Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
TABLE OF CONTENTS
UNIT
I
II
III
IV
V
VI
VII
VIII
LESSON
TITLE
PAGE
NO
...
2
Law and its origin
Mercantile Law and its Sources
2
...
2
Offer and Acceptance
22
2
...
4
Free Consent
41
2
...
1
Indemnity and Guarantee
66
3
...
1
Contract of Agency
85
5
...
2
Negotiable Instruments Act
116
5
...
4
Parties to a Negotiable Instrument
129
5
...
1
Company – Nature and Features
142
6
...
3
Company Incorporation
168
7
...
2
Articles of Association
192
7
...
1
8
Dividends, Bonus And Interest
3
218
PAPER IV - BUSINESS LAW
UNIT I
Law: Rights, Duties and Liabilities – Legal Personality – Law and Fact – Cases and
Legislation Mercantile Law and commercial Law – Sources
...
UNIT – III
Special Contracts – Indemnity and Guarantee – Rights and Liabilities of Surety – Bailment
and Pledge – Duties of Bailor and Bailee – Bailer’s Lien – Pledge – Pawner and Pawnee
...
UNIT – V
Law of Sales of Goods – Contract of Sale – Conditions and Warranties – Transfer of
Property and Title to Goods – Rights and Duties of Seller and Buyer – Rights of Unpaid
seller
...
UNIT – VI
Evolution of Companies Act, 1956 – Forms of Companies – Characteristics of Company –
Advantages of incorporation – Conversion of Private Company into Public Company
Formation of Company – Promotion – Incorporation – Registration – Inviting
Subscriptions – Commencement of Business
UNIT – VII
Memorandum, Articles of Association and Prospectus – Contents of Memorandum –
Doctrine of ultra-vires – Contents of Articles of Association – Difference between Articles
and Memorandum – Prospectus – Need – Issue of Prospectus – Contents – Exemptions
from disclosure – Liability for misstatement – Civil Liability – Rights of Indemnity –
Criminal Liability for misrepresentation
...
TEXT BOOK:
Kapoor N
...
, Elements of Mercantile Law & Elements of Company Law
REFERENCES:
Bagrial A
...
C
...
R
...
Singh Avtar, Company Law
4
UNIT–I
CONCEPT OF LAW
Unit Structure:
Lesson – 1
...
2 - Mercantile Law and its Sources
LESSON – 1
...
The day-to-day survival of
each member of our society must proceed to a greater extent in conformity with
recognized rules and principles
...
Without law, life and business would
become a matter of the survival of the fittest
...
WHAT IS LAW?
It is not possible to give one complete accurate definition of law
...
The State regulates the conduct of its people by a set
of rules
...
In this sense, Holland, a jurist/defines law as “rules of external human action
enforced by the State
...
Anson observes as follows:
“The object of law is order, and the result of order is that men are enabled to look
ahead with some sort of security as to the future
...
5
SOCIETY AND LAW
The term ‘society’ is used to mean a community or a group of persons living in any
region, who are united together by some common interest (or) bond
...
These rules are
made by the members of the society
...
According to Salmond, “Law is the body of principles recognized and applied by
the state in the administration of justice”
...
”Law in this sense, is
a bundle of rules and regulations and also a social machinery for securing justice in the
community
...
As the conditions in a society change, laws are modified to fit
the needs of the society
...
In the changing economic scenario, the main object of law is considered to be “to
establish socio-economic justice and remove the existing imbalance in the socio-economic
structure”
...
In a social set up like ours, a great part of law is designed primarily to bring about
all-round improvement and well-being of the public individually and collectively from
material and cultural view points, But ‘Law’ unlike social rules is enforced by the State,
The objective of law is to bring order in the society with a view to enable its members to
progress and develop with some sort of security regarding the future
...
Disobedience of state laws involves penalty which is
enforced by the government through the sovereignty of the State
...
Law of the state are applicable to all without exception in identical
circumstances
...
RULE OF LAW
In earlier times, certain classes and individuals possessed special privileges and
were governed by special law
...
Democracy can remain only in a society of equals
...
The Rules are summarized as follows:
1
...
2
...
3
...
MEANING OF LEGAL PERSONALITY
A person in law means any entity which is accepted by law as having certain
defined rights and obligations
...
Example: The Company can be sued in its own name and sometimes be prosecuted for
criminal offences like tax evasion etc
...
LAW AND FACT
Lawyers always distinguish between the law involved in a case and the facts which the
court has to consider in reaching its decision
...
But the judge decides on points of law
i
...
whether the conduct of accused amounts to murder in the eyes of the law
...
) that a murder has been committed, and
(ii
...
7
LESSON – 1
...
g
...
The term commercial law is used to include only the rules relating to industry, trade
and commerce
...
The scope of commercial law is large
...
SOURCES OF INDIAN COMMERCIAL LAW
The commercial law of India is based upon statues of the Indian legislature,
English mercantile law and Indian maritime usages, modified and adapted judicial
decisions
...
1
...
These are the most efficient and the most
usual way of bringing about changes in law today
...
In India, the Central and State legislatures possess law making
powers and have exercised the powers extensively
...
The Contract Act, 1872 , the Sale of Goods Act, 1930, the Partnership
Act, 1932, the Companies Act, 1956, are instances of the Statute law
...
English Mercantile Law
Many rules of English Mercantile law have been incorporated into Indian Law
through statutes and judicial decisions
...
It is incorporated in a number of Acts, which follow to a considerable
extent the English mercantile law with some reservations and modifications necessitated
by the peculiar conditions prevailing in India
...
The
8
sources of English Mercantile law are (a) Common Law (b) Equity (c) The Law Merchant,
and (d) The Statute Law
...
It is traditionally unwritten law, developed in
English courts during the period beginning with the thirteenth century and brought to our
country by the British rule of India
...
(b) Equity: Equity Law is also unwritten and grew as a system of Law supplementary to
the Common Law
...
As the
Common Law was too stereotyped and very harsh the Law of Equity was developed in
English courts
...
(c ) The Law Merchant: The Law Merchant or ‘Les Mercatoria’ was independent body of
customs and usages governing commercial transaction of the Merchants and Traders of
14th and 15th centuries, which have been ratified by the decisions of the Courts of Law
...
In its earliest stages, therefore, the Law Merchant was a kind of Private
International Law administered by tribunals consisting principally of the merchants
themselves
...
In India the Law
Merchant is codified, and the courts are left only with the task interpreting the languages
of the Acts
...
(d) Statute Law: The Statute Law refers to the Law passed in the Parliament
...
The authority of the Parliament being supreme
...
The other sources of the English Mercantile Law are:
(i) Roman Law: If for any particular case the existing law fails to suit, a reference to
Roman law is made
...
i
...
on the principle that
what has been decided in an earlier case is binding in a similar future case, unless there is a
change in the circumstances
...
Judicial Decision or Precedents
This is source of law based upon previous judicial decisions which have to be
followed in similar future cases
...
Rules of equity and
justice are incorporated in law through judicial decision
...
4
...
A custom becomes legally recognized when it is accepted by a court and is
incorporated in a judicial decision
...
Define “Law” and discuss the theory of “Rules of Law”
...
“Change of Law depends upon the change of society”
...
3
...
“All are equal in the eyes of law”
...
5
...
6
...
What is meant by legal personality?
8
...
10
U N I T – II
LAW OF CONTRACTS
Lesson – 2
...
2 - Offer and Acceptance
Lesson – 2
...
4 - Free Consent
Lesson – 2
...
1
THE INDIAN CONTRACT ACT
Introduction
The Indian Contract Act which was passed on 25th April,1872, came into effect
from 1st Sep
...
It was passed with an object to define and amend certain portions of
the laws relating to contracts
...
It
applies to the whole of the country except the State of Jammu and Kashmir
...
Originally, the Act contained
provisions relating to sale of goods and partnership
...
Similarly in 1932, provisions relating to partnership were codified as a separate Act
and The Indian Partnership Act, 1932 was passed in the parliament
...
It is the
nerve centre of trade and commerce
...
Every
one of us enters into a number of contracts from dawn to dusk
...
, he enters into a contract through he may not be
conscious of it
...
The object of the law of contracts is to introduce definiteness in commercial and
other transactions
...
Since such a contract is
enforceable by the courts, Y can plan his activities on the basis of getting iron ore on the
fixed date
...
Sir William Anson observes in this regard that the law of contract is intended “to
ensure that what a man has been led to except shall come to pass and what has been
promised to him shall be performed”
...
A
contract has been defined by Sir John Salmond as “an agreement creating and defining
obligations between the Parties”
...
2(h) of the Indian Contract Act, provides that “An agreements enforceable by
law is a contract
...
There are various social religious and moral obligations which are not enforceable
by law as contracts
...
Later, the parties separated and the husband stopped the payment
...
As such they are not contracts
...
B
...
They are not contracts
because the parties do not intend that they should be attended by legal consequences”
...
An agreement is defined under Sec
...
A promise is defined under Sec
...
A proposal when accepted, becomes promise” In a
nutshell, an agreement is an accepted proposal
...
12
Definitions
The word contract is derived from the Latin word contractum meaning “drawn
together”
...
According to Sir John Salmond, a contact means “An agreement creating and
defining obligations between parties”
...
According to Pollock, an “Every agreement and promise enforceable at law is contract”
...
ESSENTIALS OF A VALID CONTRACT
We have seen that all agreements are not contracts
...
An agreement, which creates legal obligations in order to be valid and binding must
possess certain basic essentials
...
10 of the Contracts Act has laid down certain basic essentials for a valid
contact
...
From the rule stated in Sec
...
)
Free consent of Parties (S
...
)
Competency of Parties (S
...
)
Lawful consideration (SS
...
)
Lawful object (SS
...
)
Not declared to be void by any law(24,30)
(vi
...
, writing, registration etc
...
“This principle is followed in India also
...
Now we shall discuss in detail the various essential elements of a valid contract
...
Proposal or offer by one party and acceptance of the proposal or offer by another
party resulting in an agreement
...
This agreement results when one person, the
offeror or promisor, makes a proposal or offer and a person to whom the offer is made, the
offered or promise, accepts it
...
As it is imperative that there be a concurrence of at least two minds, it is
impossible for one person to make an agreement with himself
...
That there must be more than one person is an essential characteristic of an
agreement
...
Consensus-Ad-Idem (or) Meeting of Minds: To constitute an agreement or a contract,
there must be a meeting of the minds of the parties and both must agree to the same thing
in the same sense
...
Example: Mr
...
But Miss, Athiral thinks she is purchasing the white car
...
The terms of the offer and acceptance must be legal which means that they should
conform to the rules laid down in the Contract Act regarding the valid offer and valid
acceptance i
...
the terms of the offer must be definite and the acceptance of the offer must
also be absolute and unconditional
...
2
...
Mere
social or domestic agreements are not contracts because they are not intended to be
14
binding i
...
, an agreement to have a cup of tea at a friend’s house is simply a social
obligation
...
If later on,
“X” refuses to do so,”Y” cannot go to the court for enforcing the promise
...
Lawful Consideration:
Subject to certain exceptions an agreement legally enforceable only when each of the
parties to it gives something and gets something
...
The something given or obtained is called
consideration
...
Consideration may be past,
present or future
...
Example:
“X” agrees to sell his car to “Y” for Rs
...
For “X”’s promise, the consideration is Rs
...
For “Y”’s promise the consideration is the car
...
Capacity of Parties:
The parties to an agreement must be legally capable entering into an agreement; otherwise
it cannot be enforced by a court
...
If any of the parties to the agreements suffers from
any such disability, the agreement is not enforceable by law, except in some special cases
...
Free Consent:
The two parties to a contract must have agreed as to the particular subject matter in the
same sense
...
The consent of parties not be
affected by any flaw
...
Example: ’A’ threatens to beat “B” if he does not sell his land for a low price agrees to do
so
...
15
6
...
23)
...
Example: ‘A’, ’B’ and ‘C’ enter into an agreement for the division among them of gains
acquired or to be acquired by them by fraud
...
7
...
Example: ‘A’ agrees to sell to ‘B’ a hundred tons of oil”
...
The agreement is void for want of certainty
...
Possibility of Performance:
The terms of the agreement must also be such as are capable of performance
...
Example: When A agrees with B to find a treasure the agreement is void as it is
impossible of performance
...
Void agreements:
The agreements must not have been expressly declared to be void
...
b
...
d
...
Agreement in restraint to marriage (Sec
...
27)
Agreement in restraint to legal proceedings (Sec
...
29)
Wagering agreement (Sec
...
Legal formalities:
The agreement may either be oral or in writing
...
g
...
Such agreements must be in
16
writing, attested and registered, if so required by law
...
17 of the Indian
Registration Act, 1980
...
CONTRACTUAL RIGHTS AND OBLIGATIONS
The law of contract consists of a number of limiting factors subject to which the
parties may create rights and duties for themselves which the law will enforce
...
5000 from ‘Y’ that right can be
exercised only by ‘X’ but not by others because the right ‘X’ has against ‘Y’ is a right in
personam
...
RIGHYTS IN REM
If ‘A’ owns a plot of land and ‘B’ is the adjacent owner, the right of ‘A’ to have
uninterrupted possession and employment of that land is available not only against ‘B’ but
against every member of the public
...
The rights to property are all “Rights in Rem”
...
Let us examine them in detail
...
Classification according to validity: When we closely analyse the definition of a
contract, it is found that the contract is based on agreement
...
To make the agreement enforceable at law
...
