the company has issued a new certificate to the so called transferee,
it can not deny his title to the shares, the certificate stops it (the
company) from doing so
...
Companies normally notify the transferor of the transfer so
that he can object if he wishes
...
Blank Transfer
A blank transfer is an instrument of transfer signed by the
transferor in which the name of the transferee is not filled
...
Thus, stamp duty and registration fee is saved
...
The results are :
(i)
this helps in avoiding or reducing liability of tax thereon; and
(ii)
these may act as clear security for creditors
...
If he wants to retain the shares, he can fill in his name and
date in the transfer deed and get himself registered as shareholder
...
Morally, he
is a trustee for the dividends declared and received
...
A blank transfer, however, can remain in circulation only for
12 months after its signing by the prescribed authority or up to the time of
closure of the register of members by the company, whichever is later
...
B
...
It takes place when a
registered shareholder (a) dies or (b) becomes bankrupt
...
If they wish, they may ask the company
to register them as the holder of these shares and for this purpose no
instrument of transfer is required and the company is bound to accept the
probate of will or letters of administration as sufficient evidence of the
title to those shares
...
Thus if the shares are not fully paid, they
will be liable to pay the unpaid value of the shares
...
Section 109 enables the legal representative to transfer the
shares even if he is not himself a member of the company
...
e
...
Transmission on bankruptcy : If a registered shareholder is adjudged an
insolvent, his shares vest in the Official Assignee or Receiver who may
either get himself registered as the holder of the these shares or transfer
them to another person
...
Usually the articles of the company
contain provisions relating to the transmission of shares
...
If the transmission is not accepted by the company, the same
remedies are available against the company as in the case of the refusal of
a transfer of shares
...
(b)
A transfer requires an execution of an instrument of transfer, while
transmission requires evidence showing the entitlement of the
transferee
...
(d)
The company charges for registering a transfer, while no charges are
levied for registering a transmission
...
19
4
...
Share Warrants
A public company limited by shares may issue share warrants
under its common seal in the following circumstances :
(i)
if it is authroised by its articles ;
(ii)
shares are fully paid up ; and
(iii)
previous approval of the Central Government is obtained
...
It is a substitute for
the share certificate
...
A shares warrant shall entitle the bearer thereof to the shares
specified therein
...
On issue of a share warrant, the company shall strike out of its
register the name of the member then entered therein as holding the shares
specified in the warrant as if he had ceased to be a member
...
The bearer of a share warrant shall subject to the articles of the company
be entitled to have his name entered as a member in the register of members
on surrendering the warrant for cancellation and paying such fee to the
company as the Board of Directors may from time to time determine
...
B
...
A certificate under the common seal of the company, signed
by one or more of directors, specifying shares held by the member and the
amount paid up on the shares shall be prima facie evidence of the title of
the member to such share or shares
...
If default is made, the company and every officer of the
company who is in default, shall be punishable with fine which may extend
to Rs
...
The person
may make an application to the court if default is not made good by the
company within 10 days after the service of the notice
...
Objects and Advantages : Since a share certificate is prima facie evidence
of title, a shareholder is able to show his title to the shares by producing
his share certificate
...
Besides it would be very easy for a lender to lend money to the
shareholder taking the possession of his share certificate by way of security
...
The articles
may provide other terms and conditions like requiring the allottee to give
an indemnity bond (Clause 89 Table A)
...
10,000 and every officer of the company who is in default
shall be punishable with imprisonment for a term which may extend to six
months, or with fine which may extend to Rs
...
84(3)]
...
(Sec
...
The
rules so made override the provisions in the articles
...
6
DIFFERENCE BETWEEN A SHARE CERTIFICATE AND A SHARE
WARRANT
1
...
The bearer of a
share warrant can be a member only when the Articles so provide and
only for the purposes defined in the Articles
...
A share certificate may be issued in respect of partly or fully paid
shares, whereas a share warrant can be issued only when shares are
fully paid up
...
Only public companies are authorised to issue share warrants but share
certificates are issued by both public and private companies
...
A share warrant is transferable by delivery only and no transfer deed
and registration of transfer with the company is required
...
The transfer of a share
certificate must be registered with the company
...
A share warrant is a negotiable instrument as it is transferable by
delivery only
...
6
...
7
...
8
...
But the holder of a share certificate is so qualified
...
The petition for the winding up of the company can be presented by
the holders of share certificates only
...
10
...
But in the case of share certificates, the company
issues dividend warrants to the holders by name
...
7
SUMMARY
Allotment means and implies a division of the share capital
into defined shares of a particular value or of different classes and
assignment of such shares of different persons
...
The shares can be transferred by any person who is the
holder of shares and whose name appears in the Register of Members or by
23
anyone with his authority
...
The
transmission of shares takes place on the death or insolvency of the
shareholder
...
A
share warrant is a document specifying certain shares and stating that the
bearer of the document is entitled to the shares specified in it
...
8
KEYWORDS
Share Warrant: Share warrant is a document which shows that the bearer
of the warrant is entitled to the shares specified therein
...
Allotment: Allotment is the acceptance by the company of the offer made
by the applicant
...
Transmission of Shares: When a registered shareholder dies or becomes
bankrupt, his shares are transmitted to his legal representative or the official
assignee or receivers, and this is called transmission of shares
...
9
SELF ASSESSMENT QUESTIONS
1
...
What is a share certificate ? What is the object and effect of the
share certificate ? When can a company renew a share certificate or
issue a duplicate ?
24
3
...
What legal formalities are to be complied with for
the issue of a share warrant ?
4
...
What is a forged transfer ? If a forged document is lodged with a
company, what is the position of the affected parties ?
4
...
Ltd
...
M
...
Kuchhal, Mercentile Law, Vikas Publishing House Pvt
...
, New Delhi
...
, Lucknow
...
C
...
Chand & Co
...
R
...
N
...
Chand & Co
...
1
LESSON : 5
MEMBERSHIP OF COMPANIES; BORROWING POWERS
STRUCTURE
5
...
1
5
...
3
5
...
5
5
...
7
5
...
9
5
...
11
5
...
13
5
...
15
5
...
17
5
...
19
Objective
Introduction
Difference between Members and Shareholders
Capacity of a Member
Modes of Acquiring Membership
Cessation of Membership
Duties and liabilities of Members
Rights of Members
Register of Members
Index of Members
Annual Returns
Borrowing Powers
Ultra Vires Borrowings
Charges Securing Debentures
Charges Requiring Registration
Consequences of non-registration of Charges
Summary
Keywords
Self Assessment Questions
Suggested Readings
5
...
(c)
(d)
Rights, duties and liabilities of members
...
1
INTRODUCTION
A company is composed of certain persons who constitute it
as a corporate body
...
The persons composing the company are the
'members' or 'shareholders' of the company
...
Any other person who agrees
in writing to become a member and whose name is entered in company's
register of members is also a member of the company [Section 41]
...
A shareholder
means a person who holds the shares of the company
...
In
these exceptional cases, a person may be a member but not a shareholder,
or he may be a shareholder but not a member
...
(b)
A person who transfers his shares, continues to be the member of
the company until his name is replaced by the name of the transferee
...
(c)
A person who has ceased to be a shareholder by reason of forfeiture,
surrender or transfer of shares, may be held liable as member, for
the payment of unpaid amount on shares in case of default by the
present shareholder
...
3
In the following cases, a person is a shareholder, but not a member:
1
...
However, he may be treated as member for specific
purpose if company's articles so provide
...
A legal representative of a deceased shareholder is the shareholder
even if his name is not entered in the register of members
...
Note: The Depositories Act, 1996 has further widened the definition of a
member by inserting a new Sub-section 41 (3)
...
5
...
The word 'shareholder' is used in
relation to a company having a share capital and there can be no membership
except through the medium of shareholding
...
But the
term 'member' is wider in scope and may be used in relation to all types of
company
...
Companies limited by guarantee or unlimited companies having
no share capital can have no shareholders but do have members
...
A holder of a share warrant is a shareholder but not a member as his
name is struck off the register of members immediately after the
issue of such share warrant
...
Every registered shareholder is a member but every registered
member may not be a shareholder because the company may or may
not have share capital
...
The transferor or the deceased person is a member so long as his
name is on the register of members whereas he cannot be termed as
shareholder
...
Similarly, a shareholder by transfer is not a member until his name is
entered in the company's register of members
...
A person who mispresents himself to be a member is estopped from
denying his position subsequently
...
6
...
5
...
A contract to purchase shares in a company is like
any other contract
...
The Companies Act
does not prescribe any qualifications for becoming a member of a company
...
This is, however, subject to the
provisions of the memorandum and articles of the company
...
The membership rights of certain persons and organisations are discussed
hereunder :
5
1
...
But under
the Indian Law, a minor being incompetent to contract can not become a
member of a company because a contract with a minor is absolutely void
here
...
In the case of Palaniappa Mudliar v
...
, A
...
R
...
470
...
The
company allotted the shares in the name of the daughter described as a
minor
...
It was held that the
transaction was void ab-initio and neither the minor nor her guardian could
be placed on the list of contributories
...
Company
Since a company is a legal person, it can become a member of
another company, provided it is so authorised by its memorandum, by
investing in the shares of that company
...
Partnership Firm
Since a partnership firm has no legal personality, it cannot
purchase shares in a company in its own name
...
Person taking shares in fictitious names
A person who takes shares in the name of a fictitious person
will be liable as a member in respect of those shares and his name shall be
6
entered in the register of members
...
5
...
6
...
This right of the foreigner as a member will
be suspended if he becomes an alien enemy
...
Insolvent
An insolvent being incompetent to contract can not become a
member of a company
...
8
...
So the pawnee does not become the
member of the company
...
5
...
Membership by Subscribing to Memorandum (Section 41)
All the subscribers to the memorandum are deemed to have
agreed to become members of the company and on the registration of the
company their names are automatically entered as members in the company's
register of members
...
Neither an application form nor allotment of shares is
necessary for becoming a member in their case
...
In the case of Metal Constituents Co
...
Ch
...
Then, he wanted to rescind the contract
on the ground of misrepresentation on the part of the promoters
...
So he can not rescind
the contract
...
Membership by Qualification shares
Before a person can be appointed a director of a public
company, he must take, or sign an undertaking to take and pay for the
qualification shares
...
3
...
The ordinary law
of contracts applies to the agreement to take shares in a company
...
If it is absolute, a
simple allotment and notice thereof to the applicant will constitute the
agreement
...
Where there is a conditional application for shares
and an unconditional allotment, there is no contract constituted
...
Shares were allotted to him but he was not
given the appointment
...
It was held that R was
not a member as his application was conditional and allotment was
unconditional
...
R
...
633]
...
Membership by Transfer
Where a transfer of share is made and the transfer is registered
with the company, the transferee becomes entitled to be placed on the
company's register of members in the place of the transferor in respect of
the shares so transferred
...
Membership by Transmission
On the death of a member his shares rest with his legal
representative
...
If a company unduly refuses to accept a transmission, the same
remedies are available to the legal representative as in the case of transfer
...
State of Orissa,
AIR (1967) SC 253, by devolution, the state of Orissa had become entitled
9
to the shares of the Maharajas
...
It was held that the company
was bound to register the shares in favour of the state's representative
because it was a case of transmission
...
6
...
Thus if a persons's name is improperly placed on the register of members,
and he knows and assents to it, he cannot afterwards say that he is not a
member
...
5
...
(b)
by the sale of his shares by the company in exercise of right of lien
over his shares
...
(e)
by the death of a member
...
(f)
by his insolvency
...
10
(h)
by the winding-up of the company, of course he remains liable as a
contributory
...
(j)
by issue of share warrants to him in exchange of fully paid shares
...
6
DUTIES AND LIABILITIES OF MEMBERS
Duties
It is the duty of a shareholder :
(a)
as a subscriber of the memorandum, to take the share written opposite
his name direct from the company and pay for them ;
(b)
to take shares when they are duly allotted to him and pay for them
according to the terms of issue of the shares ;
(c)
to pay all valid calls as and when they are made;
(d)
to abide by the decisions of the majority of members unless the
majority acts vindictively, oppressively, mala fide or fraudulently;
(e)
to contribute to the asset of the company when it goes into liquidation
...
Company limited by shares
...
If his shares are fully paid, his liability is nil for all purposes
...
The liability of the members of a company
limited by guarantee is limited to the amount they undertook to contribute
to the assets of the company in the event of winding up
...
Every member of an unlimited company
is liable in full for all debts contracted by the company during the period he
was a member
...
7
RIGHTS OF MEMBERS
When a person becomes a member of a company he is entitled
to exercise all the rights of a member until he ceases to be a member in
accordance with the provisions of the Act
...
e
...
No document of the company can
take away or modify such rights
...
Right to receive copies of the Balance Sheet and Profit and Loss
Account of the company along with the auditor's report
...
Right to obtain a copy of the contract for the appointment of managing
directors/managers of the company
...
Right to receive notice of the general meetings of the company
...
Right to get the copies of the Memorandum and the Articles of the
company on payment of the prescribed fees
...
Right to inspect the register of members, and debentureholders and
index registers, annual returns etc
...
6
...
12
7
...
8
...
9
...
10
...
11
...
12
...
13
...
14
...
15
...
e
...
16
...
17
...
18
...
19
...
13
20
...
21
...
(B)
Documentary Rights
There rights are the rights given by the two basic documents
i
...
memorandum of association and articles of association
...
(C)
Legal Rights
These rights are given to members under general law
...
5
...
150)
It is the statutory obligation of every company to maintain a
register of its members containing the following particulars :
(a)
The name and address and the occupation, if any, of each member ;
(b)
In the case of a company having share capital, the shares held by each
member and the amount paid or agreed to be considered as paid on
those shares;
(c)
The date on which each person was entered in the register as a
member;
(d)
The date on which any person ceased to be a member
...
If default is made in complying with these provisions, the
company, and every officer of the company who is in default, shall be
punishable with fine which may extend to fifty rupees for every day during
which the default continues
...
9
INDEX OF MEMBERS (SEC
...
Any alteration in the register of members must be noted in the index within
14 days of alteration
...
The index must always be kept at the same
place as the register of members
...
The company is also bound to supply a copy of the
register on demand on payment
...
154, a company may, after
giving not less than seven days' previous notice by advertisement in a local
daily, close the register of members, for a period not exceeding 45 days in
a year, but not exceeding 30 days at any one time
...
During the period of closure, no transfer
of shares can take place and therefore, the company may determine its
membership and may send notices of general meetings and calls made and
also the dividend warrants to is members
...
10 ANNUAL RETURNS
Every company is required to file with the Registrar an annual
return containing certain particulars relating to the company
...
The
particulars to be stated in the annual return are different for the companies
having a share capital, and for the companies having no share capital
...
159)
Every company having a share capital shall within 60 days from
the day on which each of the annual general meetings is held, prepare and
file with the Registrar a return containing the particulars specified in parts
I and II of Schedule V, as they stood on that day regarding its :
1
...
2
...
3
...
4
...
5
...
6
...
Its directors, managing directors, managers and secretary, past and
present
...
Names and addresses of and number of equity shares held by each of
the following, namely :
(a)
Foreign holdings;
(b)
Government-sponsored financial institutions;
(c)
Bodies corporates (not covered under (a) and (b) above);
(d)
Directors and their relatives, their shareholdings and
directorships ;
II)
By Company not having Share Capital (Sec
...
(b)
Name of members and respective dates on which they became
members
...
(d)
Particulars regarding its directors, managers and its secretary
...
161)
The copy of the annual return filed with the Registrar under
Section 159 or 160 shall be signed both by a director and by the manager or
secretary of the company
...
The annual return is also required to
17
be signed by a secretary in whole time practice, in the case of a company
whose shares are listed on a recognised stock exchange
...
50 for every day during which the
default continues
...
5
...
Every trading company, unless
prohibited by its memorandum or articles, has an implied power to borrow
money for the purpose of its business, and to give security for the loan by
creating a mortgage or charge on its property even though such power is
not expressed in the memorandum of the company
...
If the memorandum does not contain such a power, the
memorandum have to be amended before the company can exercise its
borrowing powers
...
In General Auction Estate and Monetary Co
...
Smith (1891)
3ch
...
The Memorandum of the company did not expressly give it any power
18
to borrow money
...
The company was wound up within six months
...
Held, being a trading company, it had an implied power to borrow money
for its business and to give security to the person making the advance (loan)
...
The Board's Powers
The borrowing power is exercised by the board of directors
subject to the provisions in the memorandum and articles of the company
...
Section 293(1)(d) also limits
the directors' power to borrow
...
Thus, the power of directors to borrow is subject
to two main limitation :
1
...
Limitations enumerated in the memorandum and articles
...
12 ULTRA VIRES BORROWINGS
Ultra vires borrowings mean borrowings which are beyond the
powers of the company or the directors
...
Ultra vires of the company, or
2
...
1
...
In such a case, the contract is
void and the lender cannot sue the company for the return of the loan
...
In the case of Introduction Ltd
...
National Provincial Bank
Ltd
...
199, a company was formed with the main object of providing
information and facilities to the overseas visitors to the Festival of Britain
in 1950
...
For
this purpose, it borrowed money from a bank which took debentures as a
security
...
Held,
the loan was for a purpose known to be ultra vires and therefore, the
debentures were sold
...
20
(b)
Subrogation
If the money borrowed has been used by company in paying
off its lawful debts, the lender will rank as a creditor upto the amount so
used, and can recover it from the company
...
But the lender will have no priority over other
creditors even though the debts paid off had priority
...
A had priority over B and B had
priority over C
...
The borrowing by the company was ultra vires
...
(Re Wrexham Mold C
...
(1899) 1 Ch
...
(c)
Tracing
If the lender is in a position to trace the property purchased
with his money, he can get a tracing order from the court and follow the
property
...
In the case of Sinclair v
...
c
...
But the building society also developed a large banking
business which was ultravires of the society
...
e
...
e
...
The company had to pay
the outside creditors, the shareholders of the society (i
...
members) and
the depositors of money
...
The remaining assets were
not capable of being identified; nor were they sufficient to pay both the
shareholders and the depositors in full
...
(d)
Recovery of damages
The ultra vires lender has a right to sue the directors for the breach
of warranty of authority and recover the damages
...
g
...
Example : Under the authority of an investment trust company, its managing
director borrowed large sums of money
...
It was held that the company was liable
...
K
...
S
...
Firm v
...
AIR 1944 Mad 532]
2
...
Borrowing ultra vires the directors, but within the power
conferred by the memorandum, is voidable only and may be ratified by the
company
...
Whereas such borrowing is not ratified by the company, the
remedies available to lender are :
(i)
Doctrine of indoor management
...
22
(ii)
No notice for unauthorised business
...
A company can avoid the liability on
the ground that borrowing was known or deemed to be known to be ultra
vires
...
Further, the company shall not be liable for the unauthorised
borrowings of its directors if it can establish that the borrowing was neither
necessary not 'bonafide' or for the benefit of the company but if a loan has
not been taken in the name of the company it will not be liable even if it has
received some benefit
...
Ltd v
...
, AIR 1940 outh
202 case, it was held- "Where the managing agent of a company who is not
authorised to borrow has borrowed money which is not necessary, neither
bonafide, nor for the benefit of the company, the company is not liable for
the amount borrowed
...
5
...
Such charge may :
1
...
Floating charge
23
Fixed charge
A fixed charge or specific charge is one which is created on
some ascertained and definite property of the company such as building or
machinery, etc
...
e
...
Again in the winding up of the company, the holder of a debenture secured
by a fixed charge ranks as a secured creditor in respect of debt due to him
on the debenture
...
For example, where a
debenture is secured by creating a charge on stock-in-trade, the charge will
be valid as a floating charge
...
It attaches to
the subject charged in the varying conditions in which it happens to be from
time to time
...
[Government Stock
Investment Co
...
v
...
(1897) A
...
]
The chief characteristics of a floating charge have been summed
up by Justice Romer in Re Uorkshire Woolcomber's Association Lt
...
It is a charge upon a class of assets both present and future
...
The class of assets upon which the charge has been created must be
one which in the ordinary course of the business of the company would
be changing from time to time, and
3
...
Crystallisation of a Floating Charge
Crystallisation is the conversion of a floating charge into a
fixed charge on the assets in the class charged at the moment of
crystallisation A floating charge crystallises and becomes fixed in the
circumstances given below :
1
...
When the company ceases to carry on business, or
3
...
g
...
Effects
In the case of floating charge
1
...
2
...
25
3
...
Invalidity of Floating Charge
A floating charge created within 12 months of
the
commencement of the winding up of a company will be invalid unless it is
proved that the company immediately after the creation of the charge was
solvent
...
534)
...
14 CHARGES REQUIRING REGISTRATION
All charges are not required to be registered
...
They are :
1
...
A charge on uncalled share capital of the company
3
...
A charge on any book debts of the company
5
...
A floating charge on the undertaking or any property of the company
including stock in trade
...
A charge on calls made but not paid
8
...
A charge on goodwill, on a patent or a licence under a patent, on a
trade mark, or on a copyright or a licence under a copyright
It is the duty of the company to send the above particulars to
the Registrar within 30 days of charge or extended period which cannot be
more than seven days, but registration may also be effected on the
application of the creditor
...
134)
...
15 CONSEQUENCES OF NON -REGISTRATION OF CHARGES
If any charge which is required to be registered under Sec
...
The charge becomes void as against the liquidators (if the company
goes into liquidation) and against the creditors
...
The charge is good against the company and may be enforced until
the company goes into liquidation
...
Money secured by the charge becomes immediately payable
...
A subsequent registered charge will have priority over a prior
unregistered charge even if the subsequent creditor has notice of the
prior mortgage or charge
...
The holder of an equitable charge whose charge is void for nonregistration, has no lien on the title deeds or documents deposited
with him as they are only ancillary to the void charge
...
At the time of liquidation of the company, the creditor having an
unregistered charge becomes an unsecured creditor of the company
27
as the charge is void against the liquidator and the creditors
...
If default is made in filing the particulars of charges, the company
and every officer of the company or any other person who is in default
shall be punishable with fine which may extend to Rs
...
A further fine of upto Rs
...
142)
...
143)
Every company has to keep at its registered office a register
of charges and enter therein all charges specifically affecting property of
the company and all floating charges on the undertaking or on any property
of the company, giving in each case :
(a)
a short description of the property charged ;
(b)
the amount of charge ; and
(c)
the names of the persons entitled to charge
...
500
...
136, every company must keep at its
registered office a copy of every instrument creating any charge requiring
registration
...
The register of charges and
the documents must be open for inspection by any person
...
130)
The Registrar must also keep, with respect to each company, a
register of all the charges requiring registration
...
16 SUMMARY
There are two important elements which must be present to
make one a member of a company (a) these must be an agreement to become
a member and (b) the name must be entered in the register of member of
the company
...
There are different modes
of acquiring membership- Companies Act confers a number of rights on
the members of a company
...
Every company is bound to keep the
register of its members
...
Every trading company, unless prohibited by its memorandum
or articles, has an implied power to borrow money for the purpose of its
business, and to give security for the loan by creating a mortgage or charge
29
on its property even though such power is not expressed in the memorandum
of the company, whom borrowings are beyond the powers of the company
or the directors, it is ultra vires borrowings
...
The charges which a
company may create on its assets are of two kinds namely fixed charge and
floating charge
...
5
...
Shareholders: The term shareholder as refers to the person who holds the
share in a company
...
Ultra Vires Borrowing: Where a company borrows money in excess of
its powers, the borrowing would be ultra-vires the company
...
Subrogation: Subrogation means the substitution of one person for another
...
Floating Charge: It is the charge which is created on the class of property
which is constantly changing
...
18 SELF ASSESSMENT QUESTIONS
1
...
Comment
...
Who may become a member of a company ? How to become member
of a company? What are the ways of cessation of membership ?
Discuss in detail
...
What are the duties and liabilities of members ? Discuss
...
Discuss the borrowing powers of a company
...
Define a floating charge and distinguish it from a fixed charge
...
Enumerate the charges that require registration
...
5
...
P
...
Gogna, Mercantile Law, S
...
N
...
Kapoor, Company Law, Sultan Chand & Sons, New Delhi
...
C
...
S
...
Aggarwal, Business Law, Galgotia Publishing Company, New Delhi
...
K
...
, New Delhi
...
H
...
M
...
Ltd
...
1
LESSON : 6
MEETINGS; MANAGERIAL REMUNERATION
STRUCTURE
6
...
1
Introduction
6
...
3
Statutory Meeting
6
...
5
Extra Ordinary General Meeting
6
...
7
Requisites of a valid meeting
6
...
9
Resolutions
6
...
11 Summary
6
...
13 Self Assessment Questions
6
...
0
OBJECTIVE
After reading this lesson, you should be able to-
(a)
Define a meeting and explain the kinds of meeting
...
(c)
Explain the requisites of a valid meeting
...
(e)
Discuss the statutory provisions regarding payment of management
remuneration
...
1
INTRODUCTION
The company is an artificial person created by law having a
separate entity distinct from its members
...
It has to take decisions on matters relating
to its well being by way of resolutions passed at properly constituted and
convened meetings of its shareholders or directors
...
There in an old proverb that "Two heads are always better than
one"
...
It follows that to constitute
a meeting there must be two or more persons
...
6
...
Meetings of the shareholders
(i)
General meetings
(ii)
Class meetings
2
...
Meetings of the Creditors
3
Meetings
Shareholders
Directors
General
meetings
Class
meetings
Creditors
Meeting of
Debentureholders
Statutory meeting
Annual general
meeting
Meetings of
creditors
and contributories at the
time of liquidation of the
company
Extraordinary
general meeting
Board
Committee
meetings
meetings
In this lesson, the discussion will be confined to the meetings
of the shareholders
...
3
STATUTORY MEETING
Every public company limited by shares and every company
limited by guarantee and having a share capital, shall, within a period of not
less than one month nor more than six months from the date on which the
company is entitled to commence business hold a general meeting of the
members of the company
...
[Sec
...
The notice for such a meeting should state it
4
to be statutory
...
Private companies, public companies limited by guarantee and
not having a share capital and unlimited companies are not required to hold
the statutory meeting
...
43 will have to comply with the
provisions of the Act which are applicable to public limited companies from
the date of its becoming a public limited company
...
If the date of its
becoming a public company is within 6 months of its incorporation, it must
hold a statutory meeting in accordance with the provision of Section 165
(1)
...
Notice
The company must give notice to its members 21 days before
the holding of the statutory meeting
...
The time, date and place of the meeting must be mentioned in the notice
...
(b)
If the company has no share capital, holding not less than 95% of the
total voting power exercisable at the meeting
...
If the report is sent later than is required, it will be deemed to
have been duly forwarded if it is so agreed to by all the members entitled to
attend and vote at the meeting
...
The statutory report is required to be certified as correct by at least two
directors of the company, one of whom must be a Managing Director, if
there is any
...
A copy of the report must be sent to the Registrar also
[Section 165(5)]
...
(b)
The total amount of cash received by the company in respect of all
the shares allotted
...
6
(d)
The name, address and occupations of the directors of the company
and of its auditors and also if there be any, of its manager and
secretary
...
(f)
The extent to which each underwriting contract (if any) has not been
carried out and the reason therefor
...
(h)
Particulars of any commission or brokerage paid or to be paid in
connection with the issue or sale of shares or debentures to any
director
...
The list is to remain open and accessible to any member of the
company during the continuance of the meeting [Section 165 (6)]
...
[Sec
...
[Sec
...
500
...
[Sec
...
Furnished with these
particulars the shareholders are to have an opportunity of meeting and
discussing the whole situation in the management methods and prospects
of the company
...
6
...
The annual
8
general meeting is to be held in addition to any other general meeting that
might have been held in a year
...
Calender year is to
be calculated from Ist January to 31st December and not twelve months
from the date of incorporation of the company
...
For example a
company is incorporated in October 1994
...
e
...
Subsequent annual general meeting
As already discussed a company is required to hold an annual
general meeting in each year
...
However, the gap between
one annual general meting and the next should not be more than fifteen
months
...
Astt
...
640, the annual
general meeting of a company called in December 1934 was adjourned and
held in March 1935
...
The company was prosecuted
for failure to call the annual general meeting in 1935
...
The Registrar can, for any special reason, extend the time within
which any annual general meeting is required to be held by a period not
exceeding 3 months but the time for holding the first annual general meeting
cannot be so extended
...
166(1)]
Power to convene an annual general meeting
The proper authority to convene an annual general meeting is
the Board of Directors, and if the managing director, manager, secretary or
other officer calls a meting without such authority, it will not be effectual
unless the Board ratifies the act before the meeting is held
...
Annual
general meeting may be called after giving a shorter notice than 21 days if
it is so agreed by all the members entitled to vote in the meeting (Section
171)
...
Date, time and place of holding the annual general meeting
Every annual general meeting shall be called at any time during
the business hours, on a day that is not a public holiday
...
The Central Government may exempt any class
of companies from the provisions of Sec
...
10
(a)
A public company or a private company which is a subsidiary of a
public company, may by its Articles fix the time for its annual general
meetings and may also by a resolution passed in preceding annual
general meeting fix the time for its subsequent annual general
meetings and
(b)
A private company which is not a subsidiary of a public company may
in like manner and also by a resolution agreed to by all the members
thereof, fix the time as well as the place for its annual general
meetings [Sec
...
Holding of annual general meeting where the annual accounts are not
ready
According to Central Government instructions, in case the
annual accounts are not ready for laying at the appropriate annual general
meeting, the company must hold the annual general meeting within the time
limit, transact all business other than the consideration of the accounts,
announce when the accounts are expected to be ready for laying and pass a
suitable resolution adjourning the said annual general meeting to a specific
date or to a date to be specified later on
...
11
Power of Central Government to call annual general meeting
The Central Government may, on the application of any member
of the company, call or direct the calling of a general meeting of the
company
...
A general meeting held in pursuance of this order will be
deemed to be an annual general meeting of the company
...
[Section 167]
Penalty
If a default is made in holding an annual general meeting in
accordance with the above provisions or in complying with the directions
given by the Central Government, the company and every officer of the
company who is in default shall be punishable with fine which may extend
to Rs
...
250 for every day after the first during which the
default continues
...
At this meeting some
directors retire and come up for re-election and thereby the shareholders
find an opportunity to refuse to re-elect a director of whose action and
policy they disapprove
...
Annual accounts are presented at this meeting for the
consideration of the shareholders and the shareholders can ask any question
relating to the account
...
At
12
this meeting the shareholders can discuss any other matters relating to the
company's business
...
5
EXTRA ORDINARY GENERAL MEETING
Regulation 47 of the Table A provides that all general meetings
other than annual general meetings shall be called extraordinary general
meetings
...
Hence, it is a meeting of a company which is held between
two consecutive annual general meetings for transacting some urgent or
special business
...
By the Board of Directors on its own or on the resolution of
members; or
2
...
By the Central Government
...
An
extraordinary general meeting may be convened by the Board of Directors
if some business of special importance requires the approval of the
members and which in the opinion of the Board of Directors can not be
postponed till the next annual general meeting
...
Regulation 48(2) of Table A
13
provides that "If at any time, they are not present within India, the number
of directors capable of acting and forming a quorum, any director or any
two members of the company may call an extraordinary general meeting in
the same manner, as nearly as possible, as that in which such a meeting may
be called by the Board”
...
The Board of Directors is under a legal obligation to proceed
within 21 days of the deposit of the requisition to call a meeting
...
169(6)]
...
3
...
14
Any meeting called, held and conducted in accordance with any
such order of the Central Government will, for all purposes, be deemed to
be a meeting of the company duly called, held and conducted
...
It has been held that the word
'impracticable' should be taken to mean impractical from a reasonable point
of view
...
Re; 1989 BCL [763 (1989)] case,
there were only two directors and one of them who was holding 51% of the
shares wanted to remove his fellow director
...
The fellow director did not attend the meeting to frustrate
him
...
6
...
Class meetings are held to pass resolutions which will bind only
the members of the particular class concerned
...
Similarly, under Sec
...
Class meetings
can only be attended by the members of that class
...
15
6
...
1
...
However, if the board
fails to call a general meeting of the company, the members or the Central
Government or the Central Government may call such a meeting
...
2
...
171)
A proper notice of the meetings must be given to the members
of the company
...
The period of 21 days excludes the day of service of the notice
and also the day on which the meeting is to be held
...
Notice to whom (Sec
...
Deliberate omission to give
notice of the meeting to members or to a single member will make
the meeting invalid, but an accidental omission to give notice to or
the non-receipt of notice by any member will not invalidate the
proceedings at the meeting [Sec
...
Contents of Notice
Every notice of a meeting is required to specify the place and
the day and hours of the meeting and must contain a statement of the business
to be transacted at the meeting
...
The notice of general meeting must contain a statement of the
business to be transacted at the general meeting of the company
...
Section 173 provides (a) in the case of an annual general
meeting, all business to be transacted at the meeting will be deemed special
except the business relating to the consideration of accounts, Balance Sheet
and reports of the Board of Directors and auditors, the declaration of
dividends, the appointment of directors in the place of those retiring and
the appointment of and the fixing of the remuneration of the auditors and
(b) in the case of any other meeting, all business will be deemed special
...
The statement must set out all material facts concerning each item
of business including in particular the nature of the concern or interest
therein of every director or other managerial personnel
...
A notice of meeting must give a sufficiently full and frank
disclosure to the members of the fact upon which they are asked to vote
otherwise the resolution passed at the meeting will be invalid
...
Croydon Tramways Co
...
Under the agreement the buying company agreed
to pay, in addition to the sum payable to the selling company, certain amount
to the directors of the selling company as compensation for the loss of
office
...
The Court held that the notice could not make the full and fair disclosure
of all the material facts to the considered and voted upon at the meeting
and therefore the resolutions passed at the meting were invalid and
ineffective
...
Quorum
Quorum means the minimum number of members that must be
present at the meeting
...
Unless the articles provide for a large number, five members
personally present in the case of a public company (other than a public
company which has become such by virtue of Section 43-A) and two
members personally present in the case of any other company will be the
18
quorum for a meeting of the company
...
If at a adjourn meeting also the quorum is not present within
half an hour from time appointed for holding the meeting the members
present sufficient will be quorum [Section 174(5)]
...
But a few
exceptions to this general rule may also be noted :
(a)
Under Section 167, the Central Government may, on the application
of any member of the company, call a general meeting of the company
and may direct that even one member of the company present in person
or by proxy shall be deemed to constitute a meeting
...
(c)
In East v
...
Ltd
...
A meeting of preference shareholders attended
by him only was held to be a valid meeting
...
Chairman of meeting
Before a meeting of a company can start its business, it is
required to have a Chairman
...
He is to conduct the meeting and to maintain the
19
order
...
Usually the articles provide for the appointment of a
Chairman but if there is no provision in the articles to this effect, the
members present in the meeting shall elect one of themselves to be the
Chairman of such meeting on a show of hands [Section 175(1)]
...
If some other person is
elected Chairman as a result of the poll, he will be the Chairman for the
rest of the meeting [Section 175(3)]
...
A Chairman is not entitled to close the meeting prematurely
and if he does so, a new Chairman may be elected and the meeting of the
company may be continued
...
Duties of the Chairman
(a)
He must take care that the minority is not oppressed in any way
...
But at the expiry of a reasonable time, if
he thinks fit, he should stop the discussion on any resolution
...
e
...
It is the Chairman who
is to see whether a quorum is present before proceeding with the
business
...
(e)
He should adjourn the meeting when it is impossible, by reason of
disorder or other like cause, to conduct the meeting and complete
its business
...
(f)
He must take care that the opinion of the meeting is properly
ascertained with regard to the questions before it
...
(g)
He must keep order in the meeting
...
(h)
He should exercise his casting vote, if any, provided by the articles
for the benefit of the company
...
5
...
21
These records are known as minutes and the books in which
these records are written are called 'minute books'
...
193-196)
(a)
Within 30 days of every such meeting, entries of the proceedings
must be made in the books kept for that purpose
...
193 (1-A)]
(b)
Each page of minutes book which records proceedings of a board
meeting must be initialled or signed by the Chairman of the same
meeting or the next succeeding meeting
...
(c)
The minutes of each meeting must contain a fair and correct summary
of the proceedings at the meeting
...
In the case of a meeting
of the Board of Directors or of a committee of the board, the minutes
must contain the names of the directors present at the meeting and
the names of the directors dissenting from or not concurring in the
resolution passed at the meeting [Sec
...
(e)
The Chairman may exclude from the minutes, matters which are
defamatory of any person, irrelevant or immaterial to the proceedings
or which are detrimental to the interests of the company
...
(f)
The minutes books must be kept (i) at the registered office of the
company; and (ii) be open during business hours to the inspection of
any member without charge subject to reasonable restrictions but at
least two hours each day must be allowed for inspection
...
50
...
8
VOTING AND ROLL
A vote is the formal expression of the will of the members of
the house either for or against a proposal
...
The procedure of voting is regulated by the Articles subject to
the provisions of the Act
...
However,
the members holding preference shares can vote only on those motions
which affect the rights attached to their capital
...
The voting rights
of an equity shareholder at a poll are in proportion to his share of the paid
up equity capital
...
Voting by a show of hands
At any general meeting, unless the Articles otherwise provide,
a resolution put to the vote is in the first instance decided by a show of
hands except when a poll is demanded [Sec
...
While voting by a show
of hands, one member has one vote irrespective of the shares held by him
...
The
23
Chairman will count the hands raised and will declare the result accordingly
...
178]
...
Voting by poll [Sec
...
'Poll' means counting
the number of votes cast for and against a motion
...
Before or on the declaration of the result of voting
on any resolution by a show of hands, a poll may be ordered to be taken by
the Chairman of the meeting of his own motion, and shall be ordered to be
taken by him on a demand made in that behalf by the person or persons
specified below :
(a)
In the case of a public company having a share capital, by any member
or members present in person or by proxy and holding shares in the
company:
(i)
which confer a power to vote on the resolution not being less
than one tenth of the total voting power in respect of the
resolution, or
(ii)
on which an aggregate sum of not less than fifty thousand
rupees has been paid-up,
(b)
In the case of a private company having a share capital, by one member
having the right to vote on the resolution and present in person or by
proxy if not more than seven such members are personally present,
and by two such members present in person or by proxy, if more than
seven such members are personally present,
24
(c)
In the case of any other company, by any member or members present
in person or by proxy and having not less than one tenth of the total
voting power in respect of the resolution [Sec
...
The demand for a poll may be withdrawn at any time by the
person or persons who made the demand
...
179(2)]
...
A poll demanded on the question of adjournment or the election
of the Chairman shall be taken forth with
...
Where
a poll is taken, the meeting will be deemed to continue until the
ascertainment of the result of the poll
...
The Chairman of the meeting shall have the power to regulate
the manner in which a poll shall be taken [Sec
...
Where a poll is to
be taken, the Chairman of the meeting shall appoint two scrutiniser to
scrutinise the votes given on the poll and to report thereon to him [Sec
...
Of the two scrutiniser, one shall always be a member present at
the meeting, provided such a member is available and willing to the appointed
[Sec
...
The Articles of a company may provide that no member shall
exercise any voting right in respect of any shares registered in his name on
which calls or other sums presently payable by him have not been paid
(Sec
...
25
Proxies
A meeting has right to vote either in person or by proxy
...
Unless the articles otherwise provide, a proxy
will not be allowed to vote except on a poll
...
Besides unless the articles
provide otherwise a member of a company not having a share capital is not
entitled to appoint a proxy
...
A proxy is revocable but it should be revoked before the proxy
has voted
...
Death of the member who has appointed a proxy revokes the
authority of his proxy but if the company has no notice of such death, then
the vote given by the proxy will be valid
...
9
RESOLUTIONS
The decisions of a meeting take the form of resolutions carried
by a majority of votes
...
Once a 'motion' has been put to the members and they
have opted in favour of it, it becomes a resolution
...
26
Types of Resolutions
Resolutions are of the following types :
1
...
Special Resolutions ; and
3
...
Ordinary Resolution
At a general meeting of which notice has been given, if votes
cast in favour of the resolution by members exceed the votes, if any, cast
against the resolution by members, the resolution so passed is an ordinary
resolution [Sec
...
Transactions where ordinary resolution is required
Important maters for which an ordinary resolution is enough
are as follows :
(i)
Issue of shares at a discount (Sec
...
94)
(iii)
Approval of the statutory report (Sec
...
210)
(v)
Appointment of auditors and fixation of their remuneration [Sec
...
27
(vi)
Appointment of the first directors who are to retire by rotation [Sec
...
(vii) Increase or decrease in the number of directors within the limits
prescribed by the Articles [Sec
...
(viii) Adoption of the appointment of sole selling agents [Sec
...
(ix)
Removal of a director and appointment of another director in his
place [Sec
...
(x)
Declaration of dividend [Sec
...
(xi)
Appointment of liquidator in case of voluntary winding up and fixing
his remuneration [Sec
...
(xii) To rectify the name of company [Sec
...
(xiii) To cancel or redeem debentures [Sec
...
(xiv) To cancel directors by rotation [Sec
...
(xv)
To approve the remuneration of directors [Sec
...
(xvi) To fill the vacancy in the office of Liquidator [Sec
...
Special Resolution
The resolution is a special resolution, if
(i)
the intention to propose the resolution as a special resolution has
been duly specified in the notice calling the general meeting ;
(ii)
the notice required has been duly given of the general meeting; and
(iii)
the votes cast in favour of the resolution by members are three times
the number of the votes, if any, cast against the resolution by the
members [Sec
...
28
A copy of the special resolution must be filed with the
Registrar within 30 days of its passing
...
17];
(ii)
to alter the articles of the company [Sec
...
81];
(iv)
for creation of a reserve capital [Sec
...
100];
(vi)
to pay interest out of the capital to members [Sec
...
314];
(viii) for voluntary winding-up of a company [Sec
...
Resolutions Requiring Special Notice
A resolution requiring special notice is not an independent
class of resolutions
...
If
that is not practicable, the company shall give not less than seven days notice
before the meeting either by advertisement in a newspaper or in any other
mode allowed by the articles (Sec
...
29
In addition to the purposes enumerated in the articles requiring
special notice, under the Act, special notice has to be given for the following
matters :
(a)
for a resolution at an annual general meeting appointing as auditor a
person other than a retiring auditor and for a resolution providing
expressly that a retiring auditor shall not be re-appointed (Sec
...
(b)
for certain persons who shall not be eligible for appointment as
directors whose period of office is liable to determination by
retirement of directors by rotation (Sec
...
(c)
for removing a director before the expiry of his period of office; and
(d)
of any resolution to appoint a director in place of a director so
removed (Sec
...
6
...
The resolution may be ordinary or special as the Articles
may require
...
This percentage shall be
exclusive of the fees payable to the directors under Section 309
...
The word
remuneration shall include the following :
(i)
any expenditure incurred on providing free accommodation and other
amenities connected therewith ;
(ii)
any expenditure incurred on providing any other amenity either
absolutely free or at a concessional rate ;
(iii)
any expenditure incurred in providing any obligation or service which
in the absence of provision by the company would have to be borne
by that person ;
(iv)
any expenditure incurred in providing life insurance, pension, annuity
or gratuity to such person or his spouse or child
...
However credit shall not be given for the following sums :
(i)
Profits, by way of premium, on the shares or debentures of the
company, which are issued or sold by the company,
(ii)
Profits on the sales by the company of the forfeited shares;
(iii)
Profits of a capital nature including profits from the sale of the
undertaking or any of the undertakings of the company or of any part
thereof ;
31
(iv)
Profits from the sales of any immovable property or fixed assets of
a capital nature comprising in the undertaking or any of the
undertakings of the company, unless the business of the company
consists, whether wholly or partly, of buying and selling any such
property or assets
...
The following sums shall not be deducted in computing the profits :
(i)
Income tax and super tax payable by the company or any other tax on
the income of the company not falling under clauses (d) and (e) of
Section 399 (4);
(ii)
any compensation, damages or payments made voluntarily ; and
(iii)
loss of a capital nature
...
Except with the
approval of the Central Government, such remuneration shall not exceed 5
per cent of the net profits for one such director, or 10 per cent for all of
them in case there are more than one such director
...
33
The remuneration paid to part time directors shall not exceed
per cent of the net profits of the company if the company has a managing or
whole time director or a manager and 3 per cent of the profits in any other
case
...
6
...
But every gathering of persons does
not constitute a meeting
...
The meetings of a company are of three
kinds namely meetings of shareholders directors and creditors
...
Annual general meeting is the
regular meeting of the members of the company and the purpose of this
meeting is to provide an opportunity to the members of the company express
their views on the management of company's affairs
...
The business of the meeting is conducted
in the form of resolutions passed at the meeting and the resolutions proposed
in the meeting are decided on the votes of the members of the company
...
The overall maximum limit of management remuneration
in fixed by Section 198 of the Companies Act
...
11
KEYWORDS
Meeting: A meeting may be defined as gathering or assembly of a number
of persons for transacting any lawful business
...
This meeting is called the statutory
meeting
...
Extra Ordinary General Meeting: Any meeting other than a statutory and
an annual general meeting is called an Extra Ordinary General Meeting
...
They are held in cases where their rights are
sought to be affected
...
Vote: A vote is the formal expression of the will of the members of the
house either for or against a proposal
...
e
...
Managerial Remuneration: The total managerial remuneration payable by
a public company or a private company which is a subsidiary of a public
company to its directors, managing agent, secretaries and treasurer or
35
manager in respect of any financial year shall not exceed 11% of the net
profit of that company for that financial year
...
13 SELF ASSESSMENT QUESTIONS
1
...
What are the statutory provisions regarding the holding of an annual
general meeting ? What types of business are transacted in such
meetings ?
3
...
What is a quorum ? What happens if there is no quorum at a meeting?
5
...
Discuss the statutory provisions relating to payment of managerial
remuneration of a public limited company
...
14 SUGGESTED READINGS
S
...
Davar, Mercantile Law, Progressive Corporation Pvt
...
, Mumbai
...
R
...
S
...
Gulshan & G
...
Kapoor, Business Law, New Age International
Publishers, New Delhi
...
C
...
Nirmal Singh, Business Law, Deep and Deep Publication Pvt
...
, New
Delhi
...
0
7
...
2
7
...
4
7
...
6
7
...
7
...
7
...
7
...
7
...
8
7
...
10 Winding up of Unregistered Companies
7
...
12 Effect of Winding up on Antecedent and other Transactions
7
...
14 Keywords
7
...
16 Suggested Readings
7
...
b)
c)
Different modes of winding up of a public company
...
d)
Consequences of winding up
...
1
INTRODUCTION
Winding up (which is more commonly called liquidation in
Scotland) is proceeding for the realisation of the assets, the payment of
creditors, and the distribution of the surplus, if any, among the shareholders,
so that the company may be finally dissolved
...
An administrator called a liquidator is appointed and he takes
control of the company, collects its assets, pays its debts and finally
distributes any surplus among the members in accordance with their rights
...
It
means a proceeding by which a company is dissolved
...
The winding up of a company precedes its dissolution
...
On dissolution the company ceases to
exist, its name is actually struck off from the Register of Companies by the
Registrar and the fact is published in the official Gazette
...
2
MODES OF WINDING UP
A company can be wound up in three ways :
1
...
Voluntary winding up : (i) Members' voluntary winding up; (ii)
Creditors' voluntary winding up;
3
3
...
425]
...
3
WINDING UP BY THE COURT
A company may be wound up by an order of the Court
...
Section 433 lays
down the following grounds where a company may be wound up by the Court
...
Special resolution
A company may be wound up by the Court if it has, by a special
resolution, resolved that it be wound up by the Court
...
Even in such a case it is
the discretion of the Court to order for winding up or not
...
Default in filing statutory report or holding statutory meeting
If a company has made a default in delivering the statutory
report to the Registrar or in holding the statutory meeting, a petition for
winding up of the company may be presented to the Court
...
The power
of the Court is discretionary and generally it does not order for winding up
in first instance
...
4
3
...
Even if the business is
suspended for a whole year, this by itself does not entitle the petitioner to
get the company wound up as a matter of right but the question whether the
company should be wound up or not in such a circumstances entirely in the
discretion of the Court depending upon the facts and circumstances of each
case
...
Before the order of
winding up on this ground the Court is required to see what are the
possibilities of resumption of the business of the company
...
The Court will not order for winding up on the grounds, if :
(a)
suspension of business is due to temporary causes ; and
(b)
there are reasonable prospects for starting of business within a
reasonable time
...
Reduction of membership below the minimum
When the number of members is reduced, in the case of a public
company, below 7 and in the case of a private company, below 2, a petition
for winding up of the company may be presented to the Court
...
Company's inability to pay its debts
A winding up petition may be presented if the company is unable
5
to pay its debt
...
A company will be deemed to be unable to pay its loan in
the following conditions (Section 434) :
(a)
a creditor of more than Rs
...
e
...
6
...
433(f)]
The Court may also order to wind up of a company if it is of
opinion that it has just and equitable that the company should be wound up
...
The words
'just and equitable' are of wide connotation and it is entirely discretionary
on the part of the Court to order winding up or not on this ground
...
Winding up by the Court on 'just and equitable' grounds may
be ordered in the cases given below :
(a)
When the substratum of the company has gone : In the words of Shah,
J
...
Grain Chambers Ltd
...
The substratum of a company will be deemed to have gone when
(i)
The object for which it was incorporated has substantially failed or
has become impossible or (ii) it is impossible to carry on business except
at a loss or (iii) the existing and possible assets are insufficient to meet
the existing liabilities of the company
...
(c)
When the company is formed for fraudulent or illegal objects or when
the business of the company becomes illegal
...
When
there is a complete deadlock in the management of the company, it
will be wound up even if it is making good profits
...
Ltd
...
Held,
there was a complete deadlock and consequently the company be
wound up
...
e
...
7
...
It has to be petitioned
...
The petition for winding up may be brought by any one of
the following :
1
...
However, it has been held that where the company
is found by the directors to be insolvent due to circumstances which ought
to be investigated by the Court, the directors may apply to the Court for an
order of winding up of the company even without obtaining the sanction of
the general meeting of the company
...
Petition by Creditors
The word 'creditor' includes secured creditor, debentureholder
and a trustee for debentureholder
...
Before a petition for winding up of a company presented by a
contingent or prospective creditors is admitted, the leave of the Court must
be obtained for the admission of the petition
...
Notice that a creditor has a right to winding up order if he can
prove that he claims an undisputed debt and that the company has failed to
discharge it
...
3
...
8
Section 428 makes it clear that it includes the holder of fully-paid shares
...
A contributory is entitled to present a petition for winding up
a company if :
(a)
the number is reduced, in the case of a public company below seven
and in the case of private company below two; and
(b)
the shares in respects of which he is a contributory either were
originally allotted to him or have been held by him; and
(c)
the shares have been registered in his name, for at least six months
during the period of 18 months immediately before the
commencement of the winding up; and
(d)
the shares have been devolved on him during the death of a former
holder [Sec
...
4
...
,
(a)
if a default is made in delivering the statutory report to the Registrar
or in holding the statutory meeting;
(b)
if the company does not commence its business within a year from
its incorporation, or suspends its business for a whole year ;
(c)
if the number of members is reduced, in the case of a public company
below seven and in the case of a private company below two ;
(d)
if the company is unable to pay its debts; and
9
(e)
if the Court is of opinion that it is just and equitable that the company
should be wound up
...
The Central Government
before sanctioning approval must give an opportunity to the company for
making its represent actions, if any
...
5
...
7
...
In all other cases (i
...
where the company has not previously passed a resolution for voluntary
10
winding up), the winding up will be deemed to commence from the time of
the presentation of the petition for the winding up
...
In
the case of Misrilal Dharamchand Ltd
...
B
...
(1978)
the Court ordered for winding up but stayed the operation of the order for
six months so as to enable the company to pay the petitioner, if it could do
so within this period and in case of failure the order was to come in force
...
Consequences of winding up
(i)
Where the Court makes an order for winding up of company, the Court
must forthwith cause intimation thereof to be sent to the Official
Liquidators and the Registrar (Section 444)
...
(iii)
The winding up order is deemed to be notice of discharge to the
officers and employees of the company, except when the business of
the company is continued [Section 445(3)]
...
Suits pending at the date of the winding up order
cannot be further proceeded without the leave of the Court
...
(v)
An order for winding up operates in favour of all the creditors and of
all the contributories of the company as if it had been made on the
joint petition of a creditor and of a contributory (Section 447)
...
Thus the Court can direct that any such disposition of property
or actionable claims or transfer of shares or alteration of status of
the members will be valid
...
(vii) Section 537 declares that any attachment and sale of the estate or
effects of the company, after the commencement of the winding up,
will be void
...
Similarly any sale held , without leave of the
12
Court, of any of the properties or effects of the company after the
commencement of the winding up will be void
...
Besides this
section does not apply to any proceedings for the recovery of any
tax imposed or any dues payable to the Government
...