10 of the element is missing then the contract may either be void,
voidable, illegal, or unenforceable
...
void agreements: “An agreement not enforceable by law is said to be void”- Sec
...
A void agreement has no legal effect
...
Examples: An agreement made by a minor, agreements without consideration (except
certain cases)
...
, are void from the beginning
...
When it becomes void the agreements ceases to have legal effect
...
It may
subsequently become void if the exporting country bans the product from being exported
...
Example: An agreement to commit murder, theft or cheating
...
Until it is avoided, it is a good contract
...
2(i) Examples of voidable
contracts: Contracts brought about by coercion, under undue influence, misrepresentation
etc
...
This contract can be avoided by ‘Q’
...
But ‘Q’, if he
so desires, can enforce it against ‘P’
...
It
means an agreement which cannot be forced in a court of law by one or both of the parties,
because of some technical defect
...
g
...
18
Difference between void and voidable contract
Void
1 Not enforceable by law
Voidable
Enforceable by law at the option of
one of the parties to the contract
...
3 In a void contract, the defects are In a voidable contract, the defect is
incurable
curable
4 A third party who purchased goods But in voidable contract third party will
which had been the subject of a void acquire good title
...
of an illegal contract, refuse to enforce
it, even though the illegality has not been
pleaded
...
An agreement
becomes a contract when all the essentials of a valid contract stipulated in Sec
...
2
...
It may be in writing
...
It may be made orally, and
3
...
Contracts can be classified according to the mode of their formation as Express,
Implied and Quasi contracts
19
Express contracts are those in which the fact of the agreement can be proved by
words written or spoken which express the intention of the parties
...
”
In case of implied contracts or tacit or inferred contracts agreements would be
inferred from conduct of the parties and the general circumstances of each case
...
A takes a public bus or enters into a restaurant for a cup of coffee or
obtains a ticket from an automatic machine
...
It rests on the ground of equity that,
“A person shall not be allowed to enrich himself unjustly at the expense of
another
...
Example: ‘A’ a shopkeeper supplied groceries to ‘B’ by mistake
...
‘B’ is bound to pay
...
This is known as quasi-contract
...
Classification according to performance: Contracts can again be classified
depending upon the extent to which it has been performed i
...
Executed and Executory
contracts
...
Example: ‘A’ agrees to sell his motorbike to ‘B’ for Rs
...
In this situation ‘A’ has
given the motorbike and got the money from ‘B’
...
An executor contract is one where both the parties are yet to perform their
obligations
...
Another
classification of contracts on the basis of performance is as follows:
Unilateral or one-sided and Bilateral or two sided contract: In case of a unilateral or
one-sided contract, one party to the contract has performed his part even at the time of its
formation and an obligation is outstanding only against the other
...
It creates an one-sided obligation
...
Example: ‘A’ promises to paint a picture in one month in return for which ‘B’ promises to
pay Rs
...
Here there are two promises and each party is a promisor in respect of one
promise and a promisee in respect of the other and as such each can hold the other liable
for the breach of his promise
...
2
OFFER (PROPOSAL) AND ACCEPTANCE
Introduction
As discussed earlier, a contract is defined as a promise or agreement enforceable by
law
...
All contracts are made by the process of a lawful offer by one party and the
lawful acceptance of the offer by the other party
...
5,00,000”? It is an offer
...
An ‘offer’ involves the making of a proposal
...
The promisor or the person making the offer is
called the offeror
...
Promise and Acceptance: Sec
...
A proposal when accepted becomes a promise” Promisor and promise are defined under
Sec 2(c) as “The person making the proposal is called the ‘promisor’ and the person
accepting the proposal is called the ‘promisee’ – Sec
...
A proposal or acceptance may be made in any of the following manners:
By express words spoken,
In writing
...
Examples:
1
...
20 lakhs”? It is an express
oral offer
...
When A writes to B stating the above offer, then it is an express written offer
...
When a transport company runs a bus on a particular route, it is termed as an
implied offer or an offer by conduct
...
An offer may be express or may be implied from the circumstances: In so far
as the proposal or acceptance of any promise is made in words, the promise is said
to be express
...
9)
...
An offer may be made to a definite person; to some definite class of persons;
or to the world at large: An offer made to a definite persons or a definite class of
person is called a specific offer
...
Examples: Specific offer: ‘X’ offers to sell his motor cycle to ‘Y’ for Rs
...
This is a
specific proposal
...
Only ‘Y’ can accept this
proposal
...
Mrs
...
She claimed the reward of $100
...
She filed a suit for the
recovery of the reward
...
3
...
An invitation to a birthday party or an invitation to
play cards will not crate legal relationship
...
Example: Balfour Vs Balfour (1919): A husband promised to send money to his wife, so
long as she remained away from him
...
4
...
To constitute a valid contract,
it is essential that the proposal must be so certain, that the rights and obligations of the
parties arising out of the contract can be exactly fixed
...
According to Sec
...
Example: ‘X’ says to ‘Y’ “I will give you some money if you marry ‘Z’”
...
5
...
It may be only a first
and preliminary step in the formation of a contract
...
A distinction is usually made between an ‘offer’ and “a statement of intention”
...
They are not regarded as offers but as invitation to others to make offers
...
Harvey telegraphed that
he would buy at that price
...
Held, there was no
contract because facey did not say that he was willing to sell or not
...
Similarly, in an auction sale, articles displayed in auction sale are displayed with an
intention that the bidders present during the auction sale may bid for them
...
e
...
In an auction sale, a bid is an offer
...
24
6
...
Example: ‘P’ offers a reward to anyone who finds his lost dog
...
Held he was not entitled to the reward
...
‘L’ brought
back the missing boy, without having the knowledge of the reward
...
7
...
It is immaterial if the terms are hard or ridiculous
...
The offeree must fulfil
all the conditions mentioned in the offer
...
Offer must not thrust the burden of acceptance: Offer should not contain the term
“the non-compliance of which may be assumed to amount to acceptance”
...
Similarly, if ‘A’ writes to ‘B’
...
5
lakhs
...
I shall assume that you have accepted the same
...
LEGAL RULES AS TO ACCEPTANCE
An offer unless accepted cannot become an agreement
...
The acceptance of an offer to be legally effective must
satisfy the following requirements:
1
...
A conditional acceptance is not an
acceptance at all
...
An acceptance with a variation is no acceptance but is a mere “counter offer”
which is for the original offeror to accept or not
...
’X’ informed ‘Y’ his willingness to buy ‘Y’s’car for Rs
...
On receipt
of the offer ‘Y’ informed ‘X’ that he is willing to sell his car for Rs
...
In this
25
example, ‘Y’s’ acceptance is not unconditional or unqualified
...
It
is only a counter offer
...
1,00,000, then it will become a contract
...
The mode of acceptance must be in some usual manner: Except where the offer
prescribed a particular mode of acceptance, the acceptance must be made in such
manner that it may come to the knowledge of the proposer
...
Example: If the proposer says “Telephonic reply” and the reply was sent by post, then
there is no acceptance of the offer
...
If he does not inform the offeree he is
deemed to have accepted the acceptance although it is not in the desired manner [Sec
...
(2)]
...
Acceptance must be by the party named in the offer: An offer made to a particular
person is to be accepted by him only
...
It cannot be
accepted by another without the consent of the offeror
...
4
...
In certain cases the offeror may prescribe a particular mode of acceptance, then all that
the acceptor has to do is to follow that mode
...
Acceptance must be within a reasonable time: The acceptance must be made while
offer is still in force
...
e) before the offer lapses
...
If any time limit is prescribed in the offer, it should be
accepted within that time
...
What is a ‘reasonable time’ depends upon the circumstances of each
case
...
Acceptance cannot be made in ignorance of the offer: Acceptance cannot precede the
offer nor does an acceptance in total ignorance of an offer result in a contract
...
Clarification: The seeking of clarification of offer neither amounts to the acceptance of
the offer nor to the making of a counter offer
...
Mental acceptance or uncommunicated assent does not result in a contract: No
contract is formed if the offeree remains silent and does nothing to show that he has
accepted the offer
...
“If I hear no more from you, I shall
consider the horse as mine at $30
...
Held there was no contract because
the other party was not informed (Felthouse Vs Bindley)
9
...
4 of the contract act lays down that the
communication of an acceptance is complete as against the proposer, when it is put in a
course of transmission to him; so as to be out of the power of the acceptor; and as against
the acceptor, when it comes to the knowledge of the proposer
...
The
communication of the proposal is complete when ‘B’ receives the letter
...
The communication of
the acceptance is complete as against ‘A’
...
COMMUNICATION OF OFFER AND ACCEPTANCE
An offer may be communicated to the offeree or offerees by word of mouth, by
writing or by conduct
...
Sec
...
”
The acceptance must be expressed in some usual or reasonable manner
...
27
Mr
...
A letter of allotment was posted but the
letter did not reach ‘G’
...
Vs
...
6
1
...
2
...
3
...
4
...
5
...
6
...
Example: ‘A’ offers to sell his farm to ‘B’ for Rs
...
’B’ replies offering to pay
Rs
...
‘A’ refuses
...
There is no
contract because the original offer has lapsed
...
By notice: If the offeror gives notice of revocation to the other party, an offer may be
revoked anytime before acceptance but not afterwards
...
The acceptance of an offer becomes binding on the offeror as soon as the
acceptance is put in course of communication to the offeror so as to be out of the power of
the acceptor
...
Example: A proposal is sent by ‘X’ to ‘Y’ and accepted by ‘Y’ by letter
...
The notice of revocation does not take effect until it comes within the knowledge
of the offeree
...
Example: ‘A’ proposes by a letter sent by post to sell his house to ‘B’
...
‘A’ may revoke his proposal at any time before or at the
moment when ‘B’ posts his letter of acceptance but not afterwards
...
29
LESSON - 2
...
It is the sign and symbol of
every bargain subject to certain exceptions
...
Consideration is the necessary evidence required by law of the intention of the
parties to effect their legal relations
...
Consideration means the valuable considerations (i
...
Contract results where one party promises to do in exchange for something in
return
...
” In a nutshell,
consideration is the price paid by the promise for the obligation of the promisor
...
2,00,000 to ‘Q’
...
2,00,000
...
(ii)
‘X’ promises not to file a suit against ‘Y’ if ‘Y’ pays him Rs
...
‘X’s act of not filing a case against ‘Y’ is the consideration for ‘Y’
and Rs
...
if there is no consideration there is no
contract
...
500 to rebuild a mosque
...
(Abdul Aziz V
...
2(d) of contract act defines consideration as follows:
“when at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing, or promises to do or to abstains from
doing, such act or abstinence or promise is called a consideration for the promise
...
Misa (1875) consideration was defined as, “some
right, interest, profit or benefit accruing to one party for some forbearance, detriment, loss
or responsibility given, suffered or undertaken by the other
...
2000 per month
...
the services of ‘Y’ is the consideration for ‘X’
...
TYPES OF CONSIDERATION
Consideration may be classified as
1
...
Present consideration, and
3
...
Past consideration: When the consideration of one party was given before the date of the
promise, it is said to be past
...
The consideration of ‘X’ is past
consideration
...
But
under Indian law a past consideration is good consideration because the definition of
consideration in Sec
...
”
Present consideration: Consideration which moves simultaneously with the promise is
called present consideration or executed consideration
...
ESSENTIALS OF VALID CONSIDERATION
1
...
An
act done without any request is a voluntary act and does not come within the definition of
consideration
...
‘D’ cannot demand payment from the shopkeepers using the market for having
improved the market
...
It must be a real consideration: The consideration must have some value in the eyes
of law
...
The impossible acts or non-existing goods cannot
31
support a contract
...
A promise to pay
an existing debt within due date if the creditor gives a discount is without consideration
and the discount cannot be enforced
...
Public Duty: “Where the promise is already under an existing public duty, an express
promise to perform or performance of that duty will not amount to consideration
...
4
...
‘X’ wrote to his nephew ‘B’, promising to pay him an annuity of 150 pounds in
consideration of his marrying ‘C’
...
Held that the
fulfilment of B’s contract with ‘C’ was consideration to support X’s promise to pay the
annuity
...
Consideration need not be adequate: Explanation 2 under Sec
...
” Law requires the presence of consideration, but does
not inquire into the adequacy
...
5,00,000 for Rs
...
P’s consent to the
agreement was freely given
...
6
...
Example: ‘X’ agreed to pay Rs
...
7
...
In the present
consideration, it simultaneously moves with promise
...
32
8
...
‘C’ also entered into an agreement with ‘R’ promising
him to pay the allowance
...
“A promise without
consideration is a gift; one made for a consideration is a bargain” (Salmond and
Windfield)
A promise without consideration is a gratuitous undertaking and cannot create a legal
obligation
...
Under English law simple contracts must be supported by
consideration but special contracts require no consideration
...
Exceptions:
1
...
(iii)
The agreement is made on account of natural love and affection
...
Examples: An agreement entered into by a husband with his wife during quarrels and
disagreement, whereby the husband promised to give some property to his wife
...
(Rajlukhy Debee V
...
Voluntary Compensation: Sec
...
The term ‘voluntary’ signifies that the act was done,
“otherwise than at the desire of the promisor
...
Example: ‘D’ finds B’s baggage and gives it to him
...
100
...
3
...
[Sec
...
10,000 but the debt is barred by the limitation act
...
5000 on account of the debt
...
4
...
(Sec
...
5
...
25 ‘No consideration no contract’ rule does
not apply to completed gifts
...
Can a person who is stranger to consideration sue upon it? Normally, the rule is that
the consideration must move from the promise and the party to a contract can sue
...
Under English law, a stranger to a
consideration cannot sue
...
5,000, ‘C’ cannot maintain a suit on the
promise because he is a stranger to the consideration and the fact of C being the son of A
will not alter the position
...
So it is clear that the consideration can move from any person
...
A stranger to contract i
...
one who is not a party to it, cannot file a suit to
enforce it
...
But a stranger to consideration can sue to enforce it provided he is a party to the
contract
...
34
CAPACITY OF PARTIES
Capacity defined: According to
...
‘capacity’ referred to here, means competence of the parties to enter
into a valid contract
...
According to Sec
...
From this definition we come to the conclusion that the following are not
competent to contract:
1
...
2
...
g
...
3
...
g
...
Minor: Under Section 3 of the Indian Majority Act, 1875, a minor is one who has not
completed eighteenth year of age
...
In England, minority continues up to the completion of 21st year
...
Minor’s agreement is Void-ab-initio: (void from the very beginning):
Today an agreement with or by minor is void and inoperative
...
The Indian Contract Act, does not expressly state whether a contract made by a
minor is void or voidable
...
11 of the Act simply states that a minor is not competent to
contract
...
The issue came up again in the case of Mohori Bibee Vs Dharmadas
Ghose (1903)
In this case, a minor executed an agreement for Rs
...
8,000
from a mortgagee by way of earnest money
...
The
lender wanted refund of the sum which he had actually paid
...
Had the agreement been only voidable, the benefit received would have been
refunded under Sections 64 and 65 of the Act
...
A Minor can be a Promisee or a Beneficiary: During his minority, a minor cannot
bind himself by a contract, but there is nothing in the contract act which prevents him from
making the other party to the contract to be bound to the minor
...
But he is capable of becoming a mortgagee, a
payee or endorsee
...
3
...
Example: Indira Ramasamy V Anthiappa Chettiar
...
on attaining majority, he makes out a fresh promissory note in place of
the old one
...
4
...
In
that case, the lender could not recover the money paid to the minor
...
5
...
Thus, an minor who has deceived the other party
to the agreement by representing himself as of full age is not prevented from later
asserting that he was minor at the time he entered into agreement
...
On default by ‘S’,
‘L’ sued for return of ₤ 400 and damages for the crime
...
Even on equitable grounds, the minor could not be
asked to refund ₤ 400, as the money was not traceable as the minor had already spent it
...
The court may award
compensation to that other party under Sections 30 and 33 of the Specific Relief Act,1963
...
A Minor Cannot be a Partner in a Partnership Firm: He cannot become a partner
but for the benefit of the partnership with the consent of all the partners he can be
admitted as a partner
...
7
...
The term ‘necessaries’ is not defined in the Indian Contract Act, 1872
...
From the above definition it is very clear that in order to entitle the supplier to be
reimbursed from the minor’s estate, the following conditions must be fulfilled:
The goods are necessaries for that particular minor having regard to his status
...
The minor needs the goods both at the time of sale and delivery
...
C
...
, in a college
...
The tailor sued him for the price
...
Held, the coats
supplied by the tailor were not necessaries and therefore, tailor cannot get the price
...
The lending of money to a minor for the purpose of defending a
suit on behalf of a minor in which his property is in jeopardy or for defending him in
prosecution, or for saving his property from sale in execution of decree is deemed to be a
37
service rendered to the minor
...
8
...
But the parents are
liable where the minor is acting as an agent of the parents or the guardian
...
A minor can act as an agent and bind his principal by his acts without incurring any
personal liability
...
No specific performance: An agreement by a minor being void, the court can never
direct specific performance of such an agreement by him
...
No Insolvency: A minor cannot be declared insolvent even though there are dues
payable from the properties of the minor
...
Company’ shares to a minor: A minor cannot apply for and be a member of a
company
...
But where a minor was
made a member and, after attaining majority, he received and accepted dividends, he
will be stopped from denying that he is a member
...
What is sound mind for the purpose of contracting is laid down
in Sec
...
Section 12: 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
...
However, when he is of sound mind he is capable
of becoming a party to a contract
...
(b) 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 interests, cannot contract whilst such delirium or drunkenness lasts
...
Idiocy: The term idiot is applied to a person whose mental powers are completely absent
...
Insanity or Lunacy: This is a disease of the brain
...
Lunacy can
sometimes be cured
...
Drunkenness: Drunkenness produces temporary incapacity
...
Effects of Agreements Made by Persons of Unsound mind
Agreements by persons of unsound mind are void
...
g
...
Only the estate of such a person is liable
...
The guardian of a lunatic can bind the estate of the lunatic by contracts entered into
on his behalf
...
Example: Inder Singh V Parmeshwardhari Singh (1957)
A person agreed to sell a property worth Rs
...
7000
...
The court
held the agreement to be null and void
...
Contracts with aliens are valid
...
But the
government may impose certain restrictions
...
A contract with an alien becomes unenforceable if war breaks out with the
country of which the alien concerned is a citizen
...
But
they can sue and be sued for all the claims other than their professional fees
...
40
LESSON – 2
...
Sec
...
14 of the Act
specifies under what circumstances consent is “free”
...
13 “Two or more persons are said to consent when they agree upon the same thing in
the same sense”
...
When the parties agree upon the same thing in the same sense, they have consensus-adidem
...
Sec
...
Coercion
...
Undue influence,
3
...
Misrepresentation and
5
...
COERCION
Definition: Coercion is defined by Sec
...
Examples:
1
...
the adoption is voidable
as having been induced by coercion
...
‘A’ threatens to kill ‘B’ if he does not transfer all his property in ‘A’s favour for
a very low price
...
It is not necessary that coercion must have been exercised against the promisor only, it
may be directed at any person
...
‘A’ threatens to beat ‘B’ (C’s son) if ‘C’ does not let his house to ‘A’ the
agreement is caused by coercion
...
‘X’ threatens to kill ‘Y’ if he does not sell his house to ‘B’ at a very low price
...
Further, it is immaterial whether the Indian penal code is or is not in force in the place
where the coercion is employed
...
‘A’
afterwards sues ‘B’ for breach of contract at Calcutta
...
Threat to commit suicide – is it coercion?
As per Section 15 “committing or threatening to commit any act forbidden by the
Indian Penal Code is coercion
...
Example: Ammiraju Vs Seshamma
In this case, ‘A’ obtained a release deed from his wife and son under a threat of
committing suicide
...
Duress: The English equal of coercion is Duress
...
Duress differs from coercion on the following points:
1
...
2
...
‘Duress’ can be employed only by the party to the contract or his agent
...
‘Coercion’ is wider in its scope and includes unlawful detention of goods also
...
Only
bodily violence or imprisonment is duress
...
19: When consent to an agreement is caused by coercion
the agreement is contract voidable at the option of the party whose consent was so
42
obtained
...
Sec
...
Example: A railway company refuses to deliver certain goods to the consignee, except
upon the payment of an illegal charge for carriage
...
He is entitled to recover so much of the charge as was illegally
excessive
...
16(1)
Sec
...
Where one party holds a real or apparent authority over the other or where he
stands in a fiduciary relationship to the other
...
2
...
Example: ‘F’ having advanced money to his son ‘B’ during his minority, upon B’s
coming of age obtains by misuse of parental influence, a bond from B for a greater amount
than the sum advanced
...
Consequences of Undue influence: An agreement caused by undue influence is a contract
voidable at the option of the party whose consent was obtained by undue influence (Sec
...
43
Example: a money-lender, advances Rs
...
200 with interest at 6 percent per month
...
100 with such interest as may
seem just
...
16(3)]: If a party is proved to be in a position to dominate the will
of another and the transaction appears on the face of it or on the evidence adduced to be
unconscionable, the burden of proving that the contract was not induced by undue
influence, lies on the party who was in a position to dominate the will of the other
...
1
...
2
...
3
...
4
...
5
...
If excessive profit is
made it will also fall within this term
...
The banker declines to sanction the loan at the prevailing rate of
interest
...
So a transaction will not be set aside merely because the rate of interest is high
...
Pardanishin Women: Women, who observe the custom of Parda i
...
seclusion from
contact with people outside her own family, are peculiarly susceptible to undue influence
...
44
Difference between Undue Influence and Coercion: In both undue influence and
coercion, one party is under the influence of another
...
In coercion the influence arises from committing or threatening to commit an
offence punishable under the IPC or detaining or threatening to detain property
unlawfully
...
2
...
But in undue
influence it is a question of mental pressure
...
Misrepresentation arises when
the representation made is inaccurate but the inaccuracy is not due to any desire to defraud
the other party
...
Sec
...
The positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true
...
‘X’
tells this to B’ in order to induce him to purchase shares of that company and ‘B’ does so
...
2
...
Under this heading would fall cases where a party is under a duty to disclose
certain facts and does not do so and thereby misleads the other party
...
3
...
45
Consequence of Misrepresentation: In cases of misrepresentation the party aggrieved
can,
1
...
Insist that the contract be performed and that he be put in the position in which
he would have been if the representation made had been true
...
B’ thereupon buys the
estate in fact unknown to ‘A’, the estate is subject to mortgage
...
In case of misrepresentation the aggrieved party cannot claim compensation or
damages from the other person
...
These are:
1
...
(Collen V
...
Misstatement in prospectus: The directors of a company are liable for damages
under Sec
...
3
...
E
...
solicitor and client
...
FRAUD
Definition: The term ‘fraud’ includes all acts committed by a person with a view to
deceive another person
...
17 of the contract act states that ‘Fraud’ means and includes any of the
following acts committed 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 a
contract
...
False statement: “The suggestion as to a fact, of that which is not true by one who
does not believe it to be true
...
46
2
...
” Mere non-disclosure is not fraud where the party is not under any
duty to disclose all facts
...
Examples
‘B’ having discovered a vein of ore on the estate of ‘A’ decided to conceal the
(i)
existence of ore from ‘A’ with ‘A’s ignorance, ‘B’ contracted with ‘A’ to buy the
estate at an under value
...
(ii)
‘A’ sells by auction to ‘B’ a horse which ‘A’ knows to be unsound
...
This is not because ‘A’ is under no
duty to disclose the fact to ‘B’ but if between ‘A’ and ‘B’ there exists a fiduciary
relationship (if ‘B’ is ‘A’daughter) here arises the duty to disclose and nondisclosure amounts to fraud
...
Intentional non-performance: “A promise made without any intention of performing
it” (e
...
purchase of goods without any intention of paying for them) is fraud
...
Any other act fitted to deceive
5
...
This clause refers to provisions in certain acts which make it
obligatory to disclose relevant facts
...
g
...
55 of the Transfer of Property Act,
the seller of immovable property is bound to disclose to the buyer all material defects
...
From the analysis of the above we can say that for fraud to exist there must be:
(a) A representation or assertion, and it must be false
...
Example: ‘A’ a seller of a horse says that the horse is a ‘Beauty’ and is worth Rs
...
it
is merely ‘A’s opinion
...
(c) The representation or statement must have been made with a knowledge of its
falsity or without belief in its truth or recklessly
...
, Vs Smith
A company issued a prospectus giving false information about the unbounded
wealth of Neveda
...
Held he could do so since the false representation in the prospectus
amounted to fraud
...
(c) The representation must in fact be to deceive
...
‘B’ examines the accounts of the factory, which
shows that only 400 kilos have been made
...
The contrast is
not voidable on account of ‘A’s misrepresentation
...
Can Silence be Fraudulent?
1
...
Example: Ward Vs Hobbs
‘H’ sold to ‘W’ some pigs which were to his knowledge suffering from swine
fever
...
2
...
” Whenever there
is a duty to disclose, silence amounts to fraud
...
Silence if fraudulent where the circumstances are such
...
Consequences of fraud
A party who has been induced to enter into an agreement by fraud has the following
remedies open to him: (Section 19)
i
...
ii
...
iii
...
Distinction between Fraud and Misrepresentation
1
...
Misrepresentation
on the other hand is innocent i
...
, without any intention to deceive or to gain an
advantage
...
In case of fraud, the aggrieved party can sue the person who made the false
statement, for damages
...
48
3
...
MISTAKE
Definition: Mistake may be defined as an erroneous belief concerning something
...
Mistake is of two kinds:
1
...
Mistake of Fact
Mistake of law: Mistake on a point of Indian law does not affect the contract
...
This is a valid contract
...
But if in the above case, the mistake is related to
the law of limitation of a foreign country, the agreement could have been avoided (Sec
...
Mistake of fact may be
1
...
a unilateral mistake
Bilateral Mistake: When both the parties to the agreement are under a mistake of fact
essential to the agreement, the mistake is called a bilateral mistake of fact and the
agreement is void (Sec
...
For the application of Sec
...
(i)
The mistake must be mutual
(ii)
The mistake must relate to a matter of fact essential to the agreement
...
‘A’ agrees to buy from ‘B’ a horse
...
2
...
It turns out that, before the day of the bargain, the
49
ship carrying the cargo has been washed away and the goods lost
...
The agreement is void
...
Mistake as to the subject matter:
(a) Mistake as to the Existence of Subject-matter: If both the parties believe that the
subject-matter of the contract to be in existence, which in fact at the time of the
contract is non-existent, the contract is void
...
Unknown to
either party the car and the garage were completely destroyed by fire a day earlier
...