T
...
can
commence assessment proceedings without leave of the Court
...
The corporate existence of the company
continues through winding up till the company is dissolved
...
Its corporate existence come to an end only when it is dissolved
...
(x)
On a winding up order being made in respect of a company, the
Official Liquidator, by virtue of the office, becomes the liquidator
of the company (Section 449)
...
6
OFFICIAL LIQUIDATORS
Under the present Act, the only person who is competent to
act as the liquidator in a winding up is the official liquidator
...
In district
courts the official receiver will be the official liquidator
...
There is
no provision in the Act, for the removal of the official liquidator [Sec
...
Liquidator
On a winding up order being made, the official liquidator, by
virtue of his office, becomes the liquidator of the company (Sec
...
Where the official liquidator becomes or acts as liquidator, there shall be
paid to the Central Government out of the assets of the company such fees
as may be prescribed
...
452]
...
450 (1)]
...
The Court
may dispense with such notice where there are special reasons
...
A provisional liquidator is as much liquidator
as a liquidator in the winding up of a company
...
On a winding up order being made, the official liquidator shall cease
to be provisional liquidator and shall become liquidator of the company
...
The official
liquidator gets his remuneration from the Central Government and as such
he is not entitled to any further remuneration
...
The acts of a liquidator shall be valid, notwithstanding any
defect that may afterwards be discovered in his appointment or qualification
...
451]
...
454]
The company must make out and submit to the official
liquidator a statement as to the affairs of the company in the prescribed
form verified by an affidavit and containing the following particulars :
(a)
The assets of the company, stating separately the cash balance in hand
and at the bank and the negotiable securities held by the company;
(b)
Its debts and liabilities;
(c)
Names, residences and occupation of its creditors, stating separately
the amount of secured and unsecured debts;
(d)
In the case of secured debts, particulars of securities given, their
value and the dates on which they were given ;
(e)
The debts due to the company and the names, residences and
occupations of the persons from whom they are due and the amount
likely to be realised on account thereof; and
15
(f)
Such further or other information as may be prescribed or as the
official liquidator may require
...
454 (3)]
...
(ii)
He must submit a preliminary report to the Court as to :
(a)
the amount of capital issued, subscribed and paid up and the
estimated
amount of assets and liabilities, giving separately,
under the heading of assets such as (i) cash and negotiable
securities; (ii) debts due from contributories; (iii) debts due
to the company and securities, if any available in respect
thereof ; (iv) immovable and movable properties belonging to
the company; and (v) unpaid calls
...
Note that the Court may extend the period of six months for
the submission of the above report by the official liquidator
...
16
(iii)
The official liquidator may, if he thinks fit, make further reports,
stating the manner in which the company was promoted or formed
...
He may also state any other matters which, in his
opinion, it is desirable to bring to the notice of the Court [Sec
...
(iv)
He must take into his custody and control the property of the
company
...
456(2)]
...
460(1)]
...
(vi)
To Summon Meetings of Creditors and Contributories : He may
summon general meetings of the creditors or contributories for the
purpose of ascertaining their wishes
...
460 (3)]
...
Any creditor or contributory may,
subject to the control of the Court, inspect any such books, personally
or through his agent [Sec
...
(viii) He must, at least twice in each year, present to the Court an account
of his receipts and payments as liquidator
...
The Court gets
the account audited, keeps one copy thereof in its records and delivers
the other copy to the Registrar for filling
...
The liquidator must also send a printed copy of the
accounts so audited by post to every creditor and to every
contributory
...
Within 14 days of the meeting of
the creditors, the liquidator must call a meeting of the contributories
to consider the decision of the creditors
...
The statement must be filed :
(a)
in the case of a winding up by or subject to the supervision of the
Court, in the Court ; and
18
(b)
in the case of voluntary winding up, with the Registrar
...
551]
...
Powers with the Sanction of the Court
(a)
to institute or defend any suit, prosecution or other legal
proceedings, civil or criminal, on behalf of the company ;
(b)
to carry on the business of the company for the beneficial winding
up of the company ;
(c)
to sell the immovable and movable property and actionable claims of
the company by public auction or private contract ;
(d)
to raise any money required on the security of the assets of the
company ;
(e)
to appoint an advocate, attorney or pleader to assist him in the
performance of his duties ;
(f)
to do all such other things as may be necessary for winding up the
affairs of the company and distributing its assets
...
458)
...
457(2)]
...
459], but with the sanction of the
Court
...
Any creditor or
20
contributory may, subject to the control of the Court inspect the books
which are maintained by the liquidator
...
2
...
The Court has the power to confirm,
reserve or modify any act or decision of the liquidator if complained by
any aggrieved person
...
3
...
The liquidator is under an obligation to
have directions from the committee of inspection
...
Control by Central Government
Section 463 seeks to bring the conduct of the liquidators of
companies under the control and scrutiny of the Central Government
...
The power includes the power to remove the
liquidator from office
...
It may also, if it thinks
fit, apply to the Court to examine him or any other person on oath concerning
the winding up
...
The provisions of this section do not apply where the winding
up has been completed after dissolution
...
Where such a direction is given by
the Court, the liquidator is required to convene, within 2 months from the
date of the direction, a meeting of the creditors to determine who are to be
the members of the committee, within 14 days from the date of the creditors'
meeting, the liquidator must call a meeting of the contributories to consider
the creditors' decision with respect to the membership of the committee
...
If the contributories at their meeting do not accept
the creditors' decision in its entirely, the liquidator shall apply to the Court
for directions as to what the composition of the committee should be and
who shall be its members
...
The Committee may inspect the accounts of the liquidator at
all reasonable time
...
The quorum
for a meeting of the committee will be one-third of the total number of the
members or two, whichever is higher
...
A member may resign by notice in writing signed by him and deliver
to the liquidator
...
A member of the committee may be removed at a meeting
of the creditors, if he represents creditors, or at a meeting of contributories
if he, represents contributories, by an ordinary resolution of which seven
days' notice has been given stating the objects of the meeting
...
However, the liquidator may apply to the Court that the vacancy need not be
filled in and if the Court is satisfied that in the circumstances of the case
the vacancy need not be filled, it may make an order accordingly
...
Where such an order is made by the Court, the company will be
dissolved from the date of the order of the Court
...
On the dissolution, the corporate existence of the company comes to an
end
...
After the order of dissolution, the
legal personality of the company come to an end
...
7
...
In voluntary
winding up, the company and its creditors are left free to settle their affairs
without going to the Court, although they may apply to the Court for
directions or orders if and when necessary
...
when the period fixed for the duration of the company by the articles
has expired or the event has occurred on the occurrence of which the
articles provide that the company is to be dissolved and the company
in a general meeting has passed a special resolution to wind up
voluntarily; or
2
...
Thus a company may be wound up voluntarily at any time and for any
reason if a special resolution to this effect is passed in its general
meeting
...
Commencement of Voluntary Winding up
A voluntary winding up is deemed to commence at the time
when the resolution for winding up is passed [Sec
...
The date of the
commencement of the winding up is important for several matters such as
liability of past members and fraudulent preferences, etc
...
From the commencement of voluntary winding up, the company ceases
to carry on its business, except so far as may be required for the beneficial
winding up thereof [Sec
...
2
...
The corporate state
and powers of the company shall, however, continue until it is dissolved
(Sec 456 and 487)
...
On the appointment of a liquidator, all the powers of the board of
directors cease and the liquidator may exercise the powers mentioned in
Sec
...
The
liquidator appointed in a members' voluntary winding up is merely an agent
of the company to administer the property of the company for purposes
prescribed by the statue
...
7
...
1 Members' voluntary winding up
A members' voluntary winding up takes place only when the
company is solvent
...
The liquidator is appointed by the members
...
To obtain
the benefit of this form of winding up, a declaration of solvency must be
filed
...
Such declaration shall be made within five
weeks immediately preceding the date of the passing of the resolution for
winding up and shall be delivered to the Registrar before that date
...
Where such a declaration is duly made and delivered, the
winding up following shall be called members' voluntary winding up
...
Sections 490-98 of the Act deal with provisions applicable to
members' voluntary winding up
...
Appointment and Remuneration of Liquidator
On the passing of the resolution for winding up, the company
must in a general meeting appoint one or more liquidators and fix his or
their remuneration
...
490]
...
Powers of the Board on Appointment of Liquidator
On the appointment of a liquidator, all the powers of the board
and of a managing or whole-time director, and manager, if there be any of
these, shall cease, except for the purpose of giving notice of such
appointment to the Registrar or in so far as the company in a general meeting
or the liquidator may sanction the continuance thereof [Sec
...
3
...
492]
...
Notice of Appointment to Registrar
The company must, within 10 days of the appointment of the
liquidator, or the filling up of the vacancy, as the case may be, give notice
to the Registrar of the event
...
100 for every day of
default [Sec
...
27
5
...
495]
...
498]
...
Calling General Meeting at the End of one Year
In the event of the winding up continuing for more than one
year, the liquidator must call a general meeting of the company at the end
of the first year from the commencement of the winding up at the end of
each succeeding year, or at the first convenient date within three months
from the end of the year or such longer period as the Central Government
may allow, and must lay before the meeting an account of his acts and
dealings and of the conduct of the winding up during the preceding year
[Sec
...
7
...
He then calls a general meeting, of the company and lays before it
accounts showing how the winding up has been conducted
...
The meeting must be called by advertisement :
(a)
specifying the time, place and object of the meeting ; and
(b)
published not less than one month before the meeting in the official
Gazette, and also in some newspaper circulating in the district where
the registered office of the company is situated
...
He must also make a report to each of them of the holding of the meeting
and of the date thereof
...
On receipt of the accounts and the
report, the Registrar will register them
...
If the report shows that the affairs of the company have been
conducted bonafide i
...
not in a manner prejudicial to the interests of its
members or to the public interest, then from the date of the submission of
the report to the Court, the company shall be deemed to have been dissolved
...
497]
...
7
...
In other words, when a
company is insolvent, that is, it is not able to pay its debts, it is the creditors'
voluntary winding up
...
They are :
1
...
500)
The company must call a meeting of the creditors of the
company on the same day or on the next following day on which the general
meeting of the company is held for passing a resolution for voluntary
winding up
...
The company must also cause the notice of the
meeting of the creditors to be advertised once at least in the official
Gazettee and once at least in two newspapers circulating in the district where
the registered office or principal place of business of the company is
situated
...
The
board of directors is required to lay before the meeting of the creditors(a)
a full statement of the position of the company's affairs and (b) a list of
creditors of the company with the estimated amount of their claims
...
Notice of Registrar [Sec
...
3
...
502)
The creditors and the company at their respective meetings
may nominate a person to be liquidator for the purpose of winding up the
affairs and distributing the assets of the company
...
If no person is nominated by the creditors, the person,
if any, nominated by the company shall be the liquidator
...
Committee of Inspection
The creditors at their first or any subsequent meeting may, if
they think fit, appoint a committee of inspection of not more than five
members
...
If the
creditors object to persons appointed by the company, then the matter will
be referred to the Court for the final decision
...
5
...
504]
The committee of inspection or if there is no such committee,
the creditors may fix the remuneration to be paid to the liquidator or
liquidators
...
Any remuneration fixed by the committee of inspection or
creditors or the Court shall not be increased
...
Board's Power to Cease (Sec
...
7
...
506)
If a vacancy occurs by death, resignation, or otherwise in the
office of the liquidator (other than a liquidator appointed by or by the
31
direction of the Court), the creditors in a general meeting may fill the
vacancy
...
Final Meeting and Dissolution (Secs 508-509)
The liquidator must call a general meeting of the company and
a meeting of the creditors every year within three months from the close of
the liquidation year, if the winding up continues for more than one year
...
He must call, in the same manner, a final meeting when the affairs of
the company are fully wound up and place the same statements before it, as
he does in the case of a members' meeting in a members' voluntary winding
up under Sections 496 and 497
...
7
...
If a vacancy occurs by death or resignation or otherwise in
the office of the liquidator the company in general meeting may fill the
vacancy
...
In the case of a creditors' voluntary winding up, the creditors
and the members at their respective meetings, may nominate a person to be
the liquidator of the company
...
(Section 502)
...
The
Court may also appoint a liquidator on the application of the Registrar
...
Body corporate not to be appointed as liquidator
A body corporate shall not be qualified for appointment as a
liquidator of a company in a voluntary winding up
...
(Section 513)
...
1,000
...
Notice by liquidator of his appointment
When a person is appointed as the liquidator and accepts the
appointment, he shall publish in the official gazette a notice of his
appointment, in the prescribed form
...
The liquidator shall do this within 30 days of his
appointment
...
50 for each day of default
...
33
Effect of the appointment of liquidator
On the appointment of a liquidator, in a members' voluntary
winding up, all the powers of the directors, including managing director,
whole time directors as also the manager shall cease except so far as the
company in general meeting or the liquidator may sanction their continuance
...
On the appointment of a liquidator in creditors' voluntary
winding up, all the powers of the board of directors shall cease
...
(Section 505)
...
Unless the question of
remuneration is resolved the liquidators shall not take charge of the
company
...
(Section 490)
...
In the absence of any such
fixation, the Court shall determine his remuneration
...
All costs, charges and expenses properly incurred in the
winding up, including the remuneration of the liquidator, shall subject to
the rights of secured creditors, be payable out of the assets of the company
in priority to all other claims (Section 520)
...
The Court may also
remove a liquidator on the application of the Registrar
...
7
...
In the case of members' voluntary winding up with the sanction of a
special resolution of the company and in the case of creditors' voluntary
winding up with the sanction of the Court or committee of inspection or
the meeting of the creditors if there is no committee of inspection, the
liquidator may (a) institute or defend any suit, prosecution or other legal
proceedings in the name and on behalf of the company ; (b) carry on the
business of the company so far as may be necessary for the beneficial
winding up of the company ; (c) to sell the immovable and movable property
and actionable claims of the company by public auction or private contract;
and (d) raise any money required on the security of the assets of the company
(Section 512)
...
In addition to these powers, a
liquidator in voluntary winding up exercise (i) the power of the Court of
settling a list of contributories ; (ii) the power of the Court of making calls;
(iii) the power of calling general meetings of the company
...
7
...
At any time after a company has passed a resolution for voluntary
winding up, the Court may make an order that the voluntary winding up shall
continue, but subject to such supervision of the Court
...
522)
...
523)
...
Where the company is insolvent,
the wishes of the creditors only are regarded or the investigation is required
...
439 (which deals with
provisions as to applications for winding up), or
(b)
the official liquidator [Sec
...
36
Where a supervision is made, the Court may appoint an
additional liquidator or liquidators, or remove any liquidator at any time
and fill any vacancy
...
The Registrar is also given
power to apply to the Court for the removal of a liquidator and the Court
may do so (Sec
...
The liquidator appointed by the Court will act as a
voluntary liquidator (Sec
...
In a voluntary liquidation brought under
the Court's supervision, the liquidator's remuneration cannot be increased
...
525)
...
Consequences as to Shareholders
A shareholder is liable to pay the full amount upto the face
value of the shares held by him
...
The liability of a
present member is the amount remaining unpaid on the shares held by him,
while a past member can be called upon to pay if the present contributory is
unable to pay
...
Consequences as to Creditors
A company, whether solvent or insolvent, can be wound up
under the Act
...
But in case of an insolvent company, the rules under
the law of insolvency apply
...
He may realise his security and satisfy the debts
...
The secured creditor has
also the option to relinquish his security and to prove the amount as if he
were an unsecured creditor
...
(Section 529)
...
The assets available to the liquidator are
applied in the following order :
a
...
b
...
c
...
d
...
e
...
Balance returned to the contributories
...
Such payments are called preferential payments
...
38
These preferential payments are : (a) All revenues, taxes,
cesses and rates due from the company to the Central or State Government
or to a local authority
...
(b) All wages or salary of any
employee in respect of services rendered to the company and due for a
period not exceeding 4 months within 12 months, before the winding up
and any compensation payable to any workman under any of the provision
of Chapter V-A of the Industrial Disputes Act, 1947
...
20,000 in the case of any one claimant
...
(d) All amounts due in respect of
contributions payable by the company as employer but this is not payable if
the company is being wound up voluntarily for the purpose of reconstruction
and amalgamation (e) All amounts due in respect of any compensation or
liability for compensation in respect of death or disablement of any
employee under the Workmen's Compensation Act, 1923 but this is not
payable if the company is being wound up voluntarily for reconstruction or
amalgamation
...
(g) The expenses of any investigation
held in pursuance of Sections 235 and 237, in so far as they are payable by
the company
...
Consequences as to servants and officers
A winding up order by a Court operates as a notice of discharge
to the employees and officers of the company except when the business of
the company is continued
...
Where there is a contract of service
39
for a particular period, an order for winding up will amount to wrongful
discharge and damages will be allowed as for breach of contract of service
...
Consequences of proceedings against the company
When a winding up order is made, or an official liquidator has
been appointed as provisional liquidator no suit or legal proceedings can
be commenced and no pending suit or legal proceeding continued against
the company except with the leave of the Court and on such terms as it may
impose
...
It may be noted that law does not prohibit proceedings being
taken by the company against others including directors, or officers or other
servants of the company
...
Consequences as to costs
Where the assets of the company are insufficient to satisfy
the liabilities, the Court may make an order for payment out of the assets
of the costs, charges and expenses incurred in the winding up
...
6
...
547)
...
548)
...
7
...
e
...
(b)
the valuation of annuities and future and contingent liabilities; and
(c)
the respective rights of secured and unsecured creditors
...
But it is not necessary for a secured creditor to prove his debt
in the winding up and he can stand wholly outside the winding up proceedings
...
41
The rules of insolvency in India are to be found in the
Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act,
1920
...
Apart from these provisions, in respect of other matters such as those
relating to priority of debts, all questions have to be determined with
reference to the Companies Act only
...
The provisions of the
laws of insolvency applicable to insolvent companies will not apply to such
company and it will be treated as having been solvent throughout the winding
up proceedings
...
10 WINDING UP OF UNREGISTERED COMPANIES
(SECTIONS 582-583)
The term "Unregistered Company" includes any partnership,
association of company consisting of 8 or more members at the time when
the petition for winding up is presented, but it does not include a railway
company incorporated under any Act of Parliament or other Indian Law or
any Act of Parliament of U
...
, a company registered under the present Indian
Companies Act or any of the previous Indian Companies Acts
...
However such a company can only be wound up by the Court
and cannot be wound up voluntarily or subject to the supervision of the Court
...
7
...
7
...
Fraudulent Preference (Sec
...
Fraudulent preference here relates similarly to fraudulent
preference under insolvency law, where any individual transfers any property
or makes any payment within three months before the presentation of an
insolvency petition, such transfers shall be deemed a fraudulent preference
in his insolvency
...
2
...
Further, any transfer or assignment by a company of all its
property to trustees for the benefit of all its creditors in void (Sec
...
3
...
It provide that where a company
is being wound up, a floating charge on the undertaking or property of the
company created within the twelve months immediately preceding the
commencement of the winding up, shall unless it is proved that the company
immediately after the creation of the charge was solvent, be invalid, expect
to the amount of any cash paid to the company at the time of or subsequently
to the creation of, and in consideration, for the charge, together with interest
on that amount at the rate of five per cent, per annum or such other rate as
may for the time being be notified by the Central Government in this behalf
in the official gazettee :
Section 534 makes the charge invalid but the debt is not
affected
...
4
...
535)
Disclaimer means abandoning
...
The liquidator of the company may, with the leave of the Court,
by a writing signed by him, at any time within 12 months after the
commencement of the winding up, disclaim the property
...
The disclaimer shall not affect the rights
or liabilities of any other person
...
7
...
These are three modes of winding up of a
company namely compulsory winding up by the court, voluntary winding up
and voluntary winding up with the intervention of the court section 433 of
the Companies Act contains the cases in which the company may be wound
up by the court
...
The winding
up proceedings are conducted by an official to be known as the official
liquidator
...
The members
and creditor are left free to settle their affairs without going to the court
...
As a matter of fact, it is the
voluntary winding up but under the supervision of the court
...
14 KEYWORDS
Winding-up: Winding-up is a proceeding for the realisation of the assets,
the payment of creditors, and the distribution of the surplus, if any, among
the shareholders so that the company may be finally dissolved
...
Liquidator: A liquidator is a person who is appointed by the court to conduct
the proceedings in winding up the company and perform such duties in
reference thereto as the court may impose
...
Unregistered Company: It includes any partnership association, or
company consisting of more than seven members at the time when petition
for winding up is presented before the Tribunal
...
7
...
What are the different modes of winding up ? Discuss in detail
...
What is compulsory winding up ? What are the grounds for
compulsory winding up ?
3
...
Who is a liquidator ? What are the duties of a liquidator ?
5
...
How does it differ from a members'
voluntary winding up ?
6
...
16 SUGGESTED READINGS
P
...
S
...
Chand & Company, New Delhi
...
D
...
S
...
Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi
...
K
...
G
...
Varshney, Elements of Business Law, S Chand & Co
...
R
...
Pandia, Priciples of Mercantile Law, N
...
Tripathi Pvt
...
, Mumbai
...
R
...
Ltd
...
K
...
Balchandari, Business Law for Management, Himalaya Publication
House, New Delhi
...
S
...
K
...
1
LESSON : 8
INDIAN CONTRACT ACT 1872 – ESSENTIALS OF
VALID CONTRACT
STRUCTURE
8
...
1
Introduction
8
...
3
Definition of Contract
8
...
5
Kinds of Contracts
8
...
7
Keywords
8
...
9
Suggested Readings
8
...
1
to understand definition and essentials of a valid contract; and
to bring out the various kinds of contracts
...
It would have
been very difficult, to carry on trade or commerce in the absence of this law
...
Contract is considered as the foundation
of the civilised world
...
When a person drinks a cup of tea, or rides a bus, or
goes to the cinema to see a movie or purchases the goods, or gives a loan to
friend, etc
...
Such
contracts create legal rights and obligations
...
The law of contract determines the circumstances in which a promise or an
agreement shall be legally binding on the person making it
...
For example, if X
is entitled to receive a sum of money from Y, this right can only be exercised
by X and not by others
...
On the other hand, if X
owns a plot of land and Y is the immediate neighbour, the right of X to have
complete possession and enjoyment of land is available not only against Y but
against the whole world
...
8
...
This Act is based mainly on English Common Law which is to a large extent
made up of judicial precedents
...
The Act is not exhaustive
...
There are separate Acts which deal with contracts relating to
negotiable instruments, transfer of property, sale of goods, partnership,
insurance, etc
...
1)
...
3
1
...
124-147
...
The provisions of Indian Contract Act are subjection to some assumptions
...
The
law shall not lay down absolute rights and liabilities of the contracting parties
...
If the plaintiff asserts that the defendant undertook
to do a certain act and failed to fulfil his promise an action at law shall apply
...
3
DEFINITION OF CONTRACT
A legally binding agreement is called a contract
...
Salmond defines contract
as, "an agreement creating and defining obligation between the parties"
...
"
Section 2(h) of the Indian Contract Act defines a contract as, "An agreement
which is enforceable at law
...
They are : (1) An agreement, and (2)
Legal obligation
...
1
...
2 (e)]
...
What is a promise? The answer
to this question is contained in Section 2(b) which defines the term :" When
the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted
...
An agreement, therefore, comes into existence only when one party
makes a proposal or offer to the other party and that other party signifies his
assent (i
...
, gives his acceptance) thereto
...
On analysing the above definition the following characteristics of an agreement
become evident :
(a)
Plurality of persons : There must be two or more persons to make an
agreement because one person cannot enter into an agreement with himself
...
2
...
Obligation is an undertaking to do or to
abstain from doing some definite act
...
In other words, it must be a legal obligation and not merely
moral, social or religious
...
Mohan came to
the house of Ram but Ram could not leave the house because of some important
engagement
...
In
the circumstances, there was, in eye of law no contract between Ram and Mohan
...
Such agreements are purely
domestic and are not intended to create legal relationship
...
Balfour (1919)
Facts of the case are : Mr
...
Mrs
...
On the accusation of leaving her in England for medical treatment Mr
...
But Mr
...
So Mrs
...
The court held that it was a mere
domestic agreement and that the promise made by the husband in this case was
not intended to be a legal obligation
...
Barfour was
dismissed since there was no contract enforceable in a court of law
...
(b)
Agreements between husband and wife in domestic affairs is not a
contract
...
Obligations which are not contractual in nature are
outside the scope of the law of contract
...
Sir John
6
Salmond has rightly observed
...
It is the law of those
agreements which create obligations and those obligations which arise from
an agreement"
...
4
ESSENTIAL ELEMENTS OF A VALID CONTRACT
Students must remember that all agreements are not contracts
...
In other words, the parties
to the agreement must have intended that it shall have legal consequences and
be Legally enforceable
...
Thus, the term agreement is more wider in scope than contract
...
An agreement, to be enforceable by law, must possess the essential elements
of a valid contract as contained in section 10 of the Indian Contract Act
...
" As the
details of these essentials form the subject-matter of our subsequent chapters,
it is proposed to discuss them in brief here
...
Offer and acceptance : There must be a 'lawful offer' and a 'lawful
acceptance' of the offer, thus resulting in an agreement
...
2
...
Agreements of a social or domestic nature do not
7
contemplate legal relations, and as such they do not give rise to a contract
...
Agreements between
husband and wife also lack the intention to create legal relationship and thus
do not result in contracts
...
W sang the song but H did not bring the saree for her
...
(b)
The defendant was a civil servant stationed in Ceylon
...
When the defendant was due to return to Ceylon,
his wife could not accompany him because of her health
...
She sued for breach of this agreement
...
In commercial agreements an intention to create legal relations is presumed
...
But if the parties have expressly declared their resolve that the agreement is
not to create legal obligation, even a business agreement does not amount to a
contract
...
vs Crompton and Brothers Ltd
...
Illustration : In the above case R company entered into an agreement with
company, by means of which the former was appointed as the agent of the latter
...
It was held that there was no intention to create legal relations
on the part of parties to the agreement and hence there was no contract
...
Consensus ad idem : The minds of both the parties must be ad idem
...
For instance, if A who owns
two cars, one Ambassador and the other Fiat, offers to sell B one car, A intending
it to be the Ambassador, B accepts the offer thinking that it is the Fiat, there is
no consensus and hence no contract
...
Competency of Parties : The parties to the agreement must be competent
to contract
...
According to section 11 following are the persons
who are competent to contract –
(a)
who have attained the age of majority according to the law to which they
are subject;
(b)
who are of sound mind;
(c)
who are not disqualified from contracting by any law to which they are
subject
...
Lawful consideration : The third essential element of a valid contract
is the presence of 'consideration'
...
An agreement is legally
enforceable only when each of the parties to it gives something and gets
something
...
Subject to certain exception, gratuitous promises are
not enforceable at law
...
It may be past, present
or future
...
The
consideration is lawful, unless - it is forbidden by law; or is of such a nature
that, if permitted it would defeat the provisions of any law; or is fraudulent; or
involves or implies injury to the person or property of another; or is immoral;
or is opposed to public policy (Sec
...
6
...
A consent may not be free either on account of mistake in the
minds of the parties or on account of the consent being obtained by some unfair
means like coercion, fraud, misrepresentation or undue influence
...
7
...
The object for
which the agreement has been entered into must not be fraudulent or illegal or
immoral or opposed to public policy or must not imply injury to the person or
property of another (Sec
...
If the object is unlawful for one or the other
reasons mentioned above the agreement is void
...
8
...
But in certain special cases it lays down
that the agreement, to be valid, must be in writing or/and registered
...
25)
...
Thus, (i) an arbitration agreement must be in writing as per
the Arbitration and Conciliation Act, 1996; (ii) an agreement for a sale of
immovable property must be in writing and registered under the Transfer of
Property Act, 1882 before they can be legally enforced
...
Not declared to be void : The agreement must not have been declared
to be expressly void
...
10
...
In order to give rise to a valid contract the terms of the agreement must
not be vague or uncertain
...
Illustration :A agrees to sell B a hundred tons of oil
...
The agreement is void for uncertainty
...
Possibility of Performance : Yet another essential feature of a valid
contract is that it must be capable of performance
...
If the act is impossible
in itself, physically or legally, the agreement cannot be enforced at law
...
The agreement
is not enforceable
...
If any one of them is absent the agreement does not become a contract
...
5
KINDS OF CONTRACTS
From the point of view of Enforceability
From the point of view of enforceability a contract may be valid or voidable or
void or unenforceable or illegal
...
Valid contract : An agreement enforceable at law is a valid contract
...
A offers to sell his house for Rs
...
B agrees to buy it for this price
...
A contract to enter
into a contract is, however, not a valid contract
...
Void contract : A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable
...
A contract may be valid at the time when it is made but it may
become void subsequent to its formation Thus, a contract with one who had
been an alien friend but later on becomes an alien enemy would be a case of a
void contract
...
The law will not enforce such a contract, nor can it be made valid by
the parties
...
An agreement
not enforceable at law is a void agreement
...
An agreement with a minor is void
...
An agreement which is void never matures
into a contract
...
Void contracts may better be called
void agreements to avoid contradiction in terms
...
Voidable contract : According to Section 2(i), "an agreement which is
enforceable by law at the option of one or more of the parties thereto, but not
at the option of the other or others, is a voidable contract"
...
Until it is avoided or rescinded by the party entitled to do so by exercising his
option in that behalf, it is a valid contract
...
Such a contract is voidable at the option of the aggrieved party i
...
, the
party whose consent was so caused (Secs
...
But the aggrieved party
must exercise his option of rejecting the contract (i) within a reasonable time,
and (ii) before the rights of third parties intervene, otherwise the contract
cannot be repudiated
...
threatens to shoot B if he does not sell his new Bajaj
Scooter to A for Rs
...
B agrees
...
4
...
Such contracts must be sued upon by one
or both of the parties
...
Such
contracts will not be enforced by the courts until and unless the defect is
rectified
...
The contract has been caused by fraud and is voidable
at the option of Akabar
...
For example,
(i)
When a contract contains reciprocal promises, and one party to the
contract prevents the other from performing his promise, then the contract
becomes voidable at the option of the party so prevented (Sec
...
Illustration : A
...
100
...
The contract becomes voidable at the option of A
...
55)
...
2,500
within one week
...
The contract becomes voidable at the option of Y
...
The Section states that when a person at whose option a contract is
voidable rescinds it, the other party thereto need not perform any promise
therein contained in which he is a promisor
...
14
For example, when a contract for the sale of a house is avoided on the ground
of undue influence, any money received on account of the price must be
refunded
...
But it must be remembered that the benefit which is to be
restored must have been received under the contract
...
2 (g))
...
In the eye of law such an agreement is no agreement at all
from its very inception
...
Thus, an agreement with a minor is void ab-initio as against him, because a
minor lacks the capacity to contract
...
Certain agreements have been expressly declared void in the
Contract Act e
...
, agreements which are in restraint of trade or of marriage or
of legal proceedings or which are by way of wager
...
Thus, this Section provides for restitution of the benefit
received; so that both parties may stand unaffected by the transaction; in the
following two cases :
15
(a)
When an agreement is discovered to be void : In other words, when an
agreement is void ab-initio but the fact of its being void being discovered at a
later stage
...
1,000 for B's agreeing to sell his horse
to him
...
In this case the agreement is discovered to
be void and B must repay to A Rs
...
It should, however, be noted that
agreements which are known to be void or illegal, when they are entered into,
are excluded from the purview of this Section
...
For example, A agrees to sell B after one month 10 quintals
of wheat at Rs
...
600 as advance
...
The
contract becomes void but A must return the sum of Rs
...
Similarly,
where after accepting Rs
...
A is not bound to make compensation to B for the loss of the
profits which B would have made if A would have been able to sing, but A must
refund to B the 1,000 rupees paid in advance
...
Illegal Contract : A contract which is either prohibited by law or
otherwise against the policy of law is an illegal contract
...
Thus, a contract to commit dacoity is an illegal contract and cannot be enforced
at law
...
Both
are unenforceable at law but there is something more in an illegal contract
...
g
...
Every void contract is not illegal unless its
object or consideration is (a) immoral or (b) opposed to public policy etc
...
But when a contract is illegal
collateral contracts depending thereon are also void
...
Example : X borrows Rs
...
Y knows the purpose of the loan
...
The collateral agreement is also illegal
...
A void agreement has from the very beginning no legal effects
...
A voidable contract is one which one of the parties may
affirm or reject at his option
...
2
...
But a void agreement is void ab initio and its defects are incurable
...
In the case of a void agreement even a third party cannot acquire any
right from person claiming under such contract while in the case of voidable
contract, a third party can acquire a valid title from a person claiming under
such a contract
...
Since a void agreement is unenforceable at law there does not arise any
question of compensation on account of the non-performance of the agreement
...
5
...
But where
the agreement is void on account of illegality of the object, the collateral
transaction will also become void
...
5
...
Unilateral contract : A unilateral contract is one in which a promise on
one side is exchanged for an act on the other wide
...
Thus, where a doctor in a private clinic, examines a patient and
gives the medicine, the patient alone remains liable to pay the fees
...
2
...
It is a contract in which there is an obligation on
the part of both the parties to do or to refrain from doing a particular act
...
500
...
Each party is thus
both a promisor and a promisee
...
Executed contract : A contract is said to be executed when one party to
the contract has performed his share of the obligation and the other party is
still to perform his share of the promise
...
Thus, where A advertises a reward of Rs
...
500
...
Executory contract : It is a contract where some future act is to be
done
...
Thus, where an agreement is made to build a house
in six months, it is an executory contract
...
5
...
Express contract : Where both the offer and acceptance constituting an
agreement enforceable at law are made in words spoken or written, it is an
express contract
...
1,00,000 and B in reply informs A that he accepts the offer, there
is an express contract
...
Implied contract : Where both the offer and acceptance constituting an
agreement enforceable at law are made otherwise than in words i
...
, by acts
and conduct of the parties, it is an implied contract
...
Similarly,
where M, a professional shoe shiner starts polishing the shoes of N without
being requested to do so, and N allows M to polish his shoes knowing that M
expects to be paid for the service, there comes into existence an implied
contract and N is under obligation to pay to M
...
Constructive or quasi-contract : It is a contract in which there is no
intention on either side to make a contract, but the law imposes a contract
...
Thus, a finder of lost goods is under an
obligation to find out the true owner and return the goods
...
19
8
...
Section 2(h) of the Indian Contract
Act defines a contract as, "An agreement which is enforceable at law"
...
According to Section 10 of the Indian Contract Act "All agreements are
contracts 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"
...
(2) Legal relationship
...
(4) Competency of parties
...
(6) Lawful consideration
...
(8) Not declared to be void
...
(11) Written and Registered
...
Valid contract : An agreement enforceable at law is a valid contract
...
2
...
It is a contract without any
legal effects and is a nullity
...
Voidable contract : An agreement which is enforceable by law at the
option of one or more of the parties thereto, but not at the option of other or
others is a voidable contract
...
Unenforceable contract : It is a contract which is otherwise valid, but
cannot be enforced because of some technical defect like absence of a written
20
form or absence of a proper stamp
...
Illegal contract : A contract which is either prohibited by law or
otherwise against the policy of law is an illegal contract
...
6
...
7
...
8
...
In
such a contract rights and obligations arise not by any agreement between the
parties but by operation of law
...
Executed contract : A contract is said to be executed when one party to
the contract has performed his share of the obligation and the other party is
still to perform his share of the promise
...
Executory contract : It is a contract where some future act is to be
done
...
8
...
Agreement: An agreement is the sum total of offer and acceptance
...
21
Void Contract: It is one which was legal and enforceable which it was entered
into but has subsequently become void because of certain reasons
...
Implied Contract: Where the proposal or acceptance is made otherwise than
in words, it is an implied contract
...
8
SELF ASSESSMENT QUESTIONS
1
...
Discuss the definition
and bring out clearly the essentials of a valid contract
...
"All contracts are agreements, but all agreements are not contracts"
...
3
...
4
...
5
...
Void and Voidable contracts
Void and Illegal agreements
"In business agreements, the presumption is that the parties intend to
create legal relations"
...
22
7
...
Y accepted X's
invitation
...
They waited upto 9
...
m
...
They left the place and had their meals in
Piccadilly in Sector 17
...
100
...
M agrees to pay N Rs
...
Is it a valid a contract?
[Hints No, it is not a valid contract
...
9
SUGGESTED READINGS
S
...
Gulshan & G
...
Kapoor, Business Law, New Age International Publishers,
New Delhi
...
C
...
Nirmal Singh, Business Law, Deep and Deep Publication Pvt
...
, New Delhi
...
C
...
Ltd
...
Avtar Singh, The Priciples of Mercantile Law, Eastern Book Co
...
M
...
Shukla, A Manual of Mercantile Law, S
...
, New Delhi
...
S
...
Pillai and Bagavathi, Business Law, S
...
, New Delhi
...
0
Objective
9
...
2
Essentials of a Valid Consideration
9
...
4
Exception to the Rule, 'No Consideration, No Contract'
9
...
6
Keywords
9
...
8
Suggested Readings
...
0
OBJECTIVE
After reading this lesson the students must be able to
(i)
Define consideration in the eye of law;
(ii)
Describe essentials of a valid consideration; and
(iii)
Understand exceptions to the rule, 'No consideration, No contract'
...
1
INTRODUCTION
According to section 10 of Indian Contract Act, 'Consideration' is one of the
essential elements of a valid contract
...
In the words of Blackstone : "A
consideration of some sort or other is so necessary to the forming of a contract,
that a nudum pactum, or agreement to do or pay something on one side, without
2
any compensation on the other, will not at law support an action; and a man
cannot be compelled to perform it
...
If I promise a man £100 for nothing, he neither doing nor
promising anything in return or to compensate me for my money, my promise
has no force in law"
...
It is only when a promise is made in return of 'something'
from the promisee, that such promise can be enforced by law against the
promisor
...
Definition of Consideration : It may be defined as the price for which the
promise of the other is bought
...
It may be some benefit to the plaintiff or some detriment to the
defendant
...
e
...
Section 2(d) of the Indian Contract Act defines consideration as :
(a)
when at the desire of the promisor,
(b)
the promisee or any other person,
(c)
has done or abstained from doing, or does or abstains from doing, or
promises to do or abstain from doing,
(d)
something, such act or abstinence or promise is called a consideration
for the promise
...
It is something of value which the promisee has given, gives or
promises to give in return for the promise
...
Forbearance to sue is good consideration
...
A single consideration may support more
3
than one promise
...
Settlement of dispute
can be a good consideration for the promise
...
Thus, refraining from smoking, gambling or drinking would supply
the consideration needed to support another person's promise to pay a certain
sum of money to the one who refrained
...
Illustrations : (a) X agrees to sell his horse to Y for Rs
...
Here X's
promise to sell his horse is for Y's consideration to pay Rs
...
Similarly,
Y's promise to pay Rs
...
(b) A agrees to give Rs
...
This promise is not binding on A because there is no reciprocal consideration
for his promise
...
(c)
A promises his debtor B not to file a suit against him for one year on B's
agreeing to pay him Rs
...
The abstinence of A is the consideration
for B's promise to pay
...
2
ESSENTIALS OF VALID CONSIDERATION
The essentials of a valid consideration are discussed as follows :
1
...
Thus acts done
or services rendered voluntarily, or at the desire of third party, will not amount
to valid consideration so as to support a contract
...
The leading case on this point is Durga Parsad v
...
Facts of the case are : D promised to pay P a commission on articles sold by
him in a bazar in which he occupied a shop in consideration of P having
expended money in the construction of such bazar
...
In a suit by P it was held that there was no consideration for the
promise made by D and hence no contract
...
A advanced money to B on an undertaking given by his father
and obtain promissory notes for the amount advanced
...
(Raja of Venkatagiri v
...
C
...
A promise to subscriber to a public or a charitable object is unenforceable
because there is not benefit to the promisor
...
The leading case on this point is Kedar Nath v
...
Facts on the case are : X had agreed to subscribe Rs
...
Y the secretary of the committee, on
the faith of the promise called for plans and entrusted the work to contractors
5
and undertook liability to pay them
...
It was held that though the promise was to
subscribe to a charitable institutions and there was no benefit to X, yet it was
supported by consideration in that Y, the promisor suffered a detriment in
having undertaken a liability to the contractors on the faith of the promise
made by X
...
2
...
It means that as long as there is a consideration for a
promise, it is immaterial who has given it
...
This is wider than the
concept of England, where consideration can move only from the promisee
...
The leading case on this point is Chinnaya v
...
Facts of the case are : An old lady made a gift of her property to her daughter
with a direction to pay a certain sum of money to the maternal uncle by way of
annuity
...
The daughter did not, however, pay
the annuity and the uncle sued to recover it
...
6
Illustration : X, Y and Z enter into an agreement under which X pays Rs
...
Here Z is a party to the contract
but stranger to consideration and can enforce the contract
...
Therefore, consideration
need not move from the promisee, but can move from any other person
...
3
A STRANGER TO A CONTRACT CANNOT SUE :
A person may be a stranger to the consideration but he should not be a stranger
to the contract because privity of contract is essential for enforcing any of the
rights arising out of the contract
...
Thus where A mortgages his property to B in
consideration of B's promise to A to pay A's debt to C, C cannot file a suit
against B to enforce his promise, C being no party to the contract between A
and B (Iswaram Pillai vs Sonnivaveru, 1915, 38 Mad
...
Exceptions : The above rule that a stranger to a contract cannot sue is subject
to the following exceptions :
(i)
Where an express or implied trust is created : In case of a trust, the
beneficiary can sue in his own right to enforce his rights under the trust, though
he was not a party to the contract between the settler and the trustees
...
M
...
e
...
K
...
I
...
Ker 203)
7
(ii)
Family settlement : Where a provision is made in a partition or family
arrangement for maintenance or marriage expenses of female members; such
members, though not parties to the agreement, can sue on the footing of the
arrangement
...
The daughter subsequently
refused to maintain the mother
...
I
...
AP 965)
...
Thus if A receives some money from B to be paid over to C and he admits of
this receipt to C, then C can recover this amount from A who shall be regarded
as the agent of C (Surajan vs Nanat, 1940, A
...
R
...
(iv)
In case of agency : Where a contract is entered into by an agent, the
principal can sue on it
...
g
...
3
...
To put it briefly, consideration may consist of a past,
present or a future act or abstinence
...
For example, an agreement
between B and A, under which B; on failing to pay the debt amount on the due
date to A; promises to raise the rate of interest from 9 per cent to 12 per cent
in consideration of A promising not to file a suit against him for another one
year is a valid contract; A's abstinence being the consideration for B's promise
...
It
must be noted that past consideration is good consideration only if it is given
by the promisee, 'at the desire of the promisor'
...
500 for his services
...
(ii)
A lawyer, gave up his practice and served as manger of a landlord at the
latter's request in lieu of which the landlord subsequently promised a pension
...
(Shiv Saran vs Kesho Prasad)
...
A present
consideration consists in doing or abstaining from doing something
...
Present consideration arises
where there is a promise to pay for goods sold and delivered
...
It is also
called a promise for the promise
...
9
Illustration : A promises to deliver goods to B when the ship arrives and B
promises to pay A Rs
...
This is a case of
future consideration, which is to be performed by both the parties when the
ship arrives
...
It need not to be adequate : The law of contract nowhere laid down
that consideration should be adequate to the promise
...
Adequacy is for the parties
to decide at the time of making the agreement
...
It should be of some value in the eyes of law
...
If a man gets what he
contracted for, the court will not inquire whether it was an equivalent to the
promise which he gave in return
...
For example : A agrees to sell his house worth Rs
...
9,000
...
Consideration must be real : Though consideration need not be adequate, it
must be of some value in the eyes of law, i
...
, it must be real and competent
...
(i)
Physically impossible : A promise to do something which is physically
impossible, e
...
, to make a dead man alive or to run at a speed of 100 kilometres
per hour, does not form valid consideration
...
g
...
10
(iii)
Uncertain consideration : A promise to do something which is too vague
and uncertain, e
...
, a promise to pay such remuneration "as shall be deemed
right", is no consideration in the eye of law
...
Consideration is illusory if it consists
in a promise to perform a public duty, or to perform a contract already made
with the promisor
...
B promised him a
sum of money for his trouble
...
It was held that A being under a public duty to attend and
give evidence, there was no consideration for the promise and hence the
promise is unenforceable (Callins vs Godefroy)
...
4
EXCEPTIONS OF THE RULE, "NO CONSIDERATION, NO
CONTRACT "
Consideration being one of the essential elements of a valid contract, the
general rule is that "an agreement made without consideration is void"
...
These exceptions are as follows :
1
...
Thus
there are four essential requirements which must be complied with to enforce
an agreement made without consideration, as per Section 25(1)
...
1,000
...
This is a valid
contract
...
Actually A did not
fulfil the promise
...
It was held that B could recover the
amount of debt from A
...
Rangaswamy (1903) 13 M
...
J
...
It should, however, be noted that mere existence of a near relation between the
parties does not necessarily import natural love and affection
...
[RajlaKhi Devi vs Bhootnath) (1990), 4,C
...
N
...
2
...
To apply this rule, the following essentials must
exist :
(a)
the act must have been done voluntarily;
(b)
for the promisor or it must be something which was the legal obligation
of the promisor;
(c)
the promisor must be in existence at the time when the act was done';
(d)
the promisor must agree now to compensate the promisee
...
If, however, something has not been done voluntarily, this clause
will not apply
...
The promisor should be in existence at the time when the service is rendered
...
Such a clause in the articles of association
is not binding unless it is subsequently confirmed by the company
...
Agreement to pay a time-barred debt Sec
...
A
time barred debt cannot be recovered and therefore a promise to repay such a
debt is without consideration, hence the importance of the present exception
...
25(3)];
(ii)
the promisor himself must be liable for the debt;
(iii)
there must be an 'express promise to pay' a time barred debt as
distinguished from a mere 'acknowledgement of a liability' in respect of a debt;
and
(iv)
the promise must be in writing and signed by the debtor or his agent
...
1,000, but the debt is barred by the Limitation
Act
...
500 on account of the debt
...
25)
...
Completed gifts : Explanation 1 to section 25 provides that the rule
'No consideration, of contract' shall not affect validity of any gifts actually
made between the donor and the donee
...
5
...
It is given in
section 185 which says that no consideration is needed to create on agency
...
9
...
The Essentials of valid consideration
are (1) It must at the desire of promisor
...
(3) It may be past, present or future
...
(5) It must be real
...
No one but the parties to a
contract can sue or be sued under it
...
An agreement made without
consideration is void
...
These are :
1
...
14
2
...
3
...
4
...
5
...
9
...
Privity to Contract: Privity to contract means stranger to a contract
...
9
...
Define consideration
...
2
...
3
...
"Consideration need not to be adequate but it must have some value in
the eye of law"
...
15
5
...
B does not accept
payment form A for the treatment and A promises B's son, X, to pay him
Rs
...
A being in poor circumstances, is unable to pay, X sues A for
the money
...
8
SUGGESTED READINGS
S
...
Kuchhal, Mercantile Law, Vikas Publishing House, New Delhi
...
Ltd
...
M
...
Kuchhal, Mercentile Law, Vikas Publishing House Pvt
...
, New Delhi
...
, Lucknow
...
C
...
Chand & Co
...
R
...
N
...
Chand & Co
...
1
LESSON : 10
CAPACITY OF PARTIES
STRUCTURE
10
...
1 Introduction
10
...
2
...
2
...
3 Persons of Unsound Mind
10
...
5 Summary
10
...
7 Self Assessment Questions
10
...
0 OBJECTIVE
After reading this lesson, you should be able to:
(a)
Discuss the capacity of parties to a contract
...
(c)
Discuss the law relating to contracts by persons of unsound mind
...
1 INTRODUCTION
An essential element of a valid contract according to Section 10, is that the
contracting parties must be 'competent to contract'
...
Thus a person
is competent to contract under :
(a)
if he is not a minor, according to the law to which he is subject,
(b)
if he is not of unsound mind, and
(c)
if he is not disqualified from contracting by any law to which he is
subject
...
10
...
According to The Indian Majority Act,
1875, a minor is one who has not completed his or her 18th year of age
...
In the following
two cases, a person continues to be a minor until he completes the age of 21
years
...
10
...
1 Why should minors be protected ?
A minor has an immature mind and cannot think what is good or bad for him
...
As such he must be
protected by law from any exploitation or ill design
...
3
10
...
2 Effects of minor's agreements
A minor's agreement being void is wholly devoid of all effects
...
The various rules regarding minor's agreement are discussed below
...
An agreement with or by a minor is void
Section 10 of the Contract Act requires that the parties to a contract must be
competent and Section 11 says that a minor is not competent
...
Till 1903, courts in India were not unanimous on this point
...
The leading case on this point is Mohori Bibi v
...
Facts of the case are : A, a minor borrowed Rs
...
He became a major a few
months later and filed a suit for the declaration that the mortgage executed by
him during his minority was void and should be cancelled
...
2
...
A minor cannot ratify the
agreement even on attaining majority, because a void agreement cannot be
ratified
...
Thus, where a minor borrowed a sum of money by
executing a simple pronote for it and after attaining majority executed a second
4
pronote in respect of the original loan plus interest thereon, a suit upon the
second pronote was not maintainable
...
3
...
In other words, a minor can be a beneficiary e
...
, a payee,
an endorsee of a promise under a contract ( G o e k d a L a t c h a r a o v s
Vishwanadham Bhomayya)
...
The Hindu
Minority and Guardianship Act, 1956, also provides to the same effect, namely
a natural guardian is empowered to enter into a contract on behalf of the minor
and the contract would be binding and enforceable if the contract is for the
benefit of the minor
...
308 (F
...
Example : (ii) X, a minor, insured his goods with an insurance company
...
X filed a suit for claim
...
The
court rejected the plea and allowed the minor to recover the insurance money
...
v
...
Contracts of apprenticeship and service by a minor : A contract of
apprenticeship stands on a different footing than an agreement of service by a
5
minor
...
The Act, inter alia, provides that the minor
must not be less than fourteen years of age and the contract must be entered
into on behalf of the minor by his guardian
...
So far as an agreement of service
by a minor is concerned, it is void because a minor's promise to serve would
supply no consideration for the promise of the defendant to pay him/her a
salary
...
Liability for necessaries
The case of necessaries supplied to a minor or to any person whom such minor
is legally bound to support is governed by section 68 of the Indian contract
Act
...
But a
minor is not liable for any price that he may promise and never for more than
the value of the necessaries
...
A minor is also liable for the value of necessaries
supplied to his wife
...
Objects of mere luxury are not
necessaries, nor are objects, which though of real use are excessively costly
...
The
necessaries would also include the infant's lodging expense, medical
attendance, cost of defending a minor in civil and criminal proceedings
...
But where a minor is
engaged in trade, contracts entered into by him for trading purposes are not
for necessaries and are not binding on him
...
Ten suits of clothes are necessaries for a
minor whereas even three suits may not be deemed necessary for another
...
Utility rather than
ornament is the criterion
...
He was at the time adequately provided with clothing
...
[Nash v
...
(1908) 2
...
B
...
Certain services rendered to a minor have been held to be necessaries
...
Goods necessary when ordered might have ceased to be necessary by the time
they are delivered e
...
, where a minor orders a suit from a tailor but buys other
suits before that order is actually delivered
...
The following have been held to be necessaries :
(i)
Livery for an officer's servant
...
(iii)
Goods supplied to a minor's wife for her support
...
(v)
A racing bicycle
...
7
(ii)
A silver-gift goblet
...
(iv)
Refreshment to an undergraduate for entertaining
...
The rule of estoppel does not apply to a minor
Where a minor by misrepresenting his age has induced the other party to enter
into a contract with him, he cannot be made liable on the contract
...
In other words, a minor is not estoppled from
pleading his infancy in order to avoid a contract
...
Balangowda (A
...
R
...
The court may, however, require the minor to compensate the other
party on the ground of equity
...
Fraudulent misrepresentation as to age by an infant will operate against him in
certain cases
...
If by misrepresenting himself to be of full age, has obtained money from a
trustee and given release, the release is good and he cannot compel the trustee
to make payment a second time
...
No Specific performance
A minor's contract being absolutely void, there can be no question of the
specific performance of such a contract
...
7
...
Thus, where a minor borrowed a horse for riding only
he was held liable when he let the horse to one of his friends who jumped and
killed the horse
...
But a minor
cannot be made liable for a breach of contract by framing the action on tort
...
8
...
9
...
A minor can be an agent (Sec
...
He shall bind the
principal by his acts done in the course of such an agency, but he cannot be
held personally liable for negligence or breach of duty
...
10
...
A minor cannot be adjudicated as an insolvent,
for, he is incapable of contracting debts
...
68)
...
Contract by minor and adult jointly
...
In Sain Das vs Ram Chand, [(1923)
...
334] where there was a joint
9
purchase by two vendees, one of whom was a minor, it was held that the vendor
could enforce the contract against the major vendee
...