(b) Mistake as to identity of the subject-matter: where the parties agree upon different
things, i
...
one party intends to deal in one thing and the other intends to deal in
another
...
1,00,000
...
There is a mistake as to the identity of the subject-matter and hence no contract
...
Example: A person took a lease of a fishery which, unknown to either party already
belonged to him
...
Phibbs
...
Example: Table napkins were sold at an auction by a description, “with the crest of
Charles I and the authentic property of that monarch
...
Held, the agreement was void as there was a mistake as to the quality of the subject-matter
[Nicholson Venn V
...
(e) Mistake as to the quantity of the subject-matter
Example: Henkel V
...
On receipt of the information, he telegraphed
“Send three rifles”
...
‘H’ despatched 50 rifles
...
However, ‘P’ could be held liable to pay for three rifles on the basis of
an implied contract
...
But an erroneous opinion as to the value of the subject matter of the agreement is not to be
deemed a mistake as to a matter of fact
...
10,000 while it is actually worth
Rs
...
The agreement cannot be avoided on the ground of mistake
2
...
The agreement, in such a case is void on the ground of impossibility
...
Braymer(1903)]
...
Unilateral Mistake: In case of unilateral mistake i
...
Sec
...
”
Exception: To the above rule, there are certain exceptions
...
Example: Foster Vs V
...
Held, the contract was void
...
Mr
...
Held, contract could be avoided
...
Example: Cundy Vs Lindsay & Co
(1878): Mr
...
The
goods were then sold to ‘X’ of Blenkarn
...
Therefore ‘X’ of
Blenkarn obtained no title to the goods
...
Consequences of Mistake: Mistake renders a contract void and as such in case of a
contract which is yet to be performed the party complaining of the mistake may avoid it,
i
...
need not perform it
...
52
LESSON – 2
...
A void
agreement is one which is not enforceable by law [Sec
...
Such an agreements does not
give rise to any legal consequences and is totally void from the very inception
...
Agreements made by incompetent persons
...
11)
2
...
20)
3
...
21)
4
...
23)
5
...
24)
6
...
25)
7
...
26)
8
...
27)
9
...
28)
10
...
29)
11
...
30)
12
...
32)
13
...
36)
14
...
56)
15
...
57)
It may be stated here that the agreement from 1 to 13 are void ab-initio
...
e
...
WAGERING AGREEMENTS OR WAGER (Sec
...
” It is a promise to give money or money’s
worth upon the determination or ascertainment of an uncertain event
...
‘A’ promising to pay ‘B’ Rs
...
100 if it does not rain
...
No suit
can be initiated for recovering anything alleged to be won on any wager (Sec
...
Intention of both the parties to the wagering contract is to gamble
...
The gain of one party is the loss of the other party
...
Neither party should have any interest in the happening or non-happening of the
event other than the sum he will win or lose
...
The event on the happening of which the amount is to be paid is uncertain
...
The mind of the parties to the agreement may be uncertain in regard to the fact
...
The event on which the betting is placed should not necessarily be unlawful
...
A cross word competition involving a good measure of skill for its successful
solution
...
Games of skill e
...
picture puzzles or athletic competitions
...
A subscription towards any prize or sum of money of the value of Rs
...
4
...
Contracts of insurance is not a contract of wager because of the following reasons:
a
...
b
...
c
...
d
...
e
...
Effects of Wagering Agreements: Wagering agreements have been expressly declared to
be void in India
...
No suit
can be initiated for recovering anything alleged to be won on any wager
...
So excepting in the states of Maharashtra and Gujarat
collateral transactions are valid
...
31]: A Contingent Contract is a contract to do or not to do something, if
some event, collateral to such contract does or does not happen
...
10,000 if B’s house is burnt
...
Essentials of a Contingent Contract:
1
...
2
...
i
...
3
...
If the contingency is bound to happen, the contract is
due to be performed in any case and is not therefore a contingent contract
...
ii
...
Where ‘A’ agrees to deliver 100 bags of rice and ‘B’ agrees to pay the price
only afterwards, the contract is a conditional contract and not contingent,
because the event on which B’s obligation is made to depend is a part of the
promise itself and not a collateral event
...
The contingent event should not be the mere will of the promisor
...
1000
...
If the event is within the promisor’s will but not merely his will, it may be a contingent
contract
...
10,000, if ‘A’ left Delhi or Bombay; it is a
contingent contract, because going to Bombay is an event, no doubt within A’s will but is
not merely his will
...
Contracts contingent upon the happening of a future uncertain event cannot be
enforced by law unless and until that event has happened
...
32)
Examples
(i)
‘A’ makes a contract with ‘B’ to buy ‘B’s house if ‘A’ survives ‘C’
...
(ii)
‘A’ contracts to pay ‘B’ a sum of money when ‘B’ marries ‘C’ ‘C’ dies without
being married to ‘B’
...
55
2
...
33)
Example: ’A’ agrees to pay ‘B’ a sum of money if a certain ship does not return
...
The contract can be enforced when the ship sinks
...
When the event to be deemed is impossible
Examples: ‘A’ agrees to pay ‘B’ a sum of money if ‘B’ marries ‘C’
...
the
marriage of ‘B’ to ‘C’ must now be considered impossible although it is possible that ‘D’
may die and that ‘C’ may afterwards marry ‘B’
...
a
...
Example: ‘A’ promises to pay ‘B’ a sum at a certain ship returns within a
year
...
b
...
The contract
may be enforced if the ship does not return within the yea, or is burnt within the year
...
Impossible event: Contingent agreements to do or not to do anything if an impossible
event happens, are void, whether the impossibility of the event is known or not to the
parties to the agreements at the time when it is made (Sec
...
10,000 if two straight lines should enclose a space
...
Difference between Contingent Contract and Wagering Agreements
1
...
2
...
3
...
4
...
5
...
56
QUASI-CONTRACTS
‘Quasi’ is a Latin word which means “to resemble”
...
i
...
, when all the essentials of a valid contract
are not there they are called quasi-contracts
...
Jenks, quasi-contract is “a situation in which law imposes upon
one person, on grounds of natural justice, an obligation similar to that which arises from a
true contract, although no contract express or implied has in fact been entered into by
them”
...
‘Y’ is
bound to pay the price
...
This kind of contract is called a tacit contract
...
This is Quasi-contract (or) Implied contract (or) Constructive contract
...
Sec
...
1
...
Example: ‘A’ supplies ‘B’ a lunatic (or) to his family with necessaries
suitable to his condition in life
...
2
...
Example: ‘B’ holds land in Bengal on a lease granted by ‘A’ the
Zamindar
...
Under the revenue law, the consequence of
such sale will be the cancellation of B’s lease
...
‘A’ is
bound to make good to ‘B’ the amount so paid
...
Obligation of a person enjoying benefits of non-gratuitous act: Example: ‘A’ a
tradesman, leaves goods at B’s house by mistake
...
‘B’
is bound to pay for them
...
Responsibility of Finder of goods: Generally, a person is not bound to take care of
goods of others, left on a road or other public places by accident or negligence, but if
he takes them into his custody, an agreements is implied by law
...
As per
Sec
...
“A person who finds the goods belonging to another and takes them into his
custody, or anything delivered by mistake or under coercion, must pay for it
...
10,000 to ‘C’
...
10,000 again to ‘C’
...
DISCHARAGE OF CONTRACT
When the obligation created by a contract comes to an end, the contract is said to be
discharged or terminated
...
By performance of the promise or tender: The common mode of discharge of a
contract is by performance i
...
where the parties have done whatever was expected under
the contract, the contract comes to an end
...
75, 000 as soon as the car is delivered to ‘B’
...
The contract comes to an end by performance
...
If a
promisor tenders performance of his promise but the other party refuses to accept, the
promisor stands discharged of his obligations
...
By Mutual Consent cancelling the agreement or substituting a new agreement in
place of the old: By agreement of all parties, a contract may be cancelled or its terms
altered or a new agreement substituted for it
...
“If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed” (Sec
...
Novation: Novation occurs when a new contract is substituted for an existing contract,
either between the same parties or between different parties
...
e
...
58
Example
1) ‘A’ is indebted to ‘B’ and ‘B’ is indebted to ‘C’
...
It is Novation
...
20,000
...
10,000 and certain grams of gold at a particular date
...
There is Novation
...
Recission: Recission means cancellation of all or some of the terms of the contract
...
The obligations of the
parties there under terminates
...
Alteration: If the parties mutually agree to change certain terms of the contract, it has
the effect of terminating the original contract
...
d
...
63 deals with remission: Remission is the acceptance of a lesser sum
than what was contracted for or a lesser fulfilment of the promise made
...
5000
...
2000
paid at the time and place at which the Rs
...
The whole debt is
discharged
...
Waiver: Waiver means relinquishment or abandonment of a right
...
Example: ‘A’
promises to paint a picture for ‘B’
...
‘A’ is no longer
bound to perform the promise
...
Merger: A contract is said to have been discharged by way of ‘Merger’ where an
inferior right possessed by a person coincides with a superior right of the same person
...
His rights as a
lessee vanish
...
By subsequent impossibility (Sec
...
If it happens at a later stage we call it subsequent impossibility
...
A contract is deemed to have
become impossible of performance and thus void under the following circumstances:
i
...
iii
...
By death or disablement of the parties
...
g
...
Before the contract is executed, dealings in all sorts of liquor are declared
prohibited by the Government; the contract becomes void
...
Declaration of war
...
Non-existence or Non-occurrence of particular state of things
...
Example: ‘A’ and ‘B’ contract to marry each other
...
The contract gets discharged
...
b) Commercial impossibility does not render a contract void
...
d) Failure of one of the objects does not terminate the contract
...
4
...
b) The insolvency Act provides for discharge of contracts whenever the promisor
becomes insolvent
...
d) By material alteration without seeking the consent of the other party
BY BREACH OF CONTRACT
A contract terminates by breach of contract
...
60
Anticipatory breach of contract occurs when a party repudiates it before the time
fixed for performance has happened or when a party by his own act disables himself from
performing the contract
...
Before the agreed date of
marriage he marries ‘C’
...
Consequences of Anticipatory Breach: In case of anticipatory breach, the promisee may
either;
a) rescind the contract and treat the contract as at an end, and at once sue for damages,
or
b) he may elect not to rescind but to treat the contract operative and wait for the time of
performance and then hold the other party liable for the consequences of nonperformance
...
‘B’ did not accept the refusal and
continued to demand the cargo
...
Held, the contract was
discharged and ‘B’ cannot sue for damages
...
Bowen]
b) Actual Breach of Contract: Actual breach of contract occurs when during the
performance of the contract or at the time when the performance of the contract is due; one
party either fails or refuses to perform his obligations under the contract
...
Example: ‘D’ agrees to deliver to ‘B’ 50 kilos of
Ghee on 1st June
...
Cort V
...
(1851)
‘A’ contracted with a Railway Co
...
The delivery was to be made in instalments
...
Held, A could sue for
breach of contract
...
Rescission of the Contract: When a breach of contract is committed by one party, the
aggrieved party is relieved from all his obligations under the contract
...
‘A’ does not deliver the goods on the appointed day
...
Party Rightfully Rescinding the Contract Entitled to Compensation (Sec
...
2
...
i
...
The measure of ordinary
damages is the difference between the contract price and the market price on
the date of breach
...
800 a bag on a future date
...
900 per bag
...
e
Rs
...
The ordinary damages shall be available for any loss or damage which arises naturally in
the usual course of things from the breach and as such compensation cannot be claimed for
any indirect loss by reason of breach
...
In a suit by the plaintiff or affected person
against the railway company, held, that damages for the personal inconvenience of the
plaintiff alone could be granted, but not for the sickness of the plaintiff’s wife, because it
was a very indirect consequence
...
Special Damages: Special damages are claimed in case of loss of profit etc
...
Example: ‘A’ a builder, contracts to erect and finish a house by the 1st of January so that
‘B’ may give possession of it at that time to ‘C’
...
‘A’
is informed of the contract between ‘B’ and ‘C’
...
‘A’ must make compensation to ‘B’ for the cost of rebuilding
the house, for the rent lost, and for the compensation made to ‘C’
...
Example: Hadley V
...
He delivered the shaft to
‘Y’ a common carrier, to be taken to a manufacturer to copy it and make a new one
...
By some negligence
on the part of ‘Y’ the delivery of the shaft was delayed in transit beyond a reasonable time
...
Held: ‘Y’ was not liable for loss of profits during the period of delay as the circumstances
communicated to ‘Y’ did not show that a delay in the delivery of shaft would entail loss of
profit to the mill
...
But in the following cases vindictive damages are awarded
...
d) Nominal Damages: This kind of damages is awarded when the injured party does not
suffer any damages
...
3
...
This is called ‘Specific performance’ of the contract some of the instances where court can
direct specific performance are: a contract for the sale of a particular house or some rare
article or another thing for which monetary compensation is not enough because the
injured party will not be able to get an exact substitute in the market
...
Monetary compensation is an adequate relief
...
The contract is of personal nature, e
...
a contract to marry
63
c
...
g
...
d
...
4
...
Where a party is in breach of a
negative term of a contract (i
...
where he does something which he promised not to do) the
court may, by issuing an order, prohibit him from doing
...
Ginder (1901)
G agreed to buy the whole of the electricity required for his house from a certain
company
...
(ii) N, a film star, agreed to act exclusively for a particular producer, for one year
...
Held, she could be
restrained by an injunction
...