Minor shareholder
...
A company can also refuse to register transfer
or transmission of shares in favour of a minor unless the shares are fully paid
...
Logically also, if a minor could legally hold property in his
name, it would be wrong to debar him from holding fully paid up shares in his
own name
...
3 PERSONS OF UNSOUND MIND
As stated earlier, the section 11 disqualifies a person who is not of sound mind
from entering into a contract
...
The reason is that a contract requires assent
of two minds but a person of unsound mind has nothing which the law recognises
as a mind
...
It lays down that, "A person is said to be of sound
mind for the purpose of making a contract if, at the time when he makes it he
is capable of understanding it and of forming a rational judgement as to its
effect upon his interests"
...
" Thus a patient in a lunatic
asylum, who is at intervals of sound mind, may contract during those intervals
...
Thus, a sane man,
who is delirious from fever, or who is so drunk that he cannot understand the
terms of a contract, or form a rational judgement as to its effect on his interest,
cannot contract while such delirium or drunkenness lasts
...
Consent is an act of reason accompanied by deliberation, and it is upon
the ground that there is a want of rational and deliberate consent that the
conveyance and contracts of unsound mind are generally deemed to be invalid;
or in other words, (subject to exceptions), there cannot be a contract by a
person of unsound mind
...
The mental powers of an idiot are
completely absent because of lack of development of the brain; (b) Lunacy or
Insanity – It is a disease of the brain
...
Of course he may have lucid intervals of
sanity: (d) Drunkenness – It produces temporary incapacity, till the drunkard
is under the effect of intoxication, provided it is so excessive as to suspend
the reason for a time and create impotence of mind; (d) Hypnotism – It also
produces temporary incapacity, till the person is under the impact of artificially
induced sleep; (e) Mental decay on account of old age, etc
...
J
...
The property of a person of
unsound mind is, however, always liable for necessaries supplied to him or to
any one whom he is legally bound to support, under Section 68 of the Act
...
4 DISQUALIFIED PERSONS
The third type of incompetent persons, as per Section 11, are those who are
"disqualified from contracting by any law to which they are subject"
...
Alien enemies : An alien living in India is competent to contract with
citizens of India
...
But if a war is declared, an alien enemy cannot enter into
any contract with an Indian citizen
...
2
...
These persons have right to contract but can claim the privilege
of not being sued
...
Example : E, who was a diplomat and was on the staff of a foreign embassy
rented a house belonging to M
...
sued him for arrears of rent
...
[Engelke v
...
C
...
3
...
During the period of imprisonment, a convict is incompetent (a) to enter into
12
contracts, and (b) to sue on contracts made before conviction
...
4
...
They cannot enter into contracts with respect to their
husbands' properties
...
5
...
This disqualification of an
insolvent is removed after he is discharged
...
Joint-stock company and corporation incorporated under a special
Act (like L
...
C
...
T
...
A company/Corporation is an artificial person created
by law
...
Again, being an artificial person (and not a natural person) it
cannot enter into contracts of a strictly personal nature e
...
marriage
...
5 SUMMARY
An agreement will be a contract if it is entered into by parties who are
competent to contract
...
An infant or a minor is a person who is not a major
...
If the
property of a minor is under the management of the court of wards, or a guardian
13
is appointed by the court, he attains majority only on his completing the 21st
year
...
A minor is not competent to contract and that a contract by a minor is
void ab initio
...
Minor cannot ratify the agreement even on attaining majorioty, because
a void agreement cannot be ratified
...
Where a minor by misrepresenting his age has induced the other party
to enter into a contract with him, he cannot be made liable on the contract
...
4
...
5
...
6
...
7
...
8
...
But he will not be liable to his principal for
his acts
...
Section 11 disqualifies a person who is not of sound mind from entering into a
contract
...
Unsoundness of mind does not mean weakness of mind or loss of memory
...
There is always a presumption in favour of sanity
...
These
include Alient enemies, foreign sovereigns and ambassadors, convict, married
women, insolvents and joint-stock company and corporation incorporated under
a special act
...
6 KEYWORDS
Minor: A minor is a person who has not attained the age of majority
...
Ramification: Ramification is the act of conforming or approving
...
Alien: An alien is a person who is foreigner to the land
...
10
...
"Parties to a contract must be competent to contract"
...
2
...
3
...
15
4
...
Is a minor bound on his agreement for necessaries? Is he liable upon a
bill of exchange which he has accepted in payment for necessaries?
6
...
An infant made the following contracts : (i) an engagement to marry a
girl, (ii) a credit purchase of an engagement ring for his finance (iii) a
hire-purchase contract for a set of gold clubs
...
Is he liable upon any of the above contracts ?
8
...
2,000 from B and executes a promissory note
for the amount in favour of B
...
Is the second promissory note valid ?
[Hints : The second promissory note is invalid, for a minor's agreement,
being void ab-initio, cannot be made valid by subsequent ratification
(Mohindra vs Kailash)]
...
8 SUGGESTED READINGS
P
...
S
...
Chand & Company, New Delhi
...
D
...
S
...
Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi
...
H
...
M
...
Ltd
...
S
...
Davar, Mercantile Law, Progressive Corporation Pvt
...
, Mumbai
...
0
Objective
11
...
2
Definition of Free Consent
11
...
4
Mistake
11
...
6
Fraud
11
...
8
Undue Influences
11
...
10 Keywords
11
...
12 Suggested Readings
11
...
b)
State the circumstances under which a contract can be affected on the
ground of mistake
...
d)
Explain the essentials and legal rules for a fraud
...
1
11
...
A contract
which is regular in all other respects may still fail because there is no real
consent to it by one or both of the parties
...
Consent may be rendered unreal by mistake,
misrepresentation, fraud, coercion or undue influence
...
This is defined by Salmond as error in consensus, so that there was not at
the relevant tune any real agreement or common intention between the parties, or
their minds had not met
...
When there is consent, but no free consent, there is generally a contract
voidable at the option of the party whose consent was not free, as in the case of
misrepresentation, fraud, undue influence or coercion
...
In this case a true contract is constituted by consent of the parties, but the
consent of one of the parties was induced or caused by the supposed existence
of a fact which actually did not exist
...
2
DEFINITION OF FREE CONSENT
The term 'free consent' may be defined as the consent which is obtained by the
free will of the parties, and neither party was forced or induced to give his consent
...
The term 'free consent' is defined in
Section 14 of the Indian Contract Act, which reads as under:
Consent is said to be free when it is not caused by1
...
undue influence, as defined in Section 16, or
3
...
misrepresentation, as defined in Section 18, or
5
...
Consent is said to be so caused when it would not have been given but for the
existence of such coercion, undue influence, fraud, misrepresentation or mistake
...
When the consent is there
but it is not free
...
11
...
Coercion
2
...
Fraud
4
...
Mistake
The consent obtained by any of the above elements is not free consent
...
e
...
But in the last
element (i
...
, mistake), there is no consent at all because there is no identity of minds
...
A voidable contract is enforceable at the option
of the party whose consent was not free
...
e
...
In fact, no contract will come into existence in such a case
...
Thus, there is lot of difference between 'no free consent' and 'no consent at all
...
11
...
Accordingly, the law says most clearly that it will not aid anyone to evade
consequences on the plea that the was mistaken
...
So, if the law recognises mistake in contract, that
mistake will render the contract void
...
The general common law rule is that mistake made by one or both parties
in making a contract has no effect on the validity of contract
...
If A buys an article thinking it is worth Rs
...
5, the contract is good and A must bear the loss if there has been
no misrepresentation by the seller
...
" Thus, to be operative (so as to render the contract void) the
mistake must be (i) on the part of both the parties, (ii) of fact and not of law or
opinion, and (iii) so fundamental as to negate mistake of fact, the contract would
be void
...
But as Section 22 provides unilateral mistake of fact
will not render the contract voidable
...
But mistake of foreign law and mistake of private rights are treated as mistakes
of fact, and are excusable
...
Similarly, if a contract is made in ignorance of private rights, it would be
void, e
...
where A buys property which already belongs to him
...
b)
Unilateral mistake, i
...
mistake made by one party only
...
Common Mistake occurs where both parties have made the same mistake
and may also be designed as identical bilateral mistake
...
These are clearly differentiated in following paragraphs between
themselves and contrasted with unilateral mistake
...
But if a person signs a contract in the mistaken belief that he is signing a
document of a different nature, there will be a mistake which avoids the contract
...
b)
Unilateral Mistake
Unilateral mistake occurs when one of the parties to a contract is mistaken
as to some fundamental fact concerning the contract and the other party knows
this
...
Unilateral mistakes may be of two types: (i)
regarding identity of party and (ii) unilateral mistake of offeror
...
It is rule of law that if a person intends to contract with A, B
cannot give himself if any rights under if
...
For example, where M intends to contract only with A but enters into
contract with B, believing him to be A, the contract is vitiated by mistake, as
there is no Consensus ad idem
...
e
...
6
In Cundy V
...
C
...
Lindsay claimed the recovery of the goods, or their value from Cundy
...
Cundy was liable to Lindsay from the value of the
goods
...
Brooks (1919 2 K
...
243), the plaintiff was a jeweller
...
He chose one ring worth
£450 and a pearl necklace, priced £2,250 and offered to buy them
...
North then offered to pay by cheque
...
North then said that he was Sir George Bullough, a well-known person, and gave
a London address, which the jeweller checked in the directory
...
North promptly pledged the ring with
Brooks, a pawnbroker, for £350
...
It was held that the contract was made
before the identity became important, therefore it was not void on the ground of
mistake
...
The misrepresentation took place at the time of signing the
cheque after the man who had bought it, namely, North
...
In Lake v
...
C
...
The woman then sold the neckless to an innocent buyer
...
Though the woman
got the physical possession of the necklace, there was no mental assent, as the
jewellers intended to deal not with her but quite a different person, namely, the
wife of the Baron
...
Butt (1920 3 K
...
497), B, the manager director of a Theatre,
gave instructions that a ticket was not to be sold to S
...
knew this, and asked a
friend to buy a ticket from him
...
It was held that there was no contract with S, as
the theatre company never intended to contract with S
...
In the words of Sir William Anson: "If a man accepts an offer which is
plainly meant for another, or if he becomes party to a contract by falsely
representing himself to be another, the contract in either case is void, or to put
it more accurately, no contract ever comes into existence
...
"
(ii)
Unilateral mistake of offeror where the offeror makes a material
mistake in expressing his intention, and the Offeree knows, or is
deemed to know of the error, the mistake is operative and the contract
is void
...
Colin Shields (1939 3 E
...
566)
...
C contended that there was a material mistake in
the offer and that H was well aware of this mistake when he accepted the offer
...
In the negotiations preceding the agreement, reference had
always been made to prices per piece, and it was also the custom of the trade
...
But if there is a mistake on the part of one party alone, and the other does
not, and cannot be deemed to know of the mistake, the contract is binding
...
Everidge (1902 2 Ch
...
The price was not
extravagant and the mistake was solely due to his own carelessness
...
c)
Bilateral Mistake
A bilateral mistake, as observed earlier, arises when both parties to a contract
are mistaken as regards a fact essential to the contract
...
Following may be cases of bilateral mistakes(i)
Common mistake as to the existence of the subject
...
(iii)
Mutual or non-identical mistake as to the identity of the subject
matter
...
Mistake as to non-disclosure in contracts of utmost good faith
...
Where
both parties believe the subject-matter of the contract to be in existence
at the time of the contract but in fact it is not in existence, there is
operative mistake and the contract is void
...
In Scott v
...
249), G agreed to assign to H a policy of
assurance upon the life of L
...
had died before the agreement was made
...
Again in Couturier v
...
40), there was a contract to buy
cargo described as shipped from port A to port B and believed to be at sea which
in fact had got lost earlier unknown to the parties and hence not in existence at
the time of the contract
...
But where the circumstances are such that the seller is deemed to have
warranted the existence of the goods, the seller is probably liable to the buyer for
breach of contract if the goods are non-existent
...
Where
the parties have made a contract based on a common misapprehension
relating to the fundamental subject-matter of the contract there is 'operative
mistake'
...
(iii) Mutual or non-identical mistake as to the identity of the subjectmatter
...
Thus, if A offers to sell his Ambassador Car, and B agrees to buy thinking
A means his Fiat Car, there is a bilateral mistake which is mutual or non-identical
...
The parties have negotiated completely at cross-purposes
and they were never in agreement
...
In Henkel v
...
7), P wrote to H inquiring the price of rifles
and suggested that he might buy as many as fifty
...
Due to the mistake of the telegraph clerk the message
transmitted to H was "send the rifles
...
Held, there was no
contract between the parties
...
Mistake as to the
quality raises difficult question
...
But if the mistake is only unilateral difficulty arises
...
Such a question generally arises in cases of sale of goods
...
There is generally no obligation on a contracting party to enlighten the
other party even where he knows or suspects there is a misapprehension
...
5000 for it
...
The contract is binding, provided A made no
representation in the matter
...
11
(v)
Mistake through non-disclosure in contracts of utmost good faith or
uberrimae fidei
...
In such a contract the law imposes a special duty to act with the
utmost good faith, i
...
to disclose all material information
...
Here silencer can amount to misrepresentation
...
The assured must disclose to
the insurer all material facts; and non-disclosure or misstatement
will render the contract of insurance void (Ratan Lal v
...
, 1959 Pat
...
(b)
Contracts to take shares in a company under a prospectus
...
Any person
responsible for the non-disclosure of any of these matters is liable
to damages
...
(c)
Contracts for the sale of land
...
He must,
therefore, disclose all defects in title
...
(d)
Contracts of family arrangements
...
12
(e)
Suretyship and partnership contracts
...
In both cases, after the contract
has been made there is a duty of utmost good faith on the parties
to disclose to each other all material facts coming to light after the
making of the contract
...
5
MISREPRESENTATION
A representation is a statement of fact made by one party to the contract
to the other which induces the other to enter into the contract
...
But representation
always means a statement of fact not a statement of intention or of opinion or
of law
...
Innocent Misrepresentation
Innocent misrepresentation is a misstatement made innocently and with an
honest belief as to its truth
...
The effect of innocent misrepresentation of fact is that the party misled by it may
repudiated the contract and (i) raise the misrepresentation as defence to any
action the other party may bring against him, or (ii) sue for rescission of the
contract and restitution of anything he has transferred to the misrepresenter
...
But in the following exceptional cases he can get damages:
13
(a)
From promoters or directors who made such misrepresentation in
a prospectus under Company Law;
(b)
Against an agent who commits a breach of warranty of authority;
(c)
From a person who (at the Court's discretion) is stopped from
denying a statement he has made where (i) he made a positive
statement intending that it should be relied on, and (ii) the innocent
party did rely on it, and thereby suffered damage
...
e
...
Effect
In an innocent misrepresentation, the party aggrieved may avoid the
agreement, even though the statement was true at the time it was made but became
untrue later by reason of change of circumstances
...
6
FRAUD OR WILFUL MISREPRESENTATION
Section 17 of the Contract Act defines Fraud as follows : Fraud means and
includes any of the following acts committed by a party to a contract, or with his
connivance or by a party to a contract, or with his connivance or by his agent,
with intent to deceive another party thereto or his agent, or to induce him to enter
into the contract :
14
1
...
the active concealment of a fact by one having knowledge or belief
of the fact;
3
...
any other act fitted to deceive; and
5
...
But mere silence as to facts likely to affect the willingness of a person to
enter into a contract is not fraud, unless the circumstances of the case are such
that, regard being had to them, it is the duty of the person keeping silence to
speak or unless his silence is, in itself, equivalent to speech
...
In simple terms, fraud is false statement or wilful concealment of a material
fact with intent to deceive another party
...
Characteristics of Fraud
...
If
there is an actual false statement, the case is simple, A, intending
to deceive B, falsely represent that the Television set he is offering
for sale is German made, when it is in fact a locally made set
...
Mere silence is not misrepresentation, unless silence is in itself
equivalent to speech, or where it is the duty of person keeping
silence to speak; as where a fiduciary relation exists between the
contracting parties or the contract requires utmost good faith
...
If part only of facts is disclosed, and the undisclosed part so modifies
the part disclosed as to render it, by itself, substantially untrue,
there is a duty to disclose the full facts
...
In R
...
Kylsant (1932 1 K
...
442)
...
In fact, in each of these years
the company had incurred substantial losses, and was only able to
pay the specified dividends out of secret reserves
...
Held, the prospectus was false, because
it put before intending investors figures which apparently disclosed
the existing position of the company, but in fact it hid it, and Lord
Kylsant, a director, who knew that it was false was guilty of fraud
...
The assertion must be of fact
and not a mere expression of opinion, or hearsay, or puffery of
flourishing description
...
10,000 that is A's opinion and B is at liberty
to reject it
...
5000 for it, then A has
misstated a fact, and if B has been induced by that statement to buy
the horse, he may rescind the contract on the ground of fraud
...
In a reckless
misstatement the person is not sure as to the fact in his own mind;
he feels a doubt, yet he represents to the other party, as if he is
certain about the truth of the fact represented by him
...
Also a promise made without an intention
of performing it is fraud
...
(d)
The representation must be made with the object of inducing the
party deceived to act upon it
...
This means that there is an inducement in fact and the assertion is
one which necessarily influenced and induced the party to act
...
(e)
The representation must in fact deceive
...
A deceit which does not deceive is not
fraud
...
It is a common saying that
"there is no fraud without damage", for an action being one of deceit,
and unless the plaintiff and sustained damage or injury, no action
will lie
...
Difference between Misrepresentation and Fraud
The main difference between fraud and misrepresentation is that in fraud
the person making misrepresentation does believe it to be true and in
17
misrepresentation he does not believe it to be true
...
Misrepresentation (often called
innocent misrepresentation) differs form fraud (often called fraud or wilful
misrepresentation) in following respects
...
Fraud generally implies that there is an
intention to deceive whereas misrepresentation may be innocent
...
A false statement without any intention to
deceive would be misrepresentation but a false statement deliberately
or recklessly made to deceive another is a case of fraud
...
Fraud gives right to an action for
deceit, in addition to its effects of avoidance of the contract, and
the party aggrieved can recover damages if he has sustained any in
consequence of fraud practised upon him by the other party
...
(iii)
Discovery of truth by ordinary diligence
...
But where
consent to an agreement is caused by active fraud, the contract is
truly voidable even though the party defrauded had the means of
discovering with ordinary diligence
...
7
COERCION
Coercion is defined by Section 15 of the Contract Act as "the committing
or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful
detaining, or threatening to detain, any property to the prejudice of any person
18
whatever, with the intention of causing any person to enter into an agreement
...
What is coercion in India is 'duress' under English law, but coercion covers
much wider field
...
Threats to property are not duress
...
In Multhiah Chettiar v
...
786), an agent
refused to hand over the account books, bonds etc
...
The principal did so but later succeeded in the suit to declare the
release deed as vitiated by coercion
...
Harjivan (1887 B om
...
When the fraud was known the bankers wanted to launch a prosecution
against the son
...
The settlement was set aside on the ground of coercion, as the
father was not a free agent
...
Ince (L
...
1 H
...
200), an old lady was induced to settle
property on one of her relatives by the threat of unlawful confinement in a mental
home
...
e
...
In Kaufman v
...
B
...
Held, G was not liable
under the contract, as per consent was obtained through coercion
...
Alwar Setti (1890) 13 Mad, 214, an adoption by a
girl, aged 13, was held not binding, when it had been obtained from her by her
husband's relatives by pressure on her by obstructing the removal of her husband's
dead body
...
There must be a contract made under
the threat, and that contract should be one sought to be avoided because of coercion
(Ramchandra v
...
715)
...
g
...
11
...
It makes the contract voidable by the party
influence or whose consent was not free
...
It further states that a person is deemed to be in a position to dominate the
will of another (i) where he holds a real or apparent authority over the other, or
(ii) where he stands in a fiduciary relation to the other; or (iii) he makes a
contract with a person whose mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily distress
...
Firstly, those where is no special
relationship between the parties
...
In the first case under influence must be proves as a fact, by the party
alleging it, in the second it is presumed to exist
...
It was stated in Smith v
...
L
...
750): "The principle of undue
influence applies to every case where the influence is acquired or abused, where
confidence is reposed and betrayed"
...
Where no relationship between parties exists
...
e
...
It was observed in Bhola Ram v
...
168), undue influence
has its origin in coercion or fraud
...
21
In Karnal Distillery Co
...
V
...
C
...
It was observed that when one member of the family exercises weightly
influence in the domestic counsels either from age, from character or from
superior position acquired from other circumstances an inference of undue
influences has to be drawn
...
It was further stated
in this case that once the position of dominance is proved to exist, it is deemed to
continue till its termination is established
...
However, a plea of undue influence can only be raised by a party to the
contract and not by a third party, unless there was any connivance between the
person using undue influence and the third party benefiting by the contract
...
The possibility that he may put his own interest
uppermost is so obvious that he comes under a duty to prove that he has not
abused the position
...
If B seeks to avoid a contract with A, then
in the absence of any confidential relationship, the entire onus is on B to prove
undue influence, but if he shows the existence of such relationship, the onus is
on A to prove that undue influence was not used
...
22
To discharge the onus that he did not employ undue influence, the party
must show that the other party to whom he owed the duty in fact acted voluntarily,
in the sense that he was free to make an independent and informed estimate of
the expediency of the contract or other transaction
...
A few examples will illustrate undue influence
...
A employed undue influence
...
B employs undue influence
...
There was undue influence
...
(iv)
In Debi Prasad v
...
438, D was the grandson of C's
own brother, and attended to the comforts of C in his illness, as he
was also old, infirm and weak
...
The deed was vitiated by undue influence as it was
clearly as unconscionable transaction
...
Undue
influence was presumed because of fiduciary relation
...
Ganga Prasad,
1967 S
...
878, there can be no presumption as to undue influence
simply because the donor was related to the party and that he was
of a weak disposition
...
In Afsar Shaikh v
...
C
...
Merely relying on the other for advice does not
amount to being unduly influenced
...
A third party contracting with notice of the exercise of undue
influence by another is in no better position than if he had exercised
undue influence himself
...
V
...
B
...
The daughter did not understand the nature of the
transaction, and the only advice she did not understand the nature of
the transaction, and the only advice she received was from a solicitor
acting for the mother and the moneylender
...
Held, the moneylenders were in no better position that the mother,
and the contract was voidable by the daugher
...
Such a bargain is voidable
...
Where a person is heavily indebted to another and
for a fresh loan is made to agree to pay exorbitant rate of interest, it will be an
unconscionable transaction
...
3,700 to enable him to
prosecute his claim when he was without even the means of subsistence and gave
the lender a decree only for Rs
...
Also, where a spendthrift and a drunkard 18 years of age executed a bond
in favour of his creditor agreeing to pay compound interest at 2 percent per
annum with monthly rests, it was held the bargain was unconscionable
...
1,500 from a moneylender at
100% per annum for the purpose of enabling her to establish her claim for
maintenance; and where an illiterate agriculturist heavily indebted to a moneylender
sold his land worth thrice the amount of the debt under pressure of payment
...
The mere fact that
the rate of interest is exorbitant is no ground for relief under this section unless
it be shown that the creditor was in a position to dominate the will of the borrower
...
25
Purda Nishin Woman
The law throws around a Purda Nishin woman a special cloak of protection,
and demands that person who deals with her must show affirmatively and
conclusively that the deed was not only executed by, but was explained to, and
was really understood by the lady
...
The reason
is that the ordinary presumption that a person understands the document to which
he has affixed his name does not apply in the case of Purda Nishin Woman
...
Difference between coercion and undue influence
(i)
Moral and Physical Force
...
Undue influence is sometimes marked as 'moral coercion' which is
distinct from 'physical coercion' or coercion in true sense
...
In the case of undue influence there
must be certain relationship between the parties which places-one
party in a position to dominate the will of the other i
...
undue
influence is between the parties to the transaction, the promise
procures the promisor's constant by undue influence
...
26
(iii)
Way of obtaining consent
...
In case of coercion, the consent is obtained by committing
or threatening to commit an offence, and the person is forced to
give his consent
...
Where the consent of the promisor is procured
by coercion, the contract is voidable at his option but where the
promisor's consent is procured by undue influence, the contract is
either voidable or court may enforce it in a modified form
...
Briefly, undue in influence is of a moral
character and is more subtle and intangible; coercion is chiefly of
a physical character and is of an avowedly violent character
...
9
SUMMARY
Mistake, misrepresentation, fraud, coercion and undue influence are the
elements which affect the consent of the parties
...
In an innocent misrepresentation, the
party aggrieved may avoid the agreement, even though the statement was true at
the time it was made but became untrue latter by reason of change of circumstances
...
An agreement, in which the consent is caused
by coercion, is voidable at the option of the party whose consent was so obtained
...
27
11
...
Bilateral Mistake: It is a mistake in which both the parties to an agreement are
confused about the facts which are essential to the agreement
...
Fraud: Fraud may be defined as an intentional, deliberate or wilful misstatement
of facts, which are material for the formation of a contract
...
Coercion: It means forcibly compelling a person to enter into a contract
...
11
...
State when a consent is not said to be free
...
A contract caused by mistake is void
...
3
...
4
...
(ii) mistake relating
to the identity of the parties and (iii) mistake relating to the nature of the
transaction
...
What is fraud? Distinguish it with misrepresentation
...
What remedies are available to a person induced to enter into a contract
by (a) misrepresentation which is not fraudulent, (b) fraud
...
"Mere silence as to facts likely to affect the willingness of a person to
enter into a contract is not fraud"
...
8
...
Explain
...
Explain
...
(a)
What is the effect on a contract of bilateral mistake relating to a
matter of fact ?
(c)
When does the aggrieved party lose the right to rescind the contract
of fraud?
10
...
Explain
...
(a)
What are contracts Uberrimae Fidei (utmost good faith)
11
...
R
...
Ltd
...
K
...
Balchandari, Business Law for Management, Himalaya Publication House,
New Delhi
...
S
...
K
...
S
...
Kuchhal, Mercantile Law, Vikas Publishing House, New Delhi
...
Ltd
...
M
...
Kuchhal, Mercentile Law, Vikas Publishing House Pvt
...
, New Delhi
...
, Lucknow
...
0 Objective
12
...
2 Modes of Discharge of a Contract
12
...
4 Discharge by Mutual Agreement of Consent
12
...
6 Discharge by Lapse of Time
12
...
8 Discharge by Breach of Contract
12
...
10 Summary
12
...
12 Self Assessment Questions
12
...