Quantum Meruit: The phrase ‘Quantum Meruit’ means as much as merited’ or ‘as
much as earned’
...
But in certain cases, when
a person has done some work under a contract, and the other party repudiated the contract,
or some event happened which makes the further performance of the contract impossible,
then the party who has performed the work can claim remuneration for the work he has
already done
...
‘A’
delivers 200 kilos only before that date and none after
...
‘B’ is bound to pay ‘A’ for them
64
QUESTIONS
1
...
Define offer and acceptance
...
Define consideration
...
4
...
5
...
6
...
Explain the legal rules regarding contracts with a Minor
...
When a consent is said to be free? Distinguish between coercion and undue
influence
...
Define and distinguish between misrepresentation and fraud
...
Explain the different types of mistake and give the relevant rules regarding contract
with mistake
...
When is an agreement said to be against public policy? Give examples of
agreements which are against public policy
...
Explain contingent contract and their rules
...
State the circumstances under which a contract is said to be discharged
...
What do you understand by Novation? What is the difference between Novation
and Alteration?
15
...
16
...
State the remedies allowed to the aggrieved person in case of breach of contract
...
What is a quasi-contract? Give some examples of quasi-contract
...
1 Indemnity and Guarantee
Lesson – 3
...
1
INDEMNITY AND GUARANTEE
CONTRACTS OF INDEMNITY
Definition
Section 124 of the Indian Contract Act defines a contract of indemnity as a contract
by which one party promises to save the other party from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person
...
This is a
contract of indemnity
...
There are a few requisites for a valid contract of indemnity
...
A contract of indemnity must satisfy all the essentials of a contract
...
A contract of indemnity may arise either,
(i)
by an express promise or
(ii)
by operation of law, e
...
, the duty of a principal to indemnity an agent
from consequences of all lawful acts done by him as an agent
...
3
...
Unless promisee has
suffered a loss, he cannot hold the promisor liable on the contract of indemnity
...
As per Indian Contract Act, the loss must have been caused either by the conduct
of the promisor or any other person
...
5
...
66
Rights of indemnity-holder or indemnified: The Indemnity-holder is entitled to recover
from the promisor:
1
...
All costs of suit which he may have to pay to a third party, [provided he acted
prudently or with the authority of the indemnifier];
3
...
Rights of Indemnifier: The Act makes no mentions of the rights of an indemnified
...
e
...
CONTRACT OF GUARANTEE
Definition [Section – 126]: A contract of guarantee is a contract to perform the promise or
discharge the liability of a third person in case of his default
Example: ‘P’ lends Rs
...
This is contract of guarantee
...
The person for whom the guarantee is given is called the “principal Debtor” – It is
‘Q’ in the example
...
In a contract of guarantee there are three parties namely, the creditor, the principal
debtor and the surety
...
A contract of guarantee may either be oral or in writing (Sec
...
in case of an oral agreement the existence of the agreement itself
is very difficult to prove
...
From the point of view of the scope of guarantee a contract of guarantee may
either be specific or continuing
...
A specific guarantee once given
is irrevocable
...
1,00,000 to ‘B’ by ‘C’ (a banker)
...
Continuing Guarantee [Sec
...
Example: Mr
...
‘B’, a tea-dealer, to the amount of Rs
...
‘C’
...
‘B’ supplies Mr
...
1000 and Mr
...
‘B’ for it
...
‘B’ supplies Mr
...
2000
...
‘C’ fails to pay
...
‘P’
was a continuing guarantee, and he is liable to Mr
...
1000
...
By notice of revocation by the surety
...
By the death of the surety
...
It is not necessary that the creditor
must have notice of the death
...
By variation in contract
...
Creditor’s act of omission
...
Novation
...
By discharge of principal debtor
...
All the three parties [i
...
, the principal debtor, the creditor and the surety] must
agree to make such a contract
...
2
...
So, the liability of the surety is
secondary, i
...
, the creditor must first proceed against the principal debtor and if the
latter does not perform the promise, then only, he can proceed against the surety
...
There must be consideration between creditors and the surety to make the contract
enforceable
...
The liability of the surety must be legally enforceable
...
Rights of surety can be discussed under three sub-divisions, namely,
a) As against the Principal debtor
b) As against the creditors and
c) As against the co-sureties
...
140-141]
i
...
e
...
ii
...
The surety is entitled to receive only that amount which he
had paid rightfully to the creditor (Sec
...
iii
...
(b) Right against the creditor
1
...
e
...
,
of the principal debtor, the surety can ask the creditor or the employer to dispense
with the services of the principal debtor or the employee in case the latter is proved
to be dishonest or has committed any act of dishonesty
...
After the debt has become due, and before the surety is called upon to pay, the
surety may ask the creditor to sue the debtor and collect the amount
...
In no circumstances, the surety can compel the creditor to sue the
principal debtor before suing him (surety)
...
The surety can, after payment of the debt or performance of the promise of the
principal debtor, recover all the securities which the creditor had either before or
69
after the contract of guarantee was entered into [Sec
...
It is immaterial whether
the surety was aware of such securities or not
...
(c) Right against the co-sureties [Sec
...
Where there are two or more sureties for the same debt either jointly or severally
and, whether under the same or different contracts and, sureties were aware of such
debts and if one of them is called upon to pay the debt of the principal debtor to the
creditor, then such a surety is entitled to recover the excess of the amount over and
above his share which he had to pay, from his co-sureties, in equal amount
...
If the sureties agreed to stand as sureties in different amounts for the same debt, in
case the principal debtor commits default and one of the co-sureties is asked to
clear the debt, he is entitled to recover the amount from the co-sureties but not
exceeding the amount which he had agreed originally to pay in the event of the
default by the principal debtor
...
Liabilities of a surety [Sec
...
In other words, the surety is liable for all those amounts,
the principal debtor is liable for
...
The bill is dishonoured by ‘C’
...
The liability of a surety is called as secondary or contingent, as his liability arises
only on default by the principal debtor
...
e
...
The creditor may file a
suit against the surety without suing the principal debtor
...
The creditor is not bound to give notice of the default to the surety, unless it is
expressly provided for
...
Notice of Revocation: In case of a continuing guarantee, a notice by the surety to
the creditor stating that he will not be responsible, will revoke his liability as
regards all future transactions
...
130]
2
...
131]
3
...
133]
...
10,000 on the 1st March
...
10,000 to ‘B’ on the 1st January
...
4
...
[Sec 134]
5
...
135]
...
By Creditor’s Act or Omission Impairing Surety’s Eventual Remedy [Sec
...
7
...
141]
...
e
...
e
...
2) Contract in writing or oral: Contract of indemnity need not be in writing but a
contract of guarantee should by in writing
...
e
...
e
...
4) Object: The object of a contract of indemnity is to save the indemnity holder from
a contingent risk while in a contract of guarantee the surety undertakes to discharge
the liability of the principal debtor which is an existing one and is not contingent
...
e
...
6) Right of indemnifier and surety: In the case of contract of indemnity, the
indemnifier after paying the indemnity, cannot sue the third party on whose
conduct the loss was caused in his own name unless the right of the indemnity
holder was assigned to him, while the surety after paying the creditor, can sue the
principal debtor for the reimbursement in his own name
...
2 BAILMENT AND PLEDGES
Definition of Bailment [Section 148]
Bailment is the delivery of goods by one person to another for some purpose, upon
a contract that they shall, when the purpose is accomplished be returned or otherwise
disposed of according to the directions of the person delivering them
...
The person to whom they
are delivered is called the “Bailee”
...
Example
1
...
‘P’ delivers a pen to ‘Q’ for repair
...
‘P’ gives ‘Q’ his watch as security for a loan
...
Requisites of a valid contract of Bailment
1) Contract: Bailment is the result of a contract between the owner of the goods and
the other to whom they are delivered temporarily with condition that they shall be
returned or disposed of according to the discretion of the person delivering them
...
e
...
2) Delivery of goods: The delivery of goods is made to convert the transaction into a
contract of bailment
...
In this case it is called
constructive delivery
...
3) Purpose: The goods are delivered to another person for some specific purpose
...
73
4) Ownership: In bailment the bailor continues to be the owner of the goods
...
5) Movable goods: Bailment is concerned with only movable goods
...
e
...
The relationship between depositor and the bank is that of borrower and the lender
...
Different kinds of Bailment: Bailment may by classified into
1
...
Gratuitous Bailment and
3
...
Voidable Bailment [Sec
...
Example: ‘A’ lends to ‘B’, on hire, a horse for his riding
...
This contract can be terminated at the option of ‘A’
...
In such cases, the following points must be considered:
1
...
159]
...
The bailor must indemnify the gratuitous bailee,if the bailee is asked to return the goods
before the expiry of the specified period or before the fulfilment of the purpose, for which
the good were bailed provided the bailee in such a case suffers a loss greater than the
benefit which he has derived from the gratuitous bailment for the goods (Sec
...
3
...
162]
...
Example: Motor car let out for hire; goods given to a carrier for carriage for a price;
articles given to a person for being repaired for a remuneration etc
...
Deposit
b
...
Hire
d
...
Carriage
f
...
150]
...
Example:
1
...
He does not disclose the fact
that the horse is vicious
...
‘B’ is thrown and injured
...
2
...
The carriage is unsafe, though ‘B’ is not aware of it, and ‘A’
is injured
...
(2) To repay expenses to the bailee: In case of gratuitous bailment all ordinary expenses
are to be borne by the bailee while extraordinary expenses are to be borne by the bailor and
if the bailee has incurred such expenses, the bailor must repay to the bailee all such
expenses
...
158]
...
164]
...
’B’ sues
‘C’ and receives compensation
...
(4) In the case of non-gratuitous bailment, if the bailor demands back the goods bailed
before the specified time or the f purpose for which they were bailed, he must indemnify
the bailee for any loss which the bailee has suffered
...
To get back the goods after expiry of the time for which they were bailed (or) after
the accomplishment of the purpose of bailment
...
To get back the goods from the goods from the bailee at any time if it is a
gratuitous bailment
...
159]
...
To terminate the contract of bailment if the bailee is guilty of an act in respect of
the bailed goods that is inconsistent with the terms of bailment
...
If the bailee has not been able to recover any compensation from the wrong doer of
the goods bailed, the bailor shall be entitled to proportionate compensation
according to the loss suffered by the bailor
...
The bailor may enforce the duties of the bailee
...
153]
...
160]
...
160]: The bailee must return the goods bailed on
the expiration of time or accomplish of the purpose for which the goods were bailed
...
Moreover,
the goods must be returned without any demand from the bailor
...
‘A’ rides with lot of
care, but marches to cuttack instead
...
‘B’ is
liable to make compensation to ‘A’ for the injury to the horse
...
(4) To Take Reasonable Care of the Goods Bailed: In all cases of bailment, the bailee
is bound to take as much care of the goods bailed to him as a man of ordinary prudence
would, under similar circumstances, take of his own goods of the same bulk, quality and
value as the goods bailed [Sec
...
In spite of enough care, if the goods are destroyed or
spoiled, in the absence of any special contract, the bailee is not liable for the loss [Sec
...
A liablee is liable for damages caused by negligence of the servants
...
163]
...
The cow
has a calf
...
(6) Not to Mix Bailor’s Goods With his Own Goods [Sec
...
If such mixed goods
can be separated, the cost of separation will have to be borne by the bailee
...
Example: ‘D’ bails superior flour worth Rs
...
without ‘D’s consent,
‘B’ mixes the flour with inferior quality flour of his own, worth only Rs
...
‘B’ must
compensate ‘D’ for the loss
...
If he does so, he must compensate for the same
...
1
...
148]
...
The bailee has a right to be compensated if he has suffered any loss from the defect in
the goods which the bailed and which he did not disclose [Sec
...
3
...
164]
...
4
...
5
...
If he has
incurred any expense in such a case, he can recover the amount from the bailor
...
“If several joint-owners of goods bail them, the bailee may deliver them back to, or
according to the directions of, one joint-owner without the consent of all, in the
absence of any agreement to the contrary” [Sec
...
7
...
The right of a person to retain the property of
another person till his satisfies the right of a person, who is in possession of the goods
of another, to retain such possession until the debt due to him has been discharged
...
This lien may be of its who is in possession of the two types, namely
a
...
General lien
78
PARTICULAR LIEN OR SPECIFIC LIEN
Particular lien means the right to retain particular goods until claims on account of those
goods are paid
...
Unlike general lien, the tailor has no right to retain any other items of cloth of ‘X’
other than the suit, for the pending charges from ‘X’
...
1
...
There is no lien for
custody charges or other charges for work not involving labour or skill
...
The right of lien cannot be exercised until the services have been performed in full
...
3
...
4
...
If
possession is lost for is also lost for any reason, the lien is also lost
...
The bailee (Sec
...
g
...
b
...
47 of the Sale of Goods Act
...
Agents in respect of their claims against their principals under sic
...
d
...
e
...
168 of the Indian Contract Act
...
Pawnee and pledgee under Sec
...
79
GENERAL LIEN
The ‘general lien’ is a right to retain the goods belonging to another, not only for the
discharge of a debt or liability incurred in connection with those goods but also for a
general balance of account between the owner and the person detaining the goods
...
170]
...
If the finder of goods takes the goods that he has found into the custody he must
try to find out the owner of the goods and incur necessary expenses
...
He must take as much care of the goods found as he would have taken care of his
own goods of the same bulk, quality and value till he finds the owner
...
3
...
g
...
4
...