0 OBJECTIVES
After reading this lesson, you should be able to
a)
Explain the circumstances under which a contract is said to be
discharged
...
c)
Enumerate the doctrine of frustration
...
e)
Discuss the remedies available to an aggrieved party on the breach of
contract
...
1 INTRODUCTION
A valid contract creates certain obligations on all the contracting parties, and
the parties become liable to fulfil their respective obligations
...
Thus, the discharge of a contract
means that the parties are no more liable under the contract
...
The discharge of a contract may, therefore,
be defined as the termination of contractual relationship between the parties
...
2 MODES OF DISCHARGE OF A CONTRACT
Contracts may be discharged by any one of the following modes (for details
see chart)
A
...
By Consent or Agreement
C
...
By Lapse of Time
E
...
By Breach of Contract
12
...
Every
person who is bound by an obligation must be ready to perform it at the time
when he had promised to perform it
...
) 37 of the
Contract Act, the parties to a contract must perform their respective promises,
unless such performance is dispensed with or excused under the provision of
this Act or of any other law
...
When a
By Express
Consent
a) Actual Performance
b) Tender of Attempted
Performance
A) By Performance
E) By Operation
of Law
Actual breach
(a) At the
time
of
performance
(b) During
Performance
Anticipatory
Breach
(a) Implied
Repudiation
(b) Express
Repudiation
F) By Beach
of Contract
Not covered by Doctorine of impossibility
(not an excuse)
(a) Difficulty of Performance
(b) Commercial impossibility
(c) Failure of third party
(d) Partial impossibility
(e) Strikes, Lockouts and civil disturbances
(a) By death
Superving
(b) By merger
or Subsequent (c) By unauthorised
Impossibility alteration of terms of
contract
(d) By Insolvency
(e) By Rights and
Liabilities vesting on
the same person
D) By Lapse
of Time
Covered' by Doctrine of Impossibility
a) Destruction of Subject matter
b) Non-existence of a state of affairs
c) Death or Personal Incapability
d) Supervening Illegality of change of law
e) Declaration of war
Impossibility
at the time of
Contract
C) By Impossibility
of Performance
(a) Novation
(b) Alteration
(c) Recession
(d) Remission
(e) Waiver
(f) Acceptance
of any other
satisfaction
By Implied
Consent
B) By concent or
Agreement
DISCHARGE OF CONTRACT
3
4
contract is performed the parties are discharged and the contract is terminated
...
a)
Actual Performance - When the parties of the contract perform their
promises, it is called actual performance
...
It is the most common way of discharged of a
contract
...
In such
a case, the contract is discharged of the wrongful refusal to accept the
performance
...
4 DISCHARGE BY MUTUAL AGREEMENT OF CONSENT
By agreement of all parties to the contract, or waiver or release by the party
entitled to performance, a contract may be discharged
...
For example, it may be
agreed at the time of making the contract that on the happening of an event one
or both parties will be absolved from performance
...
In Head v Tattersall (1871) Ex
...
The horse was returned
within two days as it had not been hunted with the Bicester hounds
...
Express consent subsequently to the formation of the contract may be given
by waiver; release, abandonment, novation, remission, alteration, rescission
5
and in English law, by accord and satisfaction
...
Sec
...
” Section 62
...
” Section 63
...
And
the following are the important methods for the discharge of a contract by a
fresh contract:
a)
Novation: Novation occurs when a new contract is substituted for an
existing contract, either between the same parties or between different parties,
the consideration mutually being the discharged of the old contract
...
It is agreed between A, B, and C that B
shall thenceforth accept C as his debtor, instead of A
...
The
old debt of A to B is at an end, a new debt from C to B has been contracted
...
For a valid novation it is not enough that a new promiser agrees to assume
original promisor’s obligation, the promises too should consent to the change
...
(iv) The assent of the all the parties to the creation of the
liability under the new contract and (v) the validity of the new contract
...
(b)
Alteration: Alteration of a contract takes place when one or more of
the terms of the contract are changed
...
Where, however, an alteration of
written contract is made by one party to the contract without the consent of
the other party and of a material fact, so that the legal effect of the instrument
is changed, the contract is discharged and the other party is also discharged
from his duties
...
100 per
bag
...
Subsequently, A and B entered into an
agreement that the delivery would be made in two equal installments and the
price would be Rs
...
In this case, the old contract is discharged and
the parties become bound by the contract with changed terms
...
But exception
is made if it is caused by mistake or accident (ii) it must be in a material partwhat alternation can be said to be material depends upon the character of the
instrument and other circumstances of the case
...
For example, a contract for the sale of goods can be discharged by mutual
agreement between the buyer and the seller at any time before delivery of the
goods or payment of the price
...
In avoidable contract one of the parties has the option of rescinding the contract
...
Before the
date of performance, A and B mutually agree that the contract will not
be performed
...
(ii)
A was induced to enter into an agreement by concern
...
(d)
Remission: Remission is the acceptance of a lessor sum than what was
contracted for a lessor fulfillment of the promise made
...
63 specifically
provides for remission of performance of promise
...
In the latter country, remission must be
supported by a fresh consideration
...
63, a promisee may
remit or give up a part of his claim and a promise to do so is binding even
though there is no consideration for doing so
...
5,000
...
2,000
...
(ii)
A owes B Rs
...
C pays to B Rs
...
This payment is discharge of the whole
claim
...
A party may waive its rights under the contract, whereupon
the other party is released from its obligations
...
g
...
In the case of unilateral promise,
the party entitled to performance may waive performance of it
...
Afterwards, B forbade him to
do so
...
And thus,
A is no longer liable to perform the promise
...
(f)
Acceptance of any other satisfaction: Sometimes, the party entitled
to claim performance accepts any other satisfaction instead of the performance
of the contract
...
Section 63 of the Indian Contract
Act provides for this provision
...
And such
acceptance, discharges the whole obligations under the contract
...
Without ascertaining the amount, A gave Rs
...
And B accepted this amount in satisfaction of the sum due under the contract
...
12
...
56 of the Contract Act
...
A contract to do an act
which, after the contract is made becomes impossible, or by reason of some
extent which the promisor could not present, unlawful becomes void when the
act becomes impossible or unlawful
...
”
Examples
a)
A agrees with B to discover treasure by magic
...
b)
A and B contract to marry each other
...
The contract becomes void
...
A must make
compensation to B for the loss caused to her by the non-performance of
his promise
...
It
is clear from the different parts of the section that impossibility is of various
kinds
...
e
...
The former is objective, (viz
...
The latter is subjective
impossibility, i
...
it is due to the inability of the individual promisor to perform
his promise, and does not discharge a contractual duty
...
The impossibility may exist at the time of contracting
either with or without the knowledge of the parties or it may arise subsequently
to the making of the contract, and in the latter case, it may be caused by events
beyond the control of the parties or it may be caused by some act of the promisor
or promisee
...
g
...
Here both parties were aware of the impossibility
...
In such
a case also the contract is void on the ground of mistake
...
In such a case, there is no contract to terminate and
the parties are excused from performance (Sec
...
Promise, which
are manifestly impossible cannot be binding
...
56 provides that subsequent or supervening impossibility or
illegality will make the contract void in certain circumstances and the contract
will be discharged
...
Discharge by Supervening Impossibility
A contract will discharge by subsequent or supervening impossibility in any of
the following ways:
(a)
Destruction of Subject-Matter
When there is a contract in respect to a particular subject matter which is later
destroyed without the fault of the parties, the contract is discharged
...
Caldwell (1863) 122 E
...
299, the leading case on this point, a
music hall was agreed to be let out for a series of contracts on certain days
...
The contract was
held to have become void and the owner of the hall was absolved from liability
to let the hall as promised
...
observed in this case as follows: “In
contracts in which the performance depends on the continued existence of
11
given person or thing, a condition is implied that the impossibility of
performance arising from the perishing of the person or thing shall excuse the
performance
...
In this case there is no destruction of any property affected
by the contract, but the use of that property contemplated by the contract has
became impossible
In Krell v
...
B
...
The
room was taken for the purpose, as both parties well known, of using the room
to view the coronation procession of Kind Edward VII, although the contract
contained no reference to the coronation
...
Held, that H was excused from paying rent for the
room, as the existence of the procession was the basis of the contract, and its
cancellation discharged the contract
...
In other
words the death or illness of a particular person whose action is necessary for
the promised performance discharges the duty to render that performance
...
Davidson (1871) L
...
6 Ex
...
D was ill on the day in
question and unable to perform
...
(d)
Discharge by supervening illegality
A contract which is contrary to law at the time of its formation is void
...
This is so because the performance of the promise is prevented or
prohibited by a subsequent change in the law
...
De Crespignay (1869) L
...
4 Q
...
180, D leased some land to B and
convenanted that he would not erect any but ornamental buildings upon the
adjoining land
...
Held, D was excused from performance
of his convenient, because the railway company’s statutory power had rendered
it impossible
...
The exercise of the
compulsory powers was event which might have been anticipated and guarded
against in the contract
...
So, where a notification
regulating retail prices was issued which did not make performance of the
contact impossible or unlawful, the parties were not discharged
...
(e)
Declaration of War
A contract entered into during war with an alien enemy is void ab initio
...
Such a contract will be revived and may be enforced at he end of
the war
...
It will also be discharged if it cannot remain suspended,
e
...
, the contract involves the continuous performance of mutual duties
...
Therefore, impossibility of performance is as a rule not an excuse
from performance
...
It may
be stated, as a general rule, that impossibility to perform arising subsequently
to the agreement will not, as a rule discharge the promisor, because when there
is positive contract to do a thing which is not unlawful, the promisor must
perform it or pay damages for not doing it, although the performance becomes
unexpectedly burdensome or even impossible on account of unforeseen events
...
Merely making the
contract difficult cannot attract Section 56
...
Increased
or unexpected difficulty and expense do not, as a rule excuse from performance
...
Held, B was not concerned with the way in which A was going to
get timber from Finland and therefore the impossibility of getting timber from
Finland did not excuse performance
...
In August war broke out, and the shipping space was not available except at
very rates
...
(b) Commencial Impossibility
Commencial impossibility to perform a contract will not discharge the
contract
...
A promisor’s contractual duty to
lay gas mains is not discharged because the outbreak of war makes it expensive
to procure the necessary materials
...
In Gana Saran v
...
C
...
” In a suit for damages for non delivery of goods the
defendants pleaded impossibility and frustration on the ground that the goods
were not supplied to them by the mill
...
56
of the Act, and the worlds” as soon as they did not convey the meaning that
delivery was contingent on their being supplied by the mills
...
56, as the default was due to the fault of the
defendant
...
This, if the state of things in question is not the sole basis of
the contract, so that there will still remain a substantial portion, through not
all, of what was contract for, the contract will not discharged
...
In H
...
Steamboat Co
...
Hutton (1903) 2 K
...
683, the company agreed to let
a boat to H to view naval review at the coronation and to cruise round the fleet
...
Held, the
Co
...
(e) Strikes, lockouts and civil disturbances
Strikes, lockouts and disturbances like riots do not terminate contracts unless
there is a clause in the contract providing that in such cases the contract is not
to be performed or that the time of performance is to be extended
...
The Doctrine of Frustration
The Common law of England started with the harsh doctrine that unless the
parties expressly stipulated to the contrary, impossibility was no defence to
an action for breach of a contract
...
In English cases, it has been
now held that when the common object of a contract can not longer be carried
out, the court may declare the contract to be at an end
...
The doctrine developed in England under the guise of
reading implied to stick to a contract the purpose of which has disappeared
...
If the act
became impossible subsequently be reason of some event which the promisor
could prevent, the contract is discharged
...
This discharge
of a contract rendered impossible of performance by external causes beyond
the contemplation of the parties is known as frustration
...
It has become
a gloss on the older theory impossibility which it has greatly developed under
the guise of reading “implied terms” into contracts
...
Non haec in foedera veni- “It was not this that I promised to do
...
In such a case, there
is a frustration of the object of the contract
...
The
discharge of a contract by reason of frustration follows automatically when
the relevant event happens and does not depend on the volition or election of
either party
...
Thus, a contract
may become frustrated or impossible of performance by an Act of Legislature,
or by operation of law; it may be discharged by a subsequent declaration of
war, or by emergency regulations
...
An Act of God or vis majeur is “an accident due to
natural causes, directly and exclusively, without human intervention and which
could not have been avoided by any amount of foresight or care
...
It does not extent to the
case of a third person on whose work the promisor relied
...
The doctrine does not apply
where the event which is said to have frustrated the object of the contract arises
from an international act or election of a party
...
56 which deals with the subject provides
for discharges of contract by impossibility of performance or frustration
...
56 read as follows
...
”
“A contract to do and act which after the contract is made, becomes impossible,
or by reason of some event which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful
...
There is no question of reading implied terms if contract is equivalent to
supervening impossibility or illegality
...
18
In Satyabrat Ghose V
...
, who were the owners of a large
tract of land started a scheme for its development for residential purposes and
accordingly divided in into a large number of plots for the sale of which they
invited offers from intending buyers
...
B entered into a contact on those terms with M & Co
...
Shortly prior to that assignment a portion of the
land covered by the scheme was requisitioned for military purposes by the
Government under the Defence of India Rules, and later the rest of the land
was also requisitioned
...
, thereupon informed B that the land pertaining
to the schemed was taken possession of by the Government and there was no
knowing how long the Government would retain possession and that the
company could not, therefore, take up the construction of roads and drains
during the continuance of the war and possible for many years after its
termination
...
This letter was handed over by B to his assignee
S, who asserted that the company was bound by the contract and could not
resile
...
The
company contended that the contract of sale became discharged by frustration
as it became impossible of performance by reason of supervening events
...
19
The law relating to frustration in India as laid down by the Supreme Court in
Satyabrat Ghose’s case may be summed up as follows:
“ The Court in India should look primarily to the law as embodied in Secs
...
Indeed, the above sections of the Contract
Act embrace the whole of the Indian law on the subject
...
32 applies in
cases of contingent contract and Sec
...
Under either, however,
impossibility is the central or dominating idea and the determinating factor
...
” In fact, impossibility and
frustration are after used as interchangeable expressions
...
The doctrine of frustration is in reality an aspect or part of the
law of discharge of contract by reason of supervening impossibility or illegality
of the act agreed to be done and hence comes within the purview of sec
...
In deciding cases in India the only doctrine that we have to go by is that of
supervening impossibility as laid down in Section 56, taking work impossible
in its practical and not literal sense
...
Therefore, in India, the
doctrine of frustration is applied not on the ground that parties themselves
agreed to an implied term which operated to release them from performance;
of the contract
...
When such an event or change of
circumstances occurs which is so fundamental as to be regarded by law as
striking at the root of the contract as a whole, is the Court which can pronounce
the contract to be frustration and at an end
...
If the answer be in the affirmative, the contract will
stand dissolved or discharged by virtue of Sec
...
1
...
Section 56, para 2
...
When a contract becomes void, any person who has received and advantage
under it must restore it, or make compensation for it to the person from
whom he received it
...
Where one person has premised to do something which he knew or with
reasonable diligence, might have known, and which the promisee did not
know to be impossible or unlawful, such promisor must make compensation
to such promisee for any loss which such promisee sustains through the
non-performance of the promise-Section 566, para 3
...
A must take compensation to
B for any loss caused to her by the non-performance of his promise
...
6 DISCHARGE BY LAPSE OF TIME
The Limitation Act
...
For example, where a debtor has failed to repay the
loan on the stipulated date the creditor must file the suit against him within
21
three years of the default
...
The period of limitation for simple contracts is three years in
India and six years in England, and in the case of Special Contracts it is twelve
years
...
5000 from B, a moneylender, and agreed to repay
the loan on 31st March 1983
...
But B did not take any legal action against A till 31st March, 1986
...
And thus, A is discharged from his liability to pay the loan
...
c) Sit for declaration
creditor
...
d) Suit by mortgagor to redeem
30 years
or recover possession of
When the right to redeem
or recover possession
...
e) Suit to enforce payment of
12 years
money secured by a mortgage
f) By a landlord to recover
possession from a tenant
When the money sued for
becomes due
12 years
When the tenancy is
determined
...
7 DISCHARGE BY OPERATION OF LAW
Discharge under this head may take place as follows:
(a)
By Death
Where contract requires personal skill or ability, the contract is terminated
on the death of the promisor
...
Example: A, an expert, agreed with B to translate some part of book from
French to English
...
In this case, the
contract is of personal nature as it involves the personal qualification of the
promisor (A)
...
(b)
By Merger
Where the parties embody the inferior contract in a superior contract, when
between the same parties, new contract is entered into, and security of a higher
degree, or a higher king is taken, the previous contract merges in the higher
security
...
Example: A gave his land on lease to B
...
In this cease, B becomes the owner of the
property and his rights as a lessee merge into his rights as the owner
...
(c)
By the unauthorised alteration of terms of the contract
Where a party to a contract in writings makes any material alternation without
the knowledge and consent of the other, the contract can be avoided by the
other party
...
23
Example: A contracted to sell his plot of 500 sq
...
100,000
...
Before the
registration of the sale deed, A altered the deed and made it a deed for the sale
of 300 sq
...
100,000
...
(d)
By insolvency
The Insolvency Act provides for discharge of a contract contracts under
particular circumstances
...
(e)
Right and liability vesting in the same person
Where rights and liabilities under a contract vest in same person the contract
is terminated and other parties to contract are discharged For example, when a
bill of exchange passes in the hands of the acceptor, the parties are discharged
...
8 DISCHARGE BY BREACH OF CONTRACT
We have seen contract must strictly perform according to its terms, But where
the promisor has neither performed his contract nor tendered performance
and where the performance is not excused by consent express or implied, or
where the performance is defective, there is a breach of the contract by him
...
If the contract is unilateral the
only remedy for the other party is to claim relief for beach can claim relief
for breach and also in certain circumstances is exonerated from liability to
perform his part of the contract
...
The
actual breach may take place (a) at the time when performance is due, or (b)
when actually performing the contract
...
e
...
(i)
Actual breach of Contract
(a)
Actual Breach of Contract at the time when Performance is due-
where a person fails to perform a contract, when performance is due the other
party can hold him liable for breach
...
In all mercantile contracts time
is the essence of the contract and breach of contracts results on failure to
perform within the limited time
...
In a
sale of goods subject to rapid fluctuations of market price, the time of delivery
is of the essence
...
g
...
In the case of
sale of a house to be immediately occupied or sale of a business as a going
concern, time is not of the essence and the party express willingness to perform
it after the appointed time, the law permits him to do so subject to payment of
compensations for failure or due performance
...
55)
(b)
Actual Breach during the Performance of the contract- where a party
apparently performs the promise but the other party says that it is not a proper
performance according to the contract, the question arises whether there is a
breach of the contract exonerating the other party from performance of his
part of the bargain
...
In
25
the case of sale of goods by description, unless the goods answering to the
description are offered, the buyer is not bound to take delivery or to pay for
them
...
Where the buyer has obtained possession
of goods and his right of enjoyment is disturbed in any way he can claim
damages caused by the breach of the implied warranty of quiet possession
...
(ii)
Constructive or Anticipatory Breach of Contract
It may sometimes happens that even before the time of performance arrives
the promisor may do some act which makes the performance impossible or
may definitely renounce the contract or show his intention not to perform it
...
10,000 and before the end of the years
assigned all his interests to another person, it was held that without waiting
for the 7 years to elapse B could sue for breach of the promise
...
On May 11 the employer wrote
to the courier that he had changed his mind and declined his services but refused
to make him an compensation
...
It was held that the courier was entitled to treat the letter of May 11,
equivalent to breach of contract
...
But in that case the promisee keeps the contract alive for
the benefit of the promisor not only to complete the contract in spite of
previous repudiation, but also to avail himself any excuse for non-performance
which may have come into existence before the time fixed for performance
...
A party putting and end to the
contract must restore any advantage he may have received
...
9 REMEDIES FOR BREACH OF CONTRACT
Where there is a breach of contract on the part of one party, the injured party becomes
entitled to any one or more of the following reliefs:
1
...
Suits for damages;
3
...
Suit for specific performance of the contract;
5
...
1
...
He may also
successfully defend an action for non-performance, or an action brought for
27
specific performance
...
75 further entitles him to compensation for any
damage he may have sustained through the non-fulfillment of the contract
...
100 for each nights’s performance
...
B is entitled to claim compensation for the damage which he has sustained
through the non-fulfillment of the contract
...
Damages
Where a contract has been broken, the party who suffers by such breach is
entitled, under Sec
...
But compensation is not to be given for any remote or indirect loss or damage
sustained by reason of the breach
...
Sec73 is based on the leading case of
Hadley V
...
34 the facts the which are as follows:
The plaintiff, an owner of a mill, delivered a broken shaft to the defendant
common carrier to take to a manufacturer to copy it and make a new one
...
The plaintiff did not make known to the defendant carrier that delay would
result in a loss of profits
...
Alderson, B observed in this case, “When two parties have made a contract,
which one of them has broken, the damage which the other party ought to receive
in respect of such breach should be either such as may fairly be considered as
28
arising naturally, i
...
, according to the usual course of things from such breach
of contract itself, or such as may reasonably be supposed to have been in the
contemplation of both the parties a the time the contract was entered into as a
probable result of the breach
...
Baxendale
...
73 is that a party who suffers by the breach of
contract is entitled to:
a)
Such damages as naturally arose in the usual course of things, as a result
of the breach;
b)
and if he claims special damages for any loss sustained (which would
not ordinarily flow from the breach) he must prove that the other party
knew at the time of making the contract that the special loss was likely
to result from the breach of the contract;
c)
Such compensation is not to be given for any remote and indirect loss
or damage sustained by reason of the breach;
d)
Compensation for quasi-contract as damage is the same as for a contract
...
73 of the ActA contracts to sell and deliver 50 maunds of saltpetre to B at a certain paid on
delivery a breaks his promise
...
Liquidated Damages and Un-liquidated Damages
Where there is breach of contract by one party, the other party is entitled to
sue for damages
...
Consequently, this claim can be assigned or transferred, since
it is not a debt under the law
...
Liquidated damages are damages agreed upon by the parties in the contract
itself to be paid by the party breaking the contract in case of breach
...
But liquidated damages must appear to be a genuine pre-estimate of
the loss that will be caused to one party if the contract is broken by the other
...
Unliquidated damages may be classified as follows:
a)
Ordinary Or Compensatory Damages
In deciding a suit for damages, the court has to answer two questions: (I)
Proximity and remoteness of damage (ii) Measure of damages
...
Once
the court has decided that the damage is sufficiently proximate, it will the turn
to the measure of damages, that is the amount of money that will compensate
the plaintiff
...
Baxendale and Sec
...
in jure unon
remota causa, sed proxima spectatur- “In law not the remote cause, but the
proximate cause is taken notice of
...
The aggrieved party
however, would in case of breach of contract, be entitled to recover
compensation for damage or loss caused to him thereby, if such loss or damage
arose naturally and directly in the usual course of things from such breach, of
which the parties to the contract knew, at the time of making the contract, to
be likely to result from breach of contract
...
30
In Hadley v
...
On account
of the delay by the common carrier the mill remained idle for a longer period
that should have been necessary
...
The plaintiff was held entitled to
recover damages for delay in delivery but not for loss of profits occasioned
by the closure of the mill since there was no way the common carrier could
have been foreseen that the mere absence of a shaft would cause the closure
for the mill
...
Measure of damages
The measure of damages is the estimated loss directly and naturally resulting
in the ordinary course of events, from the breach of contract
...
In the case of sale and purchase, the damages, payable would be the difference
between the contract price and the market price at the date of the breach
...
A cow was sold with condition that it was free from disease
...
Not only the cow
die but it also infected other cows of the buyer
...
b)
Special Damages
Special damages are those resulting from a breach of contract under some
special circumstances
...
If therefore there be any special damage which is attributable to
the wrongful act, then special damages, if proved, will be awarded
...
Thus, if in Hadley
v
...
(c)
Exemplary or Punitive Damages
These damages are sum awarded beyond the pecuniary loss sustained by the
injured party
...
The object of exemplary
damages is to punish the defendant and to deter him and others from similar
conduct in the future
...
In a breach of promise to marry, the amount of the damages will depend upon
the extent of injury to the party’s feelings
...
In the case of wrongful dishonor of a cheque of a customer who is a trader the
rule is the smaller the cheque dishonored the greater the damage
...
g
...
They are a token
award where there has been an infringement of contractual right, but no actual
32
loss has been suffered
...
(e)
Contemptuous Damages
Damages are said to be contemptuous, when the court finds that a breach has
been committed, but that the breach is so insignificant or petty that a reasonable
man would not have filed a suit
...
The law
does not take account of trifling things; and where it does, It awards also
something of a contemptuous character
...
Liquidated Damages and PENALTY
Where the parties have fixed at the time of contract the damages that would be
payable in case of breach, a question may arise (in English law at least) whether
the provision amounts to “liquidated damages” or a “penalty” Courts in English
give effect to liquidated damages, but they relieve against penalty
...
In Indian law, there is no such difference between liquidated damage and
penalty, as Sec
...
reads:
“When a contract has been broken, if a sum is named in the contract as the
amount to be paid in case of such breach or if the contract contains any other
stipulation by way of penalty the party complaining of the breach is entitled
whether or not actual damage or loss is proved to have been caused thereby, to
received from the party who has broken the contract a reasonable compensation
not excluding the amount so named or as the case may be the penalty stipulated
33
for
...
”
The party suffering from breach is entitled to get the actual damages he has
suffered
...
a)
A contracts with B to pay BB Rs
...
500 on
a given day
...
500 on that day
...
1000 as the Court
considers reasonable
...
5,000 A practices as a surgeon in Calcutta
...
5000 as the court considers
reasonable
...
500 to appear in
Court on a certain day
...
He is liable to pay
the whole penalty
Payment of Interest
With regard to the payment of interest the following rules have been laid down
...
Payment of interest in case of default
...
Where the interest is exorbitant the Court will
give relief
...
Payment of interest as higher rate Where the bound provides that in
default of the payment of the principal by a stated date enhanced interest
should be payable, if the enhanced interest is made payable from the
34
date of default and is reasonable, it is regarded compensation and is
allowed
...
g
...
3
...
The Court do not lean towards compound
interest, they do not award in the absence of stipulation but where there
is a stipulation for its payment it is the absence of disentitling
circumstances, allowed i
...
it will be allowed only if it is the absence of
disentitling circumstances allowed, i
...
it will be allowed only if it is
not an enhanced rate
...
Suit for Quantum Meruit
Quantummeruit as much as he has earned
...
The in jured party can use for quantum
meruit, i
...
if the injured party has done can estimated at a money value of so
much as he has already done
...
B delivers 20 chairs when A informs him that he will require no
more
...
He can sue A for the breach of contract for the value of 20
chairs already supplied
...
4
...
Specific performance means the actual
carrying out by the parties carrying out their agreement
...
1
...
2
...
g
...
3
...
4
...
Specific performance is usually granted in contracts connected with land, e
...
purchase of particular plot of house, or to take debentures in company
...
5
...
It is an order of the court whereby an individual is
required to refrain from the further doing of the act complained of
...
g
...
Thus , where a party to
a contract is doing something which he had promised not to do, the court may
in its discretion, issue and order to the defendant restraining him from doing
what he promised not to do
...
In Metropolitan
Electric Supply Company v
...
799, G agreed to make the
whole electric required by his premises from the plaintiffs
...
12
...
The various modes in which a contract may
be discharged are by performance, impossibility of performance, agreement,
36
operation of law, lapse of time and breach
...
Sometimes, the performance of a contract is impossible
...
A contract may be discharged by mutual agreement of
the concerned parties
...
In certain circumstances, the contract is
discharged by the operation of law
...
If any party fails to perform his
obligation, these occurs a breach of contract
...
Suit for rescission,
damages, quantum meruit, specific performance and injuctions are the remedies
available to the aggrieved party
...
11 KEYWORDS
Breach of Contract: A breach of contract occurs if any party refuses or fails
to perform his part of the contract or by his act makes it impossible to perform
his obligation under the contract
...
Injunction: Injunction is generally granted to prevent the breach of an
obligation arising out of a contract
...
Novation: Novation is the substitution of existing contract for a new contract
...
37
Remission: Remission is the acceptance of lesser fulfillment of the terms of
the promise
...
12 SELF ASSESSMENT QUESTIONS
1
...
2
...
Discuss its effect in the
performance of a contract
...
Explain the law of frustration of contract
...
4
...
5
...
Explain ‘breach of contract’ as a mode of discharge of contract
...
What remedies are available to an aggrieved party on the breach of a
contract
...
What are consequences of breach of a contract?
9
...
10
...
” Comment
...
Under what circumstances is a party entitled of specific performances?
12
...
K
...
G
...
Varshney, Elements of Business Law, S Chand & Co
...
R
...
Pandia, Priciples of Mercantile Law, N
...
Tripathi Pvt
...
, Mumbai
...
R
...
Ltd
...
K
...
Balchandari, Business Law for Management, Himalaya Publication House,
New Delhi
...
0 Objective
13
...
2 Contract of Sales of Goods
13
...
4 An Agreement to Sell
13
...
6 Distinction between Sale and Hire Purchase
13
...
8 Ascertainment of Price
13
...
10 Capacity to Buy and Sell
13
...
12 Summary
13
...
14 Self Assessment Questions
13
...
0 OBJECTIVE
After reading this lesson, you should be able to
a)
Define a contract of sale of goods and state its essentials
...
c)
Define the goods and explain various types of goods
...
e)
Define bailment and explain its features
...
1 INTRODUCTION
Most of economic activities involve buying and selling of movable goods
...
The goods may be sold on the spot
these may be a promise to sell the some in future
...
Before the
passing of the present Act, the law relating to the sale of goods was contained in
Chapter VII of the Indian Contract act, 1872
...
The Act came into force on Ist July, 1930
...
The sales of Goods Act, 1930, is based on English Act
...
2 CONTRACT OF SALES OF GOODS
A contract of sales of goods is a contract whereby the sellers transfers or
agrees to transfer the property in goods to the buyer for a price (Section 4)
...
But where the transfer of the property in the goods is to take place in a future
time a subject to some conditions thereafter to be fulfilled, the contract is called an
agreement to sell
...
13
...
Thus, for example, the provisions of
Contract Act relating to capacity of the parties, free consent, agreements in restraint
2
of trade, wagering agreements and
measure of damages continue to be applicable
to a contract of sale of goods
...
e
...
Contract
The word contract means an agreement enforceable at law
...
Thus, a compulsory transfer
of goods under a Nationalisation Act is not a sale
...
In other words all the essential elements
of a valid contract must also be present in a contract of sale
...
Two Parties
To constitute a contract there must be two parties, viz
...
According to Section 4(1), there may be a contract
of sale between one part-owner and another, e
...
if A and B jointly own a typewriter,
A may sell his ownership in the typewriter to B, thereby making B sole owner of the
goods
...
There is, however, one exceptional case when a person may buy his
own goods
...
Example: A partnership firm was dissolved and the surplus assets; including
the stock in trade, were divided among the partners, in spite
...
There are certain other exceptions to the rule that the same person cannot be
both a purchaser and a seller
...
c)
Where a pawnee sells the goods pledged with him on non-payment of bill
money, the pawnor may himself buy such goods
...
3
...
Transfer of property in the goods is another
essential of a contract of sale of goods
...
To constitute a contract of sale the seller must either
transfer or agree to transfer the property in the goods to the buyer
...
If P who owns certain goods pledges from
to R, he has general property in the goods, whereas R (the Pawnee) has special
property or interest in the goods to the extent of the amount of balance he has made to
the pawnor]
...
4
...
Thus every kind of movable property
except actionable claim and money is regarded as ‘goods’ Goodwill, trade marks,
patents right, copyrights, electricity, water, gas, decree of a court of law are all regarded
as goods - Shares and stock are also included in goods
...
Thus where trees
were sold so that they could be cut out and separated from the land and then taken
away by the buyer, it was held that there was a contract for sale of movable property
4
or goods (Kursell vs Timber Operators & Contractors Ltd) But contracts for sale of
things ‘forming part of the land itself’ are not contracts for sale of goods
...
Money is not regarded goods because it is the medium of exchange through
which goods can be bought
...
5
...
Where there is no money consideration the transaction is
not a contract of sale, as for instance goods given in exchange for goods or as
remuneration for work or labour
...
Further, there is nothing to prevent the consideration from being
partly in money and partly in goods or some other articles of value
...
The term ‘contract of sale’ is a generic term and includes both a ‘sale’ and an
‘agreement to sell’ Sale: where under a contract of sale the property in the goods is
immediately transferred at the time of making the contract from the seller to the
buyer, the contract is called a ‘sale’ [Sec 4(3)]
...
g
...
There is immediate conveyance of the ownership
and mostly of the subject matter of the sale as well (delivery may also be given in
future)
...
13
...
It is an executory contract and
refers to a conditional sale
...
It is an agreement to sell, since X agrees to transfer the ownership
of the scooter to y at a future time
...
There
is an agreement to sell for the furniture dealer
...
A contract of sale of goods can be made by mere offer and
acceptance
...
Neither payment nor delivery is necessary at the time
of making the contract of sale
...
13
...
Therefore, the
effect of a contract of sale is the transfer of property in the goods from the seller to
the buyer
...
Thus, whether a contract of sale of goods is an absolute sale or an
agreement to sell, depends on the fact whether it contemplates immediate transfer
from the seller to the buyer or the transfer is to take place in future date
...
(i)
Transfer of Property
In a sale, the property in the goods passes from the seller to the buyer
immediately so that the seller is no more the owner of the goods sold
...
In this sense, a sale is an executed contract and an
agreement to sell is an executory contract
...
Thus under a sale, if the goods are destroyed the loss falls
on the buyer, even though the goods are in the possession of the seller
...
(iii)
Consequences of Breach
In case of sale, if the buyer wrongfully neglects or refuses to pay the price of
the goods, the seller can sue for the price, even though the goods are still in his
possession
...
(iv)
Insolvency of the Buyer
In a sale, if the buyer is adjudged an insolvent, the seller in the absence of a
lien over the goods is bound to deliver the goods to the official Receiver or Assignee
...
On the other hand, in an agreement to sell, when the buyer becomes insolvent before
he pays for the goods, the seller may not part with the goods
...
In an agreement
to sell, if the buyer, who has paid the price, finds that the seller has become insolvent,
he can only claim a rateable dividend and not the goods because property in them has
not yet passed to him
...
If he does so, the subsequent buyer
having knowledge of the previous sale does not acquire a title to the gods
...
The
right to recover the goods from the third person is, however, lost if the subsequent
buyer had bought them bonfire without notice of the previous sale (Section 30)
...
In this case, the subsequent buyer
gets a good title to the goods, irrespective of his knowledge of previous sale
...
13
...
Nature of Contract
A sale is an executed contract in which the ownership is transferred from the
seller to the buyer as soon as the contract entered into
In a hire-purchase agreement it becomes the property of the buyer only after
a certain agreed number of installments is paid till then the hire purchaser stands in
the position of the bailee an d not the owner of the goods
...
Termination of the Contract
In a sale the buyer cannot terminate the contract and as such is bound to pay
the price of the goods
...
8
3
Insolvency of the Buyer Risk of Loss
In a sale of seller takes the risk of any loss resulting from the insolvency of
the buyer
...
4
...
It is however, subject to the implied conditions provided in the hire
purchase agreement
...
Effect of Payments
In a sale even if the payment is made by the buyer in installments the amount
payable by the buyer to the seller is reduced, for the payment made by the buyer to
the seller is towards price of the goods
...
6
...
But the hire-purchase cannot resell
unless he has paid all the installments of hire
...
7 GOODS– SUBJECT MATTER OF CONTRACT OF SALE
Goods form the subject-matter of a contract of sale
...
Trade marks, copy rights, patent rights, goodwill, electricity, water,
gas are all goods
...
An actionable claim is something
which can only be enforced by action in a Court of law
...
It can only be
assigned
...
The definition of the term ‘goods’ also suggests that it includes stocks and
shares, growing crops, grass and things attached to or forming part of land which are
agreed to be severed from land before sale
...
Trees
which are agreed to be severed before sale or under the contract of sale are goods
[Badri Prasad v State of MP, AIR (1970) SC 706]
Goods may be classified into various types as shown below:
1
...
Future goods; or
3
...
Existing goods
Goods earned and possessed by the seller at the time of the making of the
contact of sale are called existing goods
...
g
...
Existing goods may again be either specific, or ascertained or unascertained
...
To be specific the goods must be actually identified; it is not
sufficient that they are capable of identification e
...
If X who owns a number of
horses, promises to sell one of them, the contract is for unspecified goods
...
Though commonly used as similar in meaning to
specific goods, these are not always the same
...
These goods can be defined by description or even by
sample
...
He is not bound to deliver any particular goods and he
may furnish any goods answering their description in the contract
...
Future Goods
Goods to be manufactured, produced or acquired by the seller after the
making of the contract of sale are called ‘future goods’ [Sec 2(6)]
...
It is
worth noting that there can be no present sale of future goods because property
cannot pass in what is not owned by the seller at the time of the contract
...
Examples
X agrees to sell to Y all the mangoes which will be produced in this garden
next year
...
P contracts on 1 January 1990, to sell to B ten bales of Egyptian cotton to be
delivered and paid for on 1 March, 1990
...
3
...
6(2)]
...
In other words, like the future goods, in the case of contingent
goods also the property does not pass to the buyer at the time of making the contract
...
13
...
By virtue of Section 9, the price may be (1) fixed by the contract, or (20 agreed to be
fixed in a manner provided by the contract, e
...
by a valuer, or (3) determined by the
course of dealings between the parties
...
What is a reasonable price is a question of fact in each case
...
Where
there is an agreement to sell goods on the terms that price has to be fixed by the third
party and he either does not or cannot make such valuation, the agreement will do
void
...
However, a buyer who has received and appreciated the goods must pay
a reasonable price for them in any eventuality
...
9 STIPULATIONS AS TO TIME (SEC
...
Stipulations related to time of payment
2
...
g
...
Stipulations relating to time of payment are not of the essence of a contract of
sale, unless a different intention appears from the contract
...
In a contract of sale, stipulations other than those relating to the time of
payment are regarded as of the essence of the contract
...
12
13
...
‘Buyer’ means a person who buys or agrees to buy goods [Sub Section (1)];
‘seller’ means a person who sells or agrees to sell goods [Sub Section (13)]
...
In every contract of sale there is an implied condition on the part of the seller
that in the case of sale he has a right to sell the goods and in the case of an agreement
to sell he will have a right to sell the goods at the time when the property in them is to
pass
...
If a person
has no title to the goods or otherwise does not have a right to dispose of certain
goods, the buyer of such goods has a right to reject them and to claim back the price
if the same has already been paid and refuse to pay if the price has not been paid till
then
...
In this case, C
purchased a motor car for D, and after using it for sometime he was compelled to
return it to the true owner, it becoming clear that D had obtained the car by theft
...
Similarly, if the buyer having bought the goods from a seller takes the delivery
of the same but is compelled to pay the price to his seller, who sold the goods without
having a right to sell the same [Dickenson v Naul, (1833) 4B & Ad 638)]
Lack of title to the goods is not the only factor because of which the seller
may not have a right to sell the goods
...
Accordingly a sale which would be
a breach of patent, copyright, or trade mark may be repudiated by the buyer
...
i
...
from New York to London
...
At the instance of the Nestle Co
...
The buyers had to remove those labels before taking delivery of those tins
of condensed milk
...
The buyers sued the sellers to claim
compensation
...
Further, Section 27 of the Act of the true owner states:
Subject to the provisions of this Act and of any other law for the time being a
force, whose goods are sold by a person who is not the owner thereof and who does
not sell them under the authority or with the consent of the owner, the buyer acquires
no better title to the goods than the seller had
...
e
...
If the title of the seller is defective the buyer’s title will also be
subject to the same defect
...
Transfer of Title by Non-Owners
The above stated general rule contained in Sec 27 is subject to the provisions
of this Act an of any other law for the time being in force
...
The exceptions are:
1
...
27)
A mercantile agent means an agent having in the customary course of business
as such agent authority either to sell goods, or to consign goods for the purposes of
sale, or to buy goods, or to raise money on the security of goods [Sec 2(9)]
...
But by virtue of this provision (provision to Sec
...
a)
he should be in possession of the goods or documents of title to the goods in
his capacity as mercantile agent and with the consent of the owner
...
c)
The buyer should act in good faith without having any notice, at the time of the
contract, that the agent has no authority to sell
...
The agent sold it to S, a bonafide purchaser, below the reserve price and
misappropriated the proceeds
...
Held, S obtained a
good title to the car from the mercantile agent and he conveyed a good title to K and
therefore, F was not entitled to recover the car from K (Folkes v s King)
...
He did not actually
authorise Hunt to sell the same
...
Hunt sold the car to X, X sold it to Y and Y sold the same to the defendants
...
It was observed that though Hunt got possession of the car as a mercantile
agent but not the registration book
...
It was held that
for passing a good title, Hunt should have obtained the possession of the car as well
as registration book with the consent of the owner, in the absence of which Hunt was
not able to pass a good title to his transferee or the subsequent buyers
...
If he is in possession in any other capacity he cannot convey a good title
...
Transfer of title by Estoppel - Sec 27
Generally the owner of the goods can question the title of the transferee by
contending that the seller did not have a right to sell the goods
...
The closing words of the rule contained in Sec
...
As noted above sometimes the law of estoppel may apply against the owner of
the goods and he may be estopped from denying seller’s right to sell the goods
...
When the owner of the goods by his act or omission makes the buyer to
believe that the seller of those goods has a right to sell them, subsequently he cannot
deny the existence of such a right in the seller
...
Example
M, the owner of a wagon allowed one of his employees K, to have his name
painted on it
...
C purchased the wagon from K in good faith
...
16
3
...
According to Sec 28, if one of the several joint owners is
in sole possession of the goods with the permission of the other co-owners a sale by
him will convey a good title to the buyer who buys in good faith and at the time of
buying has no notice of the fact that such a joint owner has no authority to sell
...
Sale by a Person in Possession of Goods under a Voidable Contract- Sec
...
It provides that a person in possession of goods
under a voidable contract which has not been canceled can transfer a good title to the
buyer who buys the goods in good faith
...
e
...
It does not extend
to all voidable contracts
...
5
...
30(1)]
Where a seller, after having sold the goods, continues to be in possession of
the goods or of the documents of title to them and again sells or pledges them either
himself or through a mercantile agent, he will convey a good title to the buyer or the
pledgee provided the buyer or the pledgee acts in good faith and without notice of
the previous sale
...
6
...
This section says that if a buyer has
obtained the possession of the goods or the documents of title to them with the
consent of the seller any sale, pledge or other disposition thereof to any person will
17
convey a good title to the transferee provided the person receiving the goods was
acting in good faith and without any notice as regards any lien or other right of the
original seller in respect of those goods
...
B,
who was insolvent, did not accept the bill of exchange
...
It was held that since B had
obtained the bill of lading with the consent of a, the transfer by B could convey a good
title to C, and the right of A to stop the goods in transit was defeated
...
Even if a person has agreed
to buy conditionally he can convey a good title
...
In Belsize Motor supply co
...
Before all the installments were paid, Alfred Burgess Ltd pledged the vehicle with
Cox
...
7
...
e
...
Thus, a buyer at a resale acquires a
good title
...
Sale by finder of Goods - Sec 169, Indian Contract Act
According to Sec 71, Indian Contract act, the finder of goods is subject to the
same responsibility as the bailee
...
According
to Sec 169 of the Contract Act, however, if the owner cannot with a reasonable
diligence be found or if the refuses upon demand, to pay the lawful changes of the
finder, the finder may sell the goods 1
...
When the lawful changes of the finder, in respect of the thing found, amount to
two-third of its value
...
9
...
176, Indian Contract Act
Normally the pawnee of the goods is under a duty to return them if the debt
secured by such goods is paid back to him
...
According to Sec
...
Upon such a sale being made by the pawnee the
buyer of such gods acquires a good title to them
...
Sale by Authorised Officer
In some cases, a special power of sale is given to officers of court, liquidators
of companies, receivers insolvent’s estate, custom officers for duties remaining
unpaid, etc
...
19
13
...
Section 148 of the Contract Act 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 directions, of the person delivering them”
...
Essential Features of Bailment
From the definition given by Section 148 it follows that a bailment has the
following characteristics:
1
...
2
...
If the goods are delivered by
mistake, without any purpose, there is no bailment
...
The goods are delivered subject to the condition that when the purpose is
accomplished the goods are to be returned in specie or disposed of according
to the directions of the bailer
...
Money
is not included in the category of movable goods
...
Transfer of Property and Possession
In a sale the property in the goods is transferred from the seller to the buyer
and the buyer can therefore, deal with the goods in anyway he desires
...
and the bailee can only deal
with the goods in accordance with the directions of the bailer
...
Return of Goods
Normally sale, goods cannot be returned unless there is a breach of some
condition
...
3
...
In a bailment the
consideration is an undertaking to return the goods after the accomplishment of
purpose
...
12 SUMMARY
Contract of sale is a contract by which the ownership of movable goods is transferred
from the seller to the buyer
...
Where the property in goods is to be
transferred to the buyer at some future date or on the fulfillment of a certain condition,
the contract of sale is called an agreement to sell
...
The goods may be classified into existing, future and
contingent goods
...
Stipulation
relating to time of payment are not of the essence of a contract of sales unless a different
intention appears from a contract
...
It the title of the seller is defective the buyer's title will also be subject to the
same defect
...
13
...
21
Goods: Goods means every kind of movable property other than actionable claims and
money and includes stock and shares growing crops, grass and things attached to or
forming part of the land which he agreed to be severed before the sale or under the
contract of sale
...
Agreement to Sell: Where the transfer of the property in the goods is to take a place
at a future time or subject to some condition thereafter to be fulfilled the contract is
called an agreement to sell
...
Price: The money paid for the purchase of goods is called the price
...
Bailment: When the goods are delivered by one person to another for some purpose
and on the condition that the goods shall be returned back on the achievement of the
purpose, it is a case of bailment of goods
...
14 SELF ASSESSMENT QUESTIONS
1
...
Define the term ‘goods’
...
3
...
Sale and agreement to sell
Sale and bailment
“A seller cannot convey a better title to the buyer than he himself has”
...
22
13
...
D
...
S
...
Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi
...
K
...
G
...
Varshney, Elements of Business Law, S Chand & Co
...
R
...
Pandia, Priciples of Mercantile Law, N
...
Tripathi Pvt
...
, Mumbai
...
R
...
Ltd
...
23
LESSON NO
...
0 Objective
14
...
2 Rights of Unpaid Seller
14
...
1
Rights of an unpaid seller against the goods
14
...
2
Rights against the buyer personally
14
...
4 Keywords
14
...
6 Suggested Readings
14
...
b)
State the rights of unpaid seller against the goods
...
14
...
(b)
When a bill of exchange or other negotiable instrument (such as cheque)
has been received as conditional payment, and it has been dishonoured
[Section 45(1)]
...
1
The above definition of unpaid seller states the following :
(i)
The seller shall be called an unpaid seller even when only a small portion
of the price remains to be paid
...
(iii)
Where the goods have been sold on credit, the seller cannot be called as
an unpaid seller during the credit period unless the buyer becomes
insolvent
...
(iv)
Where the full price has been tendered by the buyer and the seller has
refused to accept it, the seller cannot be called as unpaid seller
...
10,000
...
9000 but failed to
pay the balance
...
10,000 and received a cheque for the
full price as conditional payment
...
(c)
X sold some goods to Y for Rs
...
One
month has not yet expired
...
10,000 on a credit of one month and one
month has expired and the price remains unpaid,
(e)
X sold some goods to Y for Rs
...
Y
became insolvent during the period of credit
...
(b) : X is an unpaid seller because the cheque received as conditional payment
has been dishonoured
...
(d) : X is an unpaid seller because the price remains unpaid even after the
expiry of credit period
...
14
...
Rights against the goods
2
...
2
...
In such cases, an unpaid seller has certain rights against the
goods
...
Where the ownership of the goods is transferred to the buyer
...
Where the ownership of the goods is not transferred to the buyer
...
Rights of unpaid seller against the goods where the property in the
goods have passed to the buyer
An unpaid seller has the following rights against the goods not with
standing the fact that the property in the goods has passed to the buyer:
(a)
Right of lien ;
(b)
Right of stoppage of goods in transit;
(c)
Right of resale
...
The unpaid seller has the right to retain the
goods until he receives their price
...
By a mere
exercise of this right, the contract of sale of goods is not automatically
rescinded
...
e
...
It has already been observed
under Section 32 that if there is no agreement to the contrary the payment of
4
the price and the delivery of the goods are concurrent condition
...
The seller can refuse to deliver them to the
buyer or in other words he can exercise the right of lien over thew goods, if
the buyer is not ready and willing to pay their price in exchange for the goods
...
As soon as the period of
credit expires the price becomes due and the seller can exercise the right of
lien thereafter
...
For example, on Ist January A sells a horse to B and it is agreed that
the buyer may take the delivery at any time he likes and the price is payable on
Ist Mach
...
(iii)
The seller can also exercise this right of lien when, before the delivery
of the goods to him, the buyer becomes insolvent
...
When
the goods are sold on credit the presumption is that the buyer shall maintain
his solvency
...
For example, the goods are sold on Ist January and
the period of credit extends upto Ist March, if the buyer becomes insolvent on
15th January and he has not yet taken the delivery of the goods the seller may
exercise his right of lien if the buyer demands delivery at any time after 15th
January although originally he had agreed to deliver the goods to the buyer on
5
credit
...
The term ‘insolvent’ here does not mean a person who has been adjudged
insolvent under the Insolvency Law
...
[Section 2 (8)]
The right of lien is linked with possession and not with title
...
The unpaid seller’s lien
can be exercised only so long as the goods are in the actual possession of the
seller or his agent
...
The right
of lien cannot be exercised during the currency of credit term
...
The lien of the unpaid
seller is for the price only; so when the price has been paid or tendered, he
cannot retain possession of the goods any longer
...
Example : A sold certain shares to B
...
The buyer became insolvent
...
Bharucha v
...
L
...
777 (P
...
The right of lien is indivisible in nature, and so the buyer is not entitled
to claim delivery of a portion of the goods on payment of a proportionate price
...
Example : A sells to B a certain quantity of sugar
...
B allows the sugar to remain in A’s warehouse til the
expiry of the three months, and then does not pay for them
...
Conditions for the Exercise of Right of Lien
The following are conditions precedent to the exercise of the right of lien:
(a)
The ownership must have passed to the buyer
...
( c)
The possession of the goods by the seller must not expressly exclude
the right of lien
...
It may be noted that
the lien can be exercised only for price
...
The lien of an unpaid seller is a particular one
...
Part Delivery : Where an unpaid seller has made part delivery of the goods, he
may exercise his right of lien on the remainder, unless such part delivery has
been made under such circumstances as to show an agreement to waive the lien
...
If for example, out of 100 bags of weighed which were to be
7
supplied by the seller to the buyer, 20 have already been delivered to the buyer,
the seller may exercise his right of lien over the other 80 bags
...
Similarly if an essential part of the machinery has been
delivered by the seller to the buyer, the seller cannot exercise his right of lien
over the remaining parts
...
By payment of price : The right of lien comes to an end when the seller
ceases to be an unpaid seller, i
...
, when the buyer pays or tenders the price to
the seller
...
Merely obtaining the decree does not mean
the payment of the price and, therefore, Section 49(2) states that unpaid seller,
having a lien on the goods, does not lose his lien by reason only that he has
obtained a decree for the price of the goods
...
By delivery to the carrier : Since the right of lien is a right to retain
the possession so long as the seller continues in possession the right would
obviously come to an end when the seller loses the possession
...
Though the delivery of the goods to a carrier or the bailee for the
purpose of transmission to the buyer results in end of lien but that results in
8
the beginning of the right of stoppage in transit
...
For the termination of the lien the delivery to the carrier or some other
bailee must have been made without reserving the right of disposal i
...
, a right
of not delivering the goods to the buyer until he fulfils the required condition,
generally that condition being the payment of the price, the seller can exercise
his right of lien
...
By the buyer obtaining possession of the goods : When the buyer or
his agent lawfully obtains the possession of the goods the right of lien comes
to an end
...
If the buyer once obtains the
possession the right of lien comes to an end, and such a right cannot be
exercised even if the seller again gets back the possession of those goods
...
4
...
According to Section 46(1) (a) an unpaid seller gets his right of lien by
implication of law
...
Section 49(1)(c) expressly provides that
the right of lien comes to an end by waiver thereof
...
9
5
...
This general rule is subject to two
exceptions :
(i)
When the seller himself assents to a sub-sale or other disposition of
the goods by the buyer
...
In the above-stated two exceptional cases the unpaid seller’s right of
lien comes to an end
...
The right to stoppage means the right to stop further
transit of the goods, to resume possession thereof and to retain the same till
the price is paid
...