Rights of a Finder of Goods
a
...
b
...
The finder of the goods may sell them
...
TERMINATION OF BAILMENT
A contract of bailment terminates under the following circumstance:
(1) Expiry of time: if the bailment’s is for a stipulated period, the bailment terminates
as soon as the stipulated period expires
...
(3) Act Inconsistent with the Terms: If the bailee does any act, with regard to the
goods bailed, which is inconsistent with the terms of the bailment, the bailment
terminates [Sec
...
(4) Goods lent Gratuitously: A gratuitous bailment can be terminated anytime
...
(5) Death: A gratuitous bailment terminates upon the death of either the bailor or the
bailee
...
The bailor in this case is called pledgor or pawnor
...
172]
...
There must be a debt or a promise to perform some act
...
Goods are bailed by way of security for the repayment of the debt or the
performance of the promise
...
Goods to be pledged must be delivered to the pledgee
...
Only movable goods can be pledged
...
Legal Possession is necessary in case of pledge and therefore, mere physical
possession cannot be considered to be a pledge, e
...
, a sevant cannot pledge the
goods belonging to his master because legally he is not the owner of those goods
...
173]
...
If the pawnee makes fresh advances to the same debtor it will be
presumed that the debtor has agreed to create lien on the goods already pledged for
the fresh advance [Sec
...
(2) Rights to sell: The pawnee may sell the goods by giving reasonable notice to the
pawnor if the principal debt and the interest is not paid to him even if the pawnor’s
title to the goods was defective
...
(3) Rights to Sue the Pawnor: If the pawnor does not repay the debt or perform the
promise after the expiry of the period, he may sue the pawnor for the same without
losing his right of lien or the right to sell the goods pledged
...
177]: A pawnor who has committed
default in the payment of the debt or in the performance of the promise within the
stipulated time, may redeem (take back) the goods pledged, before the pawnee has
sold the goods by giving a reasonable notice
...
(3) Protection of Debtors: The pawnor as a debtor has various rights given to him by
statutes enacted for the protection of debtors e
...
, Money Lender’s Acts
...
In the following cases, one who is
not an owner can make a valid pledge
...
178]: A mercantile agent who is in possession of goods,
with the consent of the owner, can make a valid pledge provided the pawnee acts in
good faith and has not noticed at the time of the plede that the pawnor has no
authority to pledge
...
(3) Pawnor with a Limited Interest [Sec
...
(4) Possession with Co-owner: If one of several co-owners is in sole possession of the
goods with the consent of the other owners
...
28 of Sale of Goods Act]
(5) Seller in Possession of Goods after Sale: A seller in possession of the goods after
the sale, and the buyer to whom the possession had been delivered before payment of
the price, may make a valid pledge, provided the pawnee acted in good faith and had
no prior notice of this effect
...
30(1)of Sale of Goods Act]
83
DISTINCTION BETWEEN PLEDGE AND BAILMENT
a
...
b
...
g
...
c
...
QUESTIONS
1
...
Distinguish between a contract of guarantee and a
contract of indemnity
...
Discuss the nature and extent of the liability of a surety
...
State the law relating to continuing guarantee
...
What are the rights of a surety against the principal debtor and against the co sureties
...
When is a surety discharged from liability?
6
...
Define bailment
...
8
...
Can a person other than the true owner make a valid pledge of goods?
10
...
11
...
12
...
84
UNIT –IV AGENCY AND LAW OF SALE OF GOODS
Lesson - 4
...
2 Law of Sale of Goods
LESSON - 4
...
182)
An agent is defined by the Act as “a person employed to do any act for another or
to represent another in dealings with a third person
...
The person for whom or on whose behalf he acts is called
‘Principal’
...
‘X’ is
the principal and ‘Y’ is his agent
...
The functioning of an agent is to bring about contractual relations between the
principal and third parties
...
Acts of the agent within the scope of the instructions by the
principal bind the principal as if he has done them by himself
...
Any person who is of the age of majority according to the law to which he is
subject to, and who is of sound mind, may employ an agent (Sec
...
According to Sec
...
Creation of Agency:
A contract of Agency may be created by
1
...
2
...
By ratification
...
Express Agency: A person may be appointed as an agent, either by word of mouth or
by writing
...
The usual form of a
written contract of agency is the power of attorney on a stamped paper
...
Implied Agency: Implied agency arises from the conduct, situation or relationships of
parties
...
i
...
Example: ‘P’ allows ‘A’ telling ‘C’ that ‘A’ is ‘P’s agent
...
‘P’ shall be held
liable to pay the price to ‘C’
...
Agency by Holding out: Though it is an extension of Agency by estoppels, some
affirmative conduct by the principal is necessary in creation of agency by
holding out
...
On one occasion, ‘P’ pays his servant
cash to purchase the goods
...
iii
...
Example: A horse was sent by rail and at the destination it was
not taken delivery of by the owners
...
Held, station master became the agent by necessity and hence, the owner must
compensate him
...
Agency by Ratification (Sec
...
However, Sec
...
If he so elects, it will have the same effect as if the act was originally done by this
authority
...
In other words,
the agency is taken to have come into existence from the moment the agent first acted
86
and not from the date of Principal’s ratification
...
Lambert (1881) is a good illustration on the point
...
Held ‘L’ was bound
...
An offer once accepted cannot be withdrawn
...
197)
...
The agent must contract in the capacity of agent and not as principal
ii
...
He
must have contractual capacity both at the time of the contract as well as at the time
of ratification
...
Ratification may be made within a reasonable time
...
iv
...
v
...
198 of the Act, “No valid ratification can be made by a person
whose knowledge of the facts of the case is materially defective
...
vi
...
The principal cannot
reject the discomforts and accept only comforts
...
Ratification of acts not within the Principal’s authority is ineffective
...
viii
...
200)
...
‘C’, an unauthorised person, gives
notice of termination to ‘A’
...
DUTIES OF AGENT
The duties of an agent towards his Principal are
1
...
211): The
duty of the agent must be not to deviate from the directions of the Principal even for
the principal’s benefit
...
Example: Lilley V
...
‘A’ stored a portion of the goods in a different place,
equally good but cheaper
...
Held, the agent was
liable to make good the loss
...
In the absence of instructions from the Principal, the agent should follow the customs
of the business in the place where it is conducted (Sec
...
Example: ‘A’ an agent
engaged in carrying on for ‘B’ a business in which it is the custom to invest from time
to time, at interest, the moneys which may be in hand, omits to make such investment
...
3
...
212)
...
a
...
213): Rendering accounts does not mean the
showing of accounts but of the accounts supported by vouchers
...
b
...
214): It is the
duty of the agent, in case of difficulty, to use all reasonable tactfulness, in
communicating with his principal, and in seeking to obtain his instructions
...
88
c
...
d
...
If he acts without the consent, the
principal can claim from the agent any benefit which the agent has received
...
‘A’ tells
‘P’ it cannot be bought, and buys the house for himself
...
4
...
(Sec
...
5
...
6
...
209)
...
Right to Receive Remuneration (Sec
...
2
...
217): In agent may retain, out of any sums received, or
account of the Principal in the business of the agency, all moneys due to himself in respect
of advances made or expenses properly incurred by him in conducting such business, and
also such remuneration as may be payable to him for acting as an agent
...
Right of Lien (Sec
...
property, whether movable or immovable of the principal received by him, until the due
amount towards commission, remuneration etc
...
89
4
...
Like an unpaid seller, he enjoys the right of
stopping the goods in transit if in the meantime the principal has become insolvent
...
5
...
222-224): The principal is bound to indemnify the agent
against consequences of all lawful acts done by the agent in exercise of authority conferred
upon him
...
6
...
225): The
principal must make compensation to his agent in respect of injury caused to such agent by
the principal’s neglect or want of skill
...
Consequently ‘B’ met with an accident ‘A’ must make compensation to ‘B’
...
1861
...
The
authority is said to be implied when it is to be inferred from the circumstances of the case
...
(Sec
...
Example: ‘A’ owns
a shop in Serampur, himself living in Calcutta and visiting the shop occasionally
...
‘B’ has an implied authority from ‘A’ to order goods from ‘C’ in the name of ‘A’ for the
purposes of the shop
...
188)
...
189]
...
b) ‘A’ consigns provisions to ‘B’ at Calcutta with directions to send them
immediately to ‘C’ at Cuttak
...
Consequences of Agent Exceeding his Authority
a) When the authority is separable: “When an agent does more than he is
authorized to do, and when the part of what he does which is within his authority,
can be separated from the part which is beyond his authority, so much only of what
he does is within his authority, is binding as between him and his principal”
...
227)
...
4,000 on the ship
...
‘A’ is bound to pay the premium
for
the
policy
on
the
ship,
but
not
the
premium
on
the
cargo
...
228]
...
‘B’ buys 500 sheep and 300 cows for a fixed sum of Rs
...
‘A’ may
repudiate the whole transaction
...
Where an agency gets terminated, but notice of termination has not
been received by the other party
...
Thus a Principal is
i
...
222)
...
Liable to indemnify an agent against the consequences of an act done in good faith,
though it causes an injury to the rights of third persons
...
223)
...
not liable for acts which are criminal in nature though done by the agent at the
instance of the principal
...
224)
...
to make compensation to his agent in respect of injury caused to such agent by the
Principal’s neglect or for want of skill (Sec
...
Principal’s Liability to Third Persons:
1
...
2
...
3
...
4
...
The Principal is liable for misrepresentations made or
frauds committed, by an agent in the business of agency for his own benefit
...
(Sec
...
5
...
6
...
Sec
...
92
Agency coupled with interest: Agency is said to be coupled with interest when authority
is given for the purpose of securing some benefit to the agent
...
Example: Where an agent is appointed to sell properties of the principal and
to pay himself out of such sale proceeds, the debt due to the agent
...
General
2
...
A general agent is one who is appointed to represent the principal in all matters
concerning a particular business e
...
manager of a firm or managing director of a
company
...
A special agent, therefore, has only a limited authority to do the
specified act
...
According to another view
point, agents may be classified as;
1
...
Non-mercantile agents
...
1
...
He cannot have the possession of goods
...
2
...
He can even sell the goods on credit and in his own
name
...
A factor has a general lien
on the goods in his possession
...
93
3
...
The remuneration that he gets for the purpose is called the
commission
...
A commission agent may have possession of the goods or not
...
4
...
A delcredere agent occupies the position of a guarantor, as
well as of an agent
...
5
...
He has a particular lien on the goods for his remuneration
...
He acts as an agent for the seller
...
An auctioneer has an implied authority to sell the goods without any
restriction
...
Banker: Though the relationship between a banker and customer is ordinarily that of
debtor and creditor, he acts as his agent when he buys and sells securities on his behalf
...
or when he pays
insurance premium out of customer’s account as per customer’s request, he acts as his
agent
...
Indentor: An indentor is a commission agent, who, for a commission procures a sale,
or, a purchase on behalf of his principal, with a merchant in a foreign country
...
Such agent can charge
commission at the rates mentioned in the indent
...
But in certain cases the husband may escape liability if he can
prove that
a) He had expressly forbidden his wife from purchasing anything on credit or from
borrowing money
...
d) The trader had been expressly told not to give credit to his wife
...
If he does not provide for her maintenance, she
has an implied authority to bind the husband for necessaries
...
Besides, estate agents, advocates, Attorneys etc
...
Sub-Agents and Substituted Agents (Sec
...
Sec
...
Sub-Agent: Sec
...
There is no privacy of
contract between the sub-agent and the principal
...
Substituted Agent: Where an agent appoints another person for being appointed as an
agent in his place, such person is called as a substituted agent
...
194 of
the Act, “Where an agent, holding an express or implied authority to name another person
to act for the principal in the
business of the agency has named another person
accordingly, such person is not a sub-agent but an agent of the principal for such part of
the business of the agency as is entrusted to him”
...
It reads, “An agency is terminated by the
principal revoking his authority; or by the agent renouncing the business of the agency
being completed; or by either the principal or agent dying or becoming insolvent or
becoming of unsound mind under the provisions of any act for the time relief of insolvent
debtors
...
By Revocation by the Principal: The principal may, by notice, revoke the authority of
the agent at anytime
...
In case of continuous agency,
notice of revocation is essential to the agent as well as to the third parties who have
acted on the agency with the knowledge of the principal
...
The agency is revocable
in the following cases:
i
...
ii
...
204)
...
On the Expiry of Fixed Period of Time: When the agency is for a fixed period of
time, it comes to an end on the expiry of that time
...
On the Performance of the Specific Purpose: where an agent is appointed to do a
particular act, it terminates when that act is done or when the performance becomes
impossible
...
Insanity or Death of the Principal or Agent: Death or insanity of the principal or the
agent terminates the agency
...
5
...
6
...
7
...
Where an agency is fixed for a particular period and the agency is
renounced without a sufficient notice, and cause, the principal must be compensated
...
205)
...
The termination of the authority of an agent does not, so far as regard the agent, take
effect until it becomes known to him
...
As regards third parties, they can continue to deal with the agent, as such, till they
come to know of the termination of the authority
...
208
...
The termination of the authority of an agent causes the termination of all sub-agents
appointed by him
...
Concealed principal: Where an agent not only conceals the name of the principal, but the
very fact that there is a principal, the principal is called as a concealed principal
...
1 Law of Sale of Goods
Lesson 5
...
3 Classification of Negotiable Instruments
Lesson 5
...
5 Endorsement
LESSON - 5
...