(ii)
The seller must have parted with the possession of the goods and the
buyer must not have acquired it
...
(iv)
The property must have passed from the seller to the buyer
...
This right is
only available when the goods are neither in the possession of the seller nor
that of the buyer, but are in the possession of a middlemen for the purpose of
transmission to the buyer
...
Clark & Co
...
Goods were first railed to London and then shipped to Melbourne, a mate’s
receipt being sent to buyers
...
They then gave
fresh notice to the shipowners claiming back the goods before the ship arrived
at Melbourne
...
Held, the goods having been effectively stopped
in transit, the trustee could not claim them
...
Clark 19 Q
...
D
...
It becomes important, therefore, to know as to what is the duration
of transit, i
...
, when transit begins and when it comes to an end
...
According to sub section (1) the goods are
deemed to be in the course of transit from the time when they are delivered to
a carrier or other bailee for the purpose of transmission to the buyer
...
It means that so long as the goods are with a
carrier the transit continues
...
If the carrier is the buyer’s agent, delivery of the goods
to him would defeat the right of stoppage in transit
...
It is only
when the carrier has the capacity of a carrier that the goods are deemed to be
in transit for the purpose of the exercise of this right
...
In Schotmans v
...
Co
...
The
bill of lading was also taken in buyer’s order
...
In Turner v
...
Patterson J
...
In the present
case the vendors by the terms of the bill of lading, made the cotton deliverable
at Liverpool, to their order or assigns, and there was not, therefore, a delivery
of the cotton to the purchasers as owners, although there was a delivery on
board their ship
...
The transit is deemed to be at an end and the seller cannot exercise his
right of stoppage in the following cases :
(i)
When the buyer or his agent takes delivery after the goods have reached
destination
...
12
(iii)
When the goods have arrived at their destination and the carrier
acknowledges to the buyer or his agent that he holds the goods on his
behalf
...
(v)
When the carrier wrongfully refuses to delivery the goods to the buyer
or his agent
...
The unpaid seller may exercise his right of stoppage in either of the
following ways :
(a)
By actually taking possession of the goods, or
(b)
By giving notice of his claim to
(i)
the carrier, or
(iii)
other bailee in whose possession the goods are
...
When the notice is given to the principal, the notice,
to be effectual, must be given at such time and in such circumstances that the
principal, by the exercise of reasonable diligence, may communicate it to the
servant or agent in time to prevent a delivery to the buyer
...
It may be noted that the expenses of
such recovery shall be borne by the seller (Section 52)
...
e
...
If
after the transit has ended and the carrier wrongfully returns the goods to the
seller, he is liable to the buyer for conversion
...
The seller’s lien attaches when the buyer is in default whether he be
solvent or insolvent, while the right of stoppage in transit arises only
when the buyer is insolvent
...
Lien is exercisable only when the goods are in actual possession of the
unpaid seller, while stoppage in transit is available only after the seller
has parted with the possession of the goods but are still passing through
channels of communication for the purpose of reaching the hands of the
vendee, i
...
they are in custody of an independent carrier
...
The right of lien consists in retaining the possession of the goods, while
the right of stoppage in transit consists in regaining the possession of
the goods
...
Lien ends where the right of stoppage commences
...
14
Effect of Sub-Sale or Pledge By Buyer (Section 53)
The general rule is that the unpaid seller’s right of lien or stoppage in
transit is not affected by any sale or other disposition of the goods which the
buyer may have made
...
They are stated below :
1
...
Example : A sold to B 80 maunds of grain out of a grainary
...
C after receiving from B the delivery order
presented it to A
...
A’s right against the 60 maunds is not lost since A
recognised the title of C the sub-buyer (Knigths v
...
2
...
g
...
But in this case the unpaid seller may require the
pledgee to satisfy his claim against the buyer first out of any other goods
or securities of the buyer in the hands of the pledge
...
(ii)
Where the seller expressly reserves right of resale if the buyer commits
a default in making the payment
...
(iii)
Where the unpaid seller who has exercised his right of lien or stoppage
in transit gives a notice to the buyer about his intention to resell and
buyer does not pay or tender within a reasonable time
...
40,000 per ton on a
credit of one month
...
State the legal
position in each of the following alternative cases :
16
(a)
If X resold 10 tons of rice to Z at a rate of Rs
...
(b)
If X resold 10 tons of rice to Z at a rate of Rs
...
(c)
If X resold 10 tons of rice to Z at a rate of Rs
...
(d)
If X resold 10 tons of rice to Z at a rate of Rs
...
Solution
(a)
X is entitled to keep the profit of Rs, 1,00,000 with himself because the
buyer cannot be allowed to take advantage of his own wrong i
...
Z shall get a good title against Y [Section
54 (3)]
...
1,00,000 from Y [Section 54(2)]
...
(c)
Y is entitled to the profit of Rs
...
However, Z
shall get a good title against Y [Section 54(3)]
...
1,00,000 [Section 54(2)]
...
2
...
17
14
...
2 Rights against the buyer personally
The unpaid seller, in addition to the rights against the goods as discussed
above, has the following rights of action against the buyer personally
...
Where under a contract of sale, the price is payable on a day certain
irrespective of delivery and the buyer wrongfully neglects or refuses to pay
the price, the seller may institute a suit for the recovery of the same, although
the property in the goods may not have passed
...
In Dunlop v
...
The price was agreed to
be paid by 30th April
...
It was held
that the seller was entitled to recover the price of the whole of the iron and he
was not required to show that he had appropriated any specific quantity of iron
to the contract for completing the delivery of the remaining iron
...
On the other hand, if the goods have not yet reached the actual
possession of the buyer, the seller has, in addition to the right of recovery of
price under Section 55 certain rights against the goods
...
Now the question arises as to what shall be the basis or principles
of estimating the damages to the claimed
...
According to Section 73, the measure of damages
is the estimated loss arising directly and naturally from the buyer’s breach of
contract
...
In Bungo Steal furniture v
...
of India by
the appellants
...
It was held that, in this case, since, the
property in the goods had not yet passed to the buyer (Govt
...
for wrongfully
refusing to accept the goods
...
Example : If the difference between the contract price and the market price
on the date of breach is nil, the seller can get only nominal damages (Charter v
...
19
(ii)
The seller does not Resell : If the seller does not resell, the difference
between the contract price and market price on the day of breach is adopted as
a measure of damages
...
Union of India)
...
Example : T Ltd
...
R refused
to accept delivery
...
Head that T
Ltd
...
, the profit they
would have earned by selling that car (Thompson Ltd
...
Robinson)
...
(c)
Suit for damages for Repudiation of the contract (Section 60)
Where buyer repudiates the contract before the due date of delivery, the
seller may either treat the contract as subsisting and wait till the due date of
delivery or he may treat the contract as rescinded and sue for damages for the
breach
...
If the goods are sold on credit, interest will
run from the expiry of the credit
...
It may be noted that the seller can only recover
interest when he is in a position to recover the price
...
14
...
The
rights of an unpaid seller is against the goods and against the buyer personally
...
These rights are sit for price, suit for damages, suit for interest and
suit for interest and suit for reputation of contract
...
4 KEYWORDS
Unpaid Seller: A person who has sold goods to another person but has not
been paid for the goods, or has been paid partially is called an unpaid seller
...
Stoppage in Transit: It means the stopping of the goods while they are in the
course of transit
...
21
14
...
When is a seller of the goods deemed to be an unpaid seller ? What are
the rights against the goods and the buyer personally ?
2
...
Do you agree that right of stoppage in transit is an extension of
right of lien ?
3
...
4
...
“Comment
...
What is meant by the right of stoppage in transit in respect of sale of
goods ? When is the this right lost ? How is this right effected or
exercised ?
Practical Problems
Decide the following problems, giving reasons:
1
...
Y pays to X through a cheque
...
X,
therefore, refuses to give the delivery of goods until paid
...
A sells to B 80 quintals of grain out of a large quantity lying in his
granary
...
Then C having a delivery order from B forwards it to A, who informs C
that he will send the grain in due course
...
Can A refuse
to deliver the 60 quintals of grain to C? Give reasons for your answer
...
A is the owner for specific goods lying in N’s warehouse
...
B resells the goods to C and gives a delivery
order but before C can obtain possession of the goods B becomes insolvent
and A warns N not to deliver to anyone without A’s order
...
4
...
It is agreed that B shall
get two months credit
...
B
becomes insolvent before the expiry of the two months, and the Official
Receiver demands delivery of the sugar without offering to pay
...
6 SUGGESTED READINGS
S
...
Gulshan & G
...
Kapoor, Business Law, New Age International Publishers,
New Delhi
...
C
...
Nirmal Singh, Business Law, Deep and Deep Publication Pvt
...
, New Delhi
...
C
...
Ltd
...
Avtar Singh, The Priciples of Mercantile Law, Eastern Book Co
...
M
...
Shukla, A Manual of Mercantile Law, S
...
, New Delhi
...
S
...
Pillai and Bagavathi, Business Law, S
...
, New Delhi
...
: 15
CONDITIONS AND WARRANTIES, DOCTRINE OF
CAVEAT EMPTOR
STRUCTURE
15
...
1 Introduction
15
...
3 Warranty
15
...
5 Change of a condition into a warranty
15
...
7 Express and Implied Condition and Warranties
15
...
9 Summary
15
...
11 Self Assessment Questions
15
...
0 OBJECTIVE
After reading this lesson you should be able to
a)
Define the condition and warranty and differentiate between them
...
c)
Discuss the implied conditions and warranties recognized by the Sales of Goods
Act
...
1
15
...
When forming a contract, a party may make a statement with a view to
inducing the other party to enter into the contract
...
Such representations are
generally about the nature, quality and fitness of goods
...
For example, where a jewellery seller, while praising a particular diamond ring,
states that the diamond is very lucky and anyone who shall purchase it must become
wealthy, his statement, being commendatory in nature, does not form part of the contract
and its breach does not give rise to any legal consequences
...
However, all stipulations are not of equal importance
...
15
...
Thus, a conditions is an important representation made by the seller the nonfulfillment of which defeats the very purpose of the buyer and he/she has the right to
terminate the contract
...
B, suggested that a 'Bugatti' car would be fit for the purpose
...
Later on, the car turned out to be
unfit for the touring purpose
...
It was held that A was entitled to reject the car and to have the refund of the price
...
It was so important that its non-fulfillment defeated the very purpose for which A bought
the car
...
3 WARRANTY
According to Section 12(3) of the Act, a warranty is a stipulation collateral to
the main purpose of the contract, the breach of which gives rise to a claim for damages
but not a right to reject the goods and treat the contract as repudiated or broken
...
It is not essential to the main purpose
of the contract of sale
...
Even if
it turns out to be untrue, the buyer cannot put an end to the contract
...
In brief, where the fulfillment of the main purpose of the contract depends on
the fulfillment of the stipulation, the stipulation is condition and where it is not so, the
stipulation is only a warranty
...
Section 12(4) of the Act states “whether a
stipulation in a contract of sale is a condition or a warranty depends in each case on the
construction of the contract as a whole
...
A stipulation may be a condition though called a
warranty in the contract”
...
3
Examples
(a): A person purchases a vehicle which is warranted quiet and smooth to drive
...
But if instead of buying a particular vehicle, a person asks a dealer
to supply him with a quiet and smooth vehicle and the dealer supplies the person with a
noisy one, the stipulation is a condition, and the buyer can return the vehicle
...
(b): A made a contract for the sale of cashew-nuts
...
The purchaser entered
into the contract relying upon the description
...
He could also claim back
the part of price paid to the seller
...
15
...
A condition is a stipulation which is essential to the main purpose of the contract
...
2
...
Breach of warranty provides right to claim damages
only
...
4
3
...
But a
breach of warranty cannot be treated as a breach of condition
...
5 CHANGE OF A CONDITION INTO A WARRANTY
Section 13 deals with cases where breach of condition would be treated as a
breach of warranty only and as a consequence, a contract is not avoided
...
These cases are as follows :
I
...
This
is to say, he only claims damages and does not elect to repudiate the contract
...
Where the buyer altogether waives the performance of the condition
...
Waiver
may be express or implied
...
Where the contract of sale is non-severable/indivisible and the buyer has accepted
either the whole goods or any part thereof
...
Indivisible contracts
are those where price for a lot, comprising goods of different qualities, as such
is fixed and not fixed per unit or per bag or per ton, etc
...
According to Section 42, the buyer is deemed to have accepted the goods:
a)
when the seller is intimated by him about the acceptance of goods; or
b)
When he does any act in relation to goods which is inconsistent with the
ownership of the seller, e
...
the buyer puts his mark on goods; or
c)
When he continues to retain the goods even after the lapse of reasonable time
without intimating the seller that he has rejected them
...
15
...
g
...
Regarding the importance of various stipulations as to time Section 11 of the
Act provides as under :
Unless a different intention appears from the terms of the contract, stipulation
as to time of payment are not deemed to be of the essence of a contract of sale
...
It may be noted that the general rule stated in Section 11 is that the time of
payment of the price is not deemed to be of the essence of the contract
...
The parties
are, however, free to express a different intention in their contract
...
Stipulations as to time, except as regards time of payment are usually of the
essence of the contract
...
Example (a) : A sold certain goods to B
...
B failed to pay after the goods had been in part delivered
...
It was held that delivery was subject to the condition of payment
and the condition being broken, A had the right to bring an action for the recovery of
goods
...
i
...
Antwerp
...
However, due to a strike in the port of loading the
goods were not shipped until November
...
[J
...
v Comptoir Wegimont
...
B
...
7 EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES
(SECTION 14-17)
In a contract of sale of goods, conditions and warranties may be either (1) express
or (2) implied
...
Besides, certain conditions and warranties, as provided in Section 14 to 17,
are impliedly there in every contract of sale of goods unless the parties agree to the
contrary
...
The implied conditions and warranties provided
in the Act are binding in every contract of sale unless they are inconsistent with any
express conditions are warranties agreed to by the parties
...
Condition as to Title (Section 14 (a) )
In a contract of sale, unless the circumstances of the contract are such as to
show a different intention, there is an implied condition on the part of the seller that(a)
in the case of sale, he has a right to sell the goods, and
(b)
in the case of an agreement to sell, he will have a right to sell the goods at the
time when the property is to pass
...
D had no title to
the car and consequently R had to hand it over to the true owner
...
B
...
Want of title to the goods is not the only factor because of which the seller may
not have a right to sell the goods
...
If the goods sold bear labels infringing the trade
mark of a third person, the seller has no right to sell them
...
the sellers sold to the buyers tins of condensed milk c
...
f from New York
to London
...
At the instance of the Nestle Co
...
The buyers had to remove those labels
before taking delivery of those tins of condensed milk
...
The Court of Appeal held that the sellers had made a
breach of condition that they had a right to sell the goods and as such they were bound
to pay damages for the loss suffered by the buyers
...
g
...
2
Condition as to Description (Section 15)
Sometimes, the goods are sold by description
...
The term
‘correspondence with description’ means that the goods purchased by the buyer must
be the same which were described by the seller
...
Example: A purchased from B a car, which he had never seen
...
However, on delivery, A found that the car was used and repainted
...
It was held that the sale was by description and the car
did not correspond with the description
...
(Based on Varley v whipp (1900) 1 Q
...
513)
It may, however, be noted that the buyer can reject the goods only if the sale is
by description, and the goods do not correspond with the description
...
In Bower v Shand (1877) 2 AC 455, Lord
Blackburn emphasized this condition in the following words:
“If you contract to sell peas you cannot oblige a party to take beans
...
”
It will be interesting to know, that the term ‘sale by description’ has not been
defined in the Sale of Goods Act
...
g
...
The sale will also be by description when the identity
or quality of the thing is describe, e
...
, Brand New Car, Maruti 85 Model etc
...
In such cases the goods must correspond with
the description given by the seller
...
The seller
(B) described the machine as “Brand New”
...
In this case, the sale is by description, and A is entitled to reject the
machine as it does not correspond with the description given by the seller
...
Example: In an auction sale of a set of napkins and table cloths, these were
described as “dating from the seventeenth century”
...
Subsequently he found the set to be an eighteenth century set
...
T
...
Example: A advertised his car for sale as a “Herald Convertible, white 1961
Model”
...
Subsequently, B discovered that the car was
made of two parts which had been welded together
...
It was held that the sale was by
description and B could reject the car as it did not correspond with the description
...
(Beale v Taylor (1967) 1 WLR 1193))
Example: A sold to B, 3000 tins of Australian fruits which were agreed to be
packed in cases each containing 30 tins
...
It was held that the method of packing was of part of the
description
...
[Moore & Co
...
(1921) 2 KB 519 CA]
...
If they do not correspond, the buyer may reject them
and the seller cannot take the defence by saying that they will serve the buyer’s purpose
...
10
3
...
There are three implied conditions when the goods are supplied according
to the samplei)
that the bulk shall correspond with the sample in quality;
ii)
that the buyer shall have a reasonable opportunity of comparing the bulk with
the sample;
Example: A agreed to sell to B two parcels of wheat
...
The buyer (B) went to A’s warehouse to examine the wheat
...
But A refused to show
the other parcel to B, which was not in the warehouse
...
[Lorymere v Smith (1822) 1 B & C 1]
...
The goods when
supplied corresponded to the sample but it was found that owing to a latent defect in
the cloth, coats made out of it would not stand ordinary wear and were therefore,
unsaleable
...
Held, the buyer was entitled to reject the cloth (Drummond &
Sons v Van Ingen)
...
Sale by Sample as well as Description (Section 15)
When the goods are sold by sample as well as description it is not sufficient
that the bulk of the goods corresponds with the sample if the goods do not also
correspond with the description
...
In such a case, the fact that the goods supplied
conform to the sample but do not agree with the description entitle the buyer to reject
the goods because the fundamental condition in every contract is that the goods should
correspond to the description
...
but the “seller giving no warranty express or implied as to growth,
description, or any other matters
...
It was held that there was a breach of condition and
the buyer was entitled to recover damages
...
The oil supplied though corresponded with the sample, was adulterated
with hemp oil
...
5
...
The buyer must examine the goods
thoroughly before he buys them in order to satisfy himself that the goods will be suitable
for the purpose for which he is buying them
...
1
...
2
...
3
...
The particular purpose for which the goods, are required has to be made known
to the seller
...
A particular purpose is
the purpose expressly or impliedly communicated to the seller, for which the buyer
buys the goods
...
But where an article is capable of being applied to a variety of
purposes,
...
Example: (a) A who had no special knowledge of hot water bottles went to the
shop of a chemist and asked for a hot water bottle
...
A bought
the bottle
...
It was found that
the bottle was not fir for use as a hot water bottle and therefore, the chemist was liable
for damages
...
But the set was not
fit for A’s mouth
...
It was held
that A was entitled to do so as the only purpose for which he wanted the set of teeth was
not fulfilled
...
After wearing the coat for
sometime, A developed a dermatitis (skin trouble)
...
And A’s skin trouble was due to his oversensitive skin
...
In this case, it was A’s duty to disclose
the fact of this oversensitiveness to the seller at the time of sale
...
Thus, when a patent smoke
consuming furnace was ordered by the plaintiff by its patent name, for his brewery and
the same being forwarded to him proved useless, it was held that the buyer had no cause
of action against the seller
...
Implied
condition as to quality or fitness will apply even though the article is described in the
contract by its trade name
...
D said that the
Bugatti car, their speciality would suit, and showed P a specimen
...
The car delivered proved to be unsuitable for touring purposes
...
6
...
According to
this Sub Section, there is a further implied condition in such a case that the goods
supplied shall be of merchantable quality
...
the goods are bought by description
2
...
The term ‘merchantable quality’ has not been defined in the Act
...
The goods should be immediately saleable under the description by which they
are known in the market
...
Goods may be unmerchantable not only because of some defect in their physical
condition, but also, because of some other circumstances as for example;
14
1
...
the use of them is dangerous or injurious in a way not to be expected from
goods of the kind, or
3
...
Examples: (a) P asked for a bottle of Stone’s Ginger Wine at D’s restaurant
...
It was held that the sale was by description and since the bottle was not of
merchantable quality
...
[Morelli v Fitch and Gibbons
(1928), 2 KB 636]
(b) A manufacturer supplied 600 horns under contract
...
Held, they were not of
merchantable quality and therefore, the seller’s suit for price was dismissed [Jackson v
Rotax Motor & Cycle Co
...
b
...
(c) A radio set was sold to a layman
...
Held, the purchaser could return the set and
claim refund [R
...
Thakur v H
...
E
...
971]
All such defects as make the goods unmerchantable are of two kinds, called
patent defects and latent defects
...
Latent
defects are those which cannot be discovered on such examination
...
In case of patent defects where an opportunity is afforded to the buyer to examine
the goods, but the buyer makes only a casual examination of the goods, this will amount
to an examination within the meaning of this section, and the seller would not be liable
to for the defects which such an examination ought to have revealed
...
The glue was stored in
barrels and every facility was given to B for its inspection
...
He then purchased the glue
...
B
...
Comparison
between the condition as to the fitness of goods for buyer’s purpose, and condition as
to merchantability
...
Goods for Buyer’s Purpose
1
...
When the goods are sold
When the goods are sold
under patent or trade name
under patent or trade name, then the
then the condition as to
condition as to merchantability is
fitness for buyer’s purpose
applicable, i
...
it is not excluded
2
...
e
...
3
...
which the goods are not fit
for buyer’s use but they may
be merchantable
...
Condition as to Wholesomeness
In the case of eatables and provisions, in addition to the implied condition as to
merchantability, there is another implied condition that the goods shall be wholesome
...
The milk contained germs of typhoid fever
...
Held, F could
recover damages [Frost v Aylesbury Dairy Co Ltd
...
B
...
16 (3)]
...
In other words it
is the stipulation which has not been included in the contract of sale in express words
...
It will be
interesting to know that implied warranties are read into every contract of sale unless
they are expressly excluded by the express agreement of the parties
...
It may be noted that sometimes there is conflict between the express and implied
warranties
...
1
...
14(b)]
In every contract of sale the first implied warranty on the part of the seller is
that “the buyer shall have and enjoy quiet possession of the goods
...
Since disturbance of quiet
possession is likely to arise only where the seller’s title to goods is defective, this
warranty may be regarded as an extension of the implied condition of the provided for
by Section 14 (a)
...
She thereafter spent a sum pound 1117
10sh
...
Unknown to the parties the
typewriter had been stolen and the plaintiff was compelled to return the same to its true
owner
...
The plaintiff was entitled to recover not
only the sum of pound 11-10sh, the amount spent on overhauling, as the same was the
loss arising naturally in the usual course of things
...
Implied Warranty of Freedom from Encumbrances
There is an implied warranty on the part of the seller that the goods are free
from any charge or encumbrance
...
This warranty will not apply where such
Encumberances are declared to the buyer when the contract is made or he has notice of
them
...
Example: A, the owner of the watch pledges it with B
...
B approaches
C and tells him about the pledge affair
...
There is breach of this warranty and C is entitled to claim compensation A
...
If there is
a breach of this warranty, the seller will be liable in damages
...
(1903) 1 K
...
155, C
purchased a tin of disinfectant powder from A
...
He also knew that C was ignorant
18
about it but did not warn C
...
Held, A was liable in damages to C as he should have
warned C of the probable danger
...
8 DOCTRINE OF CAVEAT EMPTOR (BUYER BEWARE)
Caveat Emptor means "let the buyer beware", i
...
the buyer must take care
...
In a contract for sale of goods there is no implied warranty or condition
as to quality or fitness for any particular purpose of goods and therefore, the buyer
purchased the goods at his risk relying on his own skill and judgement (Section 16)
Example : A purchase a horse from B
...
The horse is not suitable for riding but is suitable only for
being driven in the carriage
...
A can neither reject the
horse nor can he claim any compensation from B
...
But it has no application in any case, in which
the seller has undertaken and the buyer has left it to the seller, to supply goods to be
used for a purpose known to both parties at the time of the same
...
The buyer required the cloth for making special uniforms
but this fact was not made known to the seller
...
But there was nothing to show
that it was unfit for other purposes
...
[Jones v Padgelt, (1890)
...
B
...
650]
19
Exception to the 'Doctrine of Caveat Emptor'
In certain circumstances however, the doctrine has no application
...
ii)
when the seller has deliberately concealed a defect which is not apparent on the
reasonable examination of the goods
...
16 (1)]
In the case of a contract for the sale of a specified article under its patent or
other trade name, there is no implied condition that the goods shall be reasonably fit
for any particular purpose (Proviso to Sec
...
16 (3)]
Where goods are bought by description from a seller who deals in such goods,
there is an implied condition that the goods shall be of 'merchantable quality'
...
In Jackson v Rotex Motor and Cycle Co
...
B
...
20
It should be noted that goods are merchantable if they are fit for any one of the
several purposes for which the goods may ordinarily be used
...
9 SUMMARY
A condition is defined as a representation made by the seller which is so
important that its non-fulfillment defeats the very purpose of the buyer
...
Sometimes, a condition is changed to the status of a warranty and in such cases, the
buyer loses the right to reject the goods on the ground of breach of condition
...
In a contract of sale of goods, conditions and warranties may be either express or
implied
...
In a contract of sales of goods, there is no implied
condition or warranty as to quality or fitness for any particular purpose of goods and
therefore, the buyer purchased the goods at his risk relying on his own skill and
judgement
...
10 KEYWORDS
Condition: It is defined as a representation made by the seller which is so important
that its non-fulfillment defeats the very purpose of the buyer
...
Cavet Emptor: It means that a buyer purchases the goods at his own risk
...
Express Warranty: It is a warranty which has been expressly agreed upon by both the
parties at the time of contract of sale
...
11 SELF ASSESSMENT QUESTIONS
1
...
Explain the difference between the
two
...
Discuss the provision of the sales of Goods Act relating to the implied conditions
in a contract of sale by sample
...
"Let the buyer beware" - Comment
...
State the conditions in a contract for the sale of goods (i) by description (ii)
required for a particular purpose
...
12 SUGGESTED READINGS
P
...
S
...
Chand & Company, New Delhi
...
D
...
S
...
Aggarwal, Company Law, Dhanpat Rai Publications, New Delhi
...
K
...
G
...
Varshney, Elements of Business Law, S Chand & Co
...
K
...
Balchandari, Business Law for Management, Himalaya Publication House, New
Delhi
...
S
...
K
...
S
...
Kuchhal, Mercantile Law, Vikas Publishing House, New Delhi
...
, Lucknow
...
C
...
Chand & Co
...
R
...
N
...
Chand & Co
...
22