The Act came into force on 1st July, 1930
...
Unless otherwise mentioned the sections mentioned in this chapter pertain to Sale
of goods Act, 1930
...
2(1)]: Buyer means a person who buys or agrees tp buy goods
...
2(13)]: Seller means a person who sells or agrees to sell goods
...
2(7)]: The term ‘goods’ includes every kind of movable property except
(i)
Actionable claims, and
(ii)
Money
...
And money means legal tender money
...
Movable articles like furniture, clothing etc and shares, debentures are goods
...
But growing crops and grass, which can easily be
separated from earth before sale, and fruits which can be severed from trees, are included
with the definition of ‘Goods’
...
Existing goods
b
...
Contingent goods
...
Existing Goods: Existing goods are goods which are already in existence and which are
physically present in some person’s possession and ownership [Sec
...
g
...
(ii)
Generic goods are goods indicated by description and not separately identified
...
As
soon as a particular bag is separated out and marked and identified for delivery, it
becomes specific goods
...
Future goods: Future goods are goods which will be manufactured as produced as
required by the seller after the making of the contract of sale Sec
...
Example; P agrees
to sell to Q all the mangoes which will be produced in his garden next year
...
C
...
6(2)]
...
Example: ‘X’ agrees to sell to
‘Y’ a ring provided he is able to purchase it from ‘Z’
...
Definition and Essentials of Contract of Sale (Sec
...
99
ESSENTIALS OF A CONTRACT OF SALE
1
...
The seller and the buyer must be
different persons
...
Example: [Bell Vs Lever Bros
Ltd]
...
There is no sale
...
2
...
Transfer of ownership is a must
...
The subject-mater of the contract must necessarily be ‘goods’
...
4
...
If for instance, goods are offered as the consideration for goods, it will not
amount to sale
...
Similarly, in case there is no consideration,
it amounts to gift and not sale
...
Example:
Aldridge V
...
5
...
The terms may be of two types namely, essential and nonessential terms
...
The sale of goods act provides that in the absence of a contract to the
conditions and warranties are to be implied in all contracts of sale,
6
...
For example,
parties to the transaction must be competent contracting, consent of the parties must be
free, etc
...
4)
...
The transaction is a sale even though the price is
payable at a later date or delivery is to be given in the future, provided the ownership of
the goods is transferred from the seller to the buyer
...
When an agreement to sell becomes a sale: An agreement to sell becomes a sale when
the prescribed time elapses or the conditions, subject to which the property in the goods is
to be transferred, are fulfilled
...
This is a sale because the property in the goods has
passed to the buyer
...
This is an
agreement to sell because the property in the goods will pass to the buyer
when the goods come and the agreement is naturally subject to the
condition that the ship arrives in port with the goods
...
A sale is an executed contract
...
An agreement to sell is an executory
contract
...
In a sale, since the property has 2
...
damages, unless the price was payable
on a particular date
...
A sale creates a right ‘in rem’ (i
...
) 3
...
e
...
4
...
The loss in this cases shall be borne by
fall on the buyer, even though the
the seller, even though the goods are in
goods are in the possession of the
the possession of the buyer
...
5
...
In these circumstances, the buyer
seller
thereafter
becomes
an
cannot claim the goods but only a
insolvent, the buyer can claim the
rateable dividend for the money paid
goods from the official receiver
...
If the buyer becomes an insolvent 6
...
buyer, the seller shall have to give the
goods to the official receiver
...
11-17]
In a contract of sale, parties make certain stipulations i
...
agree to certain terms and
conditions
...
Some
conditions may by of fundamental nature, [e
...
quality of goods to be supplied] the breach
of which, therefore, will be regarded as a breach of the whole contract
...
e
...
The former are called ‘conditions’ and the latter ‘warranties’
...
” Section 12(3) defines
a “warranty as stipulation collateral to the main purpose of the contract, the breach of
which gives rise to a claim for damages but not to reject the goods and treat the contract as
repudiated”
...
A condition is a stipulation which is
essential to the main purpose of the
contract
...
A breach of condition gives the
aggrieved party a right to sue for
damages as well as right to repudiate the
contract
...
A warranty is a stipulation which is
only subsidiary to the main purpose of
the contract
...
A breach of warranty gives him only
the right to sue damages
...
The Distinction between the two may be illustrated as follows: A man buys a
particular horse, which is warranted quiet to rid and drive
...
But if instead of buying a particular
horse, a man asks a dealer to supply him with a quiet horse and the horse turns out to be
vicious, the stipulation is a condition and the buyer can reject the horse and claim
damages
...
Express
terms are those which have been expressly agreed upon by the parties
...
Implied Conditions
1
...
14(a)]
...
Divell ‘R’ bought a motor car from D
and used it for four months
...
‘R’ was forced to return the
car to the true owners
...
103
2
...
15]
...
In such cases the goods supplied must
be the same as the goods described
...
Sale by sample: When goods are to be supplied according to a sample agreed
upon, the following conditions are implied:
a
...
b
...
c
...
If the
defect is easily discoverable on inspection and the buyer takes delivery
after inspection, he has no remedy
...
Condition as to fitness or quality (Sec
...
Implied Warranties
1
...
14(b)]
2
...
14(c)]
The Doctrine of ‘CAVEAT EMPTOR’: Caveat Emptor is a lath expression
which means “let the buyer beware of’
...
If he makes
a bad choice he cannot blame the seller or recover damages from him
...
Where the buyer relies upon the skill and judgement of the seller
...
Where by custom an implied condition of fitness is annexed to a contract of sale
...
Where there is a sale of goods by description , there is an implied condition that
the goods are fit for sale
...
Where the seller is guilty of fraud
...
TRANSFER OF OWNERSHIP OR TITLE TO GOODS
Section 18 to 25 of the sale of Goods Act lays down the rules which determine when
ownership of property passes from the seller to the buyer
...
Unascertained Goods (unidentified goods): When there is a contract for the sale of
unascertained goods, property in the goods (ownership) is not transferred to the buyer
unless and until the goods are ascertained (or) identified
...
He can become the owner the of 50 kilos
of rice only after this quantity of rice has been separated out from the other rice in the
godown
...
The Intention of the Parties: In a contract for the sale of specific or ascertained goods
the property passes at such time as the parties to the contract intend it to pass
...
19)
...
Specific Goods (Sec
...
Property (or) ownership passes at the time of entering into the contract of sale if the
following conditions are fulfilled:
(i) The goods are specific goods
(ii) The goods can be immediately delivered
(iii) The contract of sale is without any condition
(iv) The parties themselves have not fixed a different time for the passing of property
...
Specific Goods put into deliverable state : Where there is a contract for the sale of
specific goods and the seller is bound to do something to the goods for the
purpose of putting them into a deliverable state, the property does not pass until such thing
is done and the buyer has notice thereof [Sec
...
5
...
: Where there is a contract for the sale of
specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do
some other act or thing with reference to the goods for the purpose of ascertaining the
price, the property does not pass until such act or thing is done and the buyer has notice
thereof [Sec
...
Delivery to the Carrier: As per the terms of the contract, when the seller delivers the
goods to a carrier for being taken to the buyer, the ownership passes to the buyer
...
7
...
24]: when goods are
delivered to the buyer on approval or sale or return basis the property passes to the buyer
only
(i) When he signifies his approval to the seller or does any other act accepting the
transaction;
(ii) If he does not signify his acceptance to the seller but retains the goods
without giving notice of rejections then, if a time has been fixed for the return of the
goods, on the expiration of such time and if no time has been fixed on the expiration of a
reasonable time
...
No one can give
a better title than he himself has
...
who is not the
owner there of and who does not sell under the authority or with the consent of the owner,
the buyer acquires no better title to the goods than what the seller had unless the owner is
precluded by his conduct from denying the seller’s authority to sell”
...
In each if the following cases, a person who is not an owner can give to the
transferee a valid title to the goods
...
Estoppel: Under certain circumstances the true owner may be prevented, by his
conduct, from denying the seller’s authority to sell
...
‘X’ acts in such a manner that ‘Y’ is induced to believe that the goods
belong to ‘Z’
...
Under these circumstances, the court
will not allow ‘X’ to prove his ownership
...
2
...
3
...
28]
...
Sale by the Seller in Possession of Goods After Sale: where a person, having
sold goods, continues to be in possession of the goods or of the documents of title to the
goods, a transfer of title by him or his agent by way of sale, pledge, gives a good title to
the transferee provided the buyer was acting in good faith and had no knowledge of the
seller’s want of title [Sec
...
Example: J
...
Credit Lyonnels
...
The dock warrant was issued to him
...
Held, ‘C’
acting in good faith, will acquire good title against ‘J’
...
Sale of goods obtained under a voidable agreement: When the seller of
goods has obtained possession under a voidable agreement but the agreement has not been
revoked at the time of sale, the buyer obtains a good title to the goods
...
low price by undue influence and sells it to ‘Z’
who is an innocent purchaser without the notice of ’X’s defective title
...
6
...
30(2)]
7
...
54)
...
Sale under the Contract Act:
(a) A pawnee can sell the goods of pawnor if the latter makes a default of his dues
...
(b) A finder of goods can sell the goods under certain circumstances
...
Duties of Seller of Goods
1
...
31]
...
32]
...
Risk of deterioration in the goods: Where the seller of goods agrees to deliver them at
his own risk at a place other than that where they are when sold, the buyer shall,
nevertheless, unless otherwise agreed, take any risk of deterioration in the goods
necessarily incident to the course of transit [Sec
...
Damages for non-delivery: Where the seller wrongfully neglects or refuses to
deliver the goods to the buyer, the buyer may sue the seller for damages for nondelivery [Sec
...
4
...
58]
...
Duties of Buyer of Goods
1
...
2
...
3
...
35]
...
Liability of buyer: When the seller is ready and willing to deliver the goods and
requests the buyer to take delivery and the buyer does not within a
reasonable time after the request, take delivery of the goods he is liable to the seller
for any loss caused by his refusal to take delivery, and also for a reasonable charge
for the care and custody of the goods [Sec
...
5
...
RIGHTS OF BUYER AND SELLER OF GOODS
a
...
Delivery: The buyer has the right to have delivery of the goods according to the terms
of the contract
...
Revocation: Unless otherwise agreed, the buyer of goods is not bound to accept
delivery by instalments
...
iii
...
4 1(1)]
...
Buyer is not bound to return rejected goods: Unless otherwise agreed, where goods
are delivered to the buyer and he refuses to accept them, having the right to do so,
he is not bound to return them to the seller, but it is sufficient if he intimates to the
seller that he refuses to accept them [Sec
...
v
...
58]
...
Specific performance: Under certain circumstances, the court may permit the buyer
to get specific relief from the defaulting seller [Sec
...
Rights of seller of goods
i
...
Enforcement of liabilities of buyer: The seller can enforce the liabilities of buyer
for not taking delivery [Sec
...
Other rights: The seller has been given certain rights to aggrieved party for the
following reasons:
Damages for non-delivery
Remedy for breach of warranty
Repudiation of contract
Interest and special damages
Increasing of the amount of duty imposed
RIGHTS OF THE UNPAID SELLER
A contract is comprised of return promises
...
In case buyer fails or refuses to pay,
the seller, as an unpaid seller, shall have certain rights
...
Sec
...
The term seller includes any person who is in the position of a seller, example, the agent
of the seller
...
1,000 are sold
...
1,000) is not paid on the due date
...
(ii) Unpaid seller’s rights: Rights of an unpaid seller can be listed as follows:
1
...
Seller’s Lien
b
...
Re-sale
2
...
Suit for price
b
...
(a) Seller’s Lien or Vendor’s Lien (Sec
...
(ii) Where the goods have been sold on credit but the terms of credit has
expired
...
Other rules
(i) Lien can be exercised only for non-payment of the price, and not for other charges due
against the buyer
...
(ii)The lien of an unpaid seller is a particular lien
...
(iii)The unpaid seller may exercise his lien even if he is in possession of goods as agent or
bailee for the buyer
...
When the seller delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer, without reserving a right of desposal of goods to
himself; example; takes R/R or Transport Receipt in the name of buyer or his
agent
...
Where the buyer or his agent lawfully obtains possession of the goods;
iii
...
Where he assents to a sub-sale;
v
...
vi
...
In a Bombay case on a sale of certain shares the relevant share certificates and
transfer forms duly signed were handed over by the seller to the buyer against payment of
price by cheque
...
His lien is lost when he parted with
their possession
...
Wadilal
1
...
This is known as the right of stoppage in transit
...
The goods are deemed to be in course of transit from the time they are delivered to the
carrier to the time they are delivered to the buyer or his agent
...
The right of stoppage-in-transit comes to an end as soon as the goods are delivered to
the buyer or his agent
...
Where a part delivery has been made, the remainder of the goods may be stopped in
transit unless It is shown that the part delivery was made under such circumstances as to
show an agreement to give up possession of the whole of the goods
...
(c) The right of re-sale [Sec
...
The unpaid seller who has retained possession of the
goods in exercise of his right of lien or who has resumed possession form the carrier upon
insolvency of the buyer, can re-sell the goods,
a
...
In other cases after notice to the buyer, calling upon him to pay or tender the price
within reasonable time, and upon failure of the buyer to do so
...
But if he receives more than what is due to him, he can
retain the excess
...
(a) Suit for the price (Sec
...
2
...
56]
...
He may also
recover the money paid where the consideration for the payment of it has failed [Sec
...
114
QUESTIONS
1
...
2
...
State the respective rights and duties of a principal and a agent
...
What are the different ways an agency can be terminated?
5
...
del credere agent
b
...
undisclosed principal and concealed principal
6
...
7
...
What are unascertained goods? When does the ownership ass in a contract for the sale of
goods?
9
...
explains
10
...
11
...
Sale and Agreement to sell
b
...
What do you understand by ‘Caveat Emptor’? are there any exceptions to its
application to sale of goods?
115
LESSON 5
...
The Negotiable Instruments Act 1881 deals with the laws regarding negotiable
instruments such as promissory notes, bills of exchange, cheques etc
...
Definition
The term ‘negotiable instrument’ is not defined in the Act
...
As this definition gives only the meaning, any
instrument of these types can be included In the Act
...
It can
...
good title, even when the transfer may be defective
...
Freely Transferable: The property in a negotiable instrument can be passed on from
one person to another by mere delivery if it is payable to bearer, by endorsement and
delivery if it is payable to the order
...
The Holder Gets a Perfect Title: A person taking an instrument bonafide ( in good
faith) and for value, is known as a holder in due course
...
That means, even if the instrument was not stolen
by a transferor it will not affect the title of the holder in due course
...
Recovery of the Value: The holder in due course need not give notice of transfer to
the prior parties who are liable to pay on the instrument
...
116
4
...
Hence anyone challenging any of
these presumptions will have to prove his allegations
...
c) Time of Acceptance: When a bill of exchange is accepted it is presumed that it was
accepted within reasonable time of its date and before maturity
...
e) Holder is a Holder in Due Course: Every holder of a negotiable instrument is
presumed to have been done in the order in which they appear on the instrument
...
g) Stamp: Every instrument is presumed to have been duly stamped
...
There is no question of any of these presumptions if the instrument was obtained by
any fraud, or unlawful consideration
...
Negotiable by statute, and
2
...
Negotiable by Statute: Section 13 of the Negotiable Instrument Act states only three
kinds of negotiable instruments viz
...
These are instruments by statute
...
Negotiable of Custom of Usage: These are instruments which gained the character of
negotiability by the usage or custom of trade
...
117
PROMISSORY NOTE
According to Sec
...
The person who promises to pay in writing is called the
maker of the instrument
...
Characteristics
1
...
In this context, writing includes writing
with pen, pencil, typewriting or print
...
Promise to Pay: There should be an undertaking or promise to pay
...
For
example, a writes “I am liable to B a sum of Rs
...
As there is no promise to pay,
this is not a promissory note
...
Unconditional: The undertaking or promise to pay must be unconditional
...
For example, if an instrument contains “I
promise to pay Rs
...
as this promise is
conditional, it is not valid
...
For example, if ‘X’ promises to pay ‘Y’ a sum
of Rs
...
4
...
It is just not sufficient to have the signature
...
5
...
A promissory note made payable to the maker himself is a nullity
...
6
...
For example, a promissory note stating “I promise
to pay ‘A’ Rs
...
118
7
...
For
example, an instrument containing a promise that “I promise to pay ‘X’ Rs
...
8
...
9
...
are found in all
instruments though they are not essential
...
10
...
The term “On demand’ means that it is payable
immediately
...
BILL OF EXCHANGE
According to Section 5 of the Act “A bill of exchange is an instrument in writing,
containing an unconditional order, signed by the maker directing a certain person to pay, a
certain sum of money only to or to the order, of a certain person or to the bearer of the
instrument
...
drawer, drawee and payee
...
It is he who gives the order to pay
...
when the drawee accepts the bill, he is called the
“acceptor
...
If the drawer does not pass on the instrument to somebody, he himself will be the payee
...
When the holder endorses the
instrument to another he is called the endorses
...
The important among them are as follows
...
2
...
4
...
6
...
8
...
It must contain an order to pay
...
The order must be to pay money
...
It requires three parties viz
...
It must be signed by the drawer
...
are
similar like in the case of a promissory note
...
There are three parties viz
...
the maker and
the drawee and the payee
...
2
...
3
...
creditor
...
The maker directs the drawer to pay
...
The maker of a promissory note is in the
5
...
But as he originates
give an unconditional order
...
6
...
absolute
...
Normally the drawer and the payee are
the maker himself
...
8
...
There is no need for acceptance
The maker is in immediate relation with the
9
...
relation with the acceptor and not to the
payee
...
A bill cannot be made payable to the A note can be made payable to the bearer
bearer
...
11
...
document etc
...
12
...
the drawer
...
A foreign bill must be noted and No such protest is required in the case of
protested for dishonour as required by dishonour of a note
...
CHEQUE
According to Section 6 of the Negotiable Instruments Act ”A cheque is a bill of exchange
drawn upon a specified banker and payable on demand
...
It can be seen from the definition that all cheques are bills of exchange
...
A cheque has all the
essential elements of a bill of exchange such as it must be signed by the maker, it must
contain an unconditional order, the order must be on a specified Banker, it is to pay a
certain sum of money to or to the bearer of the cheque
...
A cheque has the following additional qualifications viz
...
121
Distinction between Bill of Exchange and a Cheque
Bill of Exchange
cheque
1
...
2
...
3
...
4
...
5
...
6
...
7
...
8
...
9
...
A cheque is always drawn on a banker
...
A cheque is not entitled for any days of
grace
...
A delay in presenting a cheque for
payment will not relieve the drawer
from liability
...
No stamp is required for a cheque
...
It is not required in the case of a cheque
...
Marking is done in writing by the drawee banker on the cheque that it is good
...
Making is not practised in India
...
Such a cheque is called an open cheque
...
To protect against this risk the custom of crossing the cheque is
practised
...
It gives an indication to the drawee
banker to pay money only through the banker to the person presenting it for payment
...
122
Types of Crossing
Crossing may be divided into three types viz
...
1
...
The words “not negotiable” are also added
in certain cases
...
in the next page
...
2
...
124) Even transverse lines are not necessary in case of a special crossing
...
in the next page
...
3
...
The words ‘A/C payee’ is added to general or special crossing, under this
type
...
in the next page
...
It should be noted that account payee cheques are negotiable
...
But it takes away the main feature of negotiability
...
But if it is crossed “not negotiable” on a cheque, the title of the transferee of
such a cheque cannot be better than that of its transferor
...
Who can Cross a Cheque: A cheque can be crossed generally or specially by the (a)
drawer (b) The holder or (c)
...
If the drawer has crossed it generally the holder
or the banker can cross it specially
...
3 CLASIFICATION OF NEGOTIABLE INSTRUMENTS
Negotiable instruments may be classified as follows:
1
...
Fictitious bill
2
...
Documentary bill
3
...
Clean bill
4
...
Escrow
5
...
Ambiguous instrument
6
...
Inchoate instrument
7
...
Undated bills and notes
15
...
1
...
Hence it is a bearer
instrument and anyone in the legal possession of it can enforce payment due on it
...
The
restrictions imposed by the Reserve Bank of India Act 193 do not allow the making of a
promissory note payable to the bearer
...
Order Instruments: When a negotiable instrument states that it is payable to the order
or when it is expressed to be payable to a particular person, it is said to be an order
instrument
...
Inland Instruments (Sec
...
Any bill of exchange drawn upon a resident in India is
considered an inland bill irrespective of the place where it was drawn
...
Foreign Instrument: According to Section 12, an instrument, which is not an inland
instrument is deemed to be a foreign instrument
...
125
Usance: Usance is a term used in foreign bills
...
The length of the usance varies in
different countries depending on their custom
...
Payable on Demand: A promissory note or bill of exchange is payable on demand,
when no time for payment is shown in it and it is expressed that it is payable on demand or
at sight
...
6
...
7
...
But an accommodation bill is drawn, accepted or endorsed without any
consideration
...
Example: ‘A’ and ‘B’ are good business friends
...
‘A’ draws a
bill of exchange for Rs
...
‘B’ accept it and returns it to ‘A’
...
1,90,000
...
95,000 to ‘B’ and agrees to pay Rs
...
This is an accommodation bill
...
Fictitious Bill: If the name of the drawer or the payee or both stated in the bill is
fictitious, the bill is called a fictitious bill
...
8
...
are attached to the bill it is
called a documentary bill
...
126
9
...
10
...
Between immediate parties, the liability in the case of an escrow arises
only when the conditions agreed upon are fulfilled
...
Example: ‘X’ is the holder of a bill
...
but ‘Y’ negotiates the bill to ‘A’, who takes it bonafide and for value
...
11
...
In such a situation
the holder has to elect whether he wants to treat it as a promissory note or a bill of
exchange
...
Example: ‘X’ draws a bill on a fictitious name ‘Y’ and negotiates it
...
According to Section 18,if the amount undertaken to pay in the case of a promissory note
or ordered to be paid in the case of a bill of exchange is written differently in figures and
words, the amount stated in words is to be taken as correct
...
Inchoate Instrument: When a person delivers an instrument to another signed and
stamped by not filling up the amount, it is called an inchoate instrument
...
Example: ‘X ‘owes ‘Y’ Rs
...
He gives ‘Y’ a blank acceptance on a bill which is
sufficiently stamped to cover any amount up to Rs
...
‘Y’ endorses the bill to ‘A’, a
holder in due course
...
6000/- can recover the amount
...
Undated Bills and Notes: A negotiable instrument cannot be made invalid for the
reason that it is not dated, when it satisfies all other aspects
...
This insertion is not taken as a material
alteration
...
These are called bills
insets
...
Each part of the bill in the set is called a “via”
...
128
LESSON 5
...
One has capacity to incur liability on the negotiable instrument only when he has the
capacity to enter into a contract
...
However
this
will
not
diminish
the
liability
of
the
other
parties
...
Held,
M’s immunity from liability did not absolve ‘A’ and ‘B’; other joint promisors’ liability
(Sulochna Vs Pandiyan Bank Ltd)
...
Minors: A minor is not competent to enter into a contract
...
Even on a bill not accepted by a minor for the necessaries supplied to him, only
his estates will be liable and not he personally
...
Persons of Unsound Mind: Bills or notes drawn or accepted by persons of unsound
mind (lunatics, idiots, drunken persons etc
...
3
...
Any act done by a corporation
beyond the powers conferred upon it by its Memorandum is void
...
A trading company, unless prohibited by the Memorandum or
Articles of Association has implied power to bind itself by negotiable instruments
...
Agents: Anyone competent to contract can by himself or through his authorised agents
draw, accept or endorse a bill of exchange
...
129
5
...
But a
partner of a non-trading firm has no such implied authority
...
Joint Hindu Families: In a joint Hindu family the eldest person viz
...
Therefore an instrument executed by him
binds all other members of the family
...
Legal Representative: After the death of the holder of a negotiable instrument, the
legal representative gets all the rights and liabilities on such instruments
...
Holder in Due Course (Sec-9): A holder in due course is any person who for
considerations becomes a possessor of1 a negotiable instrument (if payable to bearer)
provided he got possession before the amount mentioned in it became payable and without
sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title
...
He is protected from certain risks
to which an ordinary holder of the negotiable instrument is exposed to
...
When the Instrument is Inchoate: A blank instrument stamped and signed without
filling up the amount is called an inchoate instrument
...
2
...
That is, the acceptor of a bill cannot avoid payment to a holder in due course
for the reason that other parties to the bill were fictitious
...
When the Instrument is Made without Consideration: A contract made without
consideration is void
...
4
...
36)
...
When the Instrument was Escrow: When a negotiable instrument is delivered to a
person for a special purpose without intention of transferring the property therein, it is
called an escrow
...
6
...
Any defect in the
title of the instrument will not affect the rights of the holder in due course provided he
himself was not a party to the fraud
...
When the Instrument was Obtained for Unlawful Consideration or by Unlawful
Means: The person liable to pay on a negotiable instrument cannot avoid payment to a
holder in due course on the ground that the instrument was lost or that it was obtained from
him by means of an offense or fraud or for an unlawful consideration
...
When the Validity of the Instrument is Denied: The validity of an instrument cannot
be denied when it is in the hands of a holder in due course
...
9
...
131
10
...
Liability of Parties
1
...
30): The drawer of a bill of exchange or cheque is bound to
compensate the holder, in case of dishonour by the drawer or acceptor thereof,
provided due notice of dishonour has been given to or received by the drawer
...
Liability of Drawee: When a banker having sufficient funds of the drawer of a
cheque fails to pay money when the cheque is duly presented must compensate the
drawer for any loss or damage caused by such default
...
Liability of Maker of a Promissory note and Acceptor of a Bill of Exchange: The
maker of a promissory note and the acceptor of a bill of exchange are liable for
payment due on the instrument at the maturity of the instrument
...
Liability of Endorser: Normally the endorser of a negotiable instrument will be liable
to all the subsequent holders in case of dishonour of the instrument
...
Liability of Prior Parties: Every prior party to a negotiable instrument will be liable
to a holder in due course till the instrument
Negotiation
When a promissory note, bill of exchange or cheque is transferred to any person, so as to
constitute that person as the holder there of, the instrument is said to be negotiated
...
If an instrument is payable to
order, it is negotiable by the holder by endorsement and delivery thereof
...
5 ENDORSEMENT
Endorsement means writing of a person’s name on the face or back of a negotiable
instrument or on a slip of paper annexed thereto, for the purpose of negotiation (Sec
...
The person who signs the instrument is called the ‘endorse’
...
Essentials of Valid Endorsement
1
...
If there is no place on the instrument, it must be on a
slip of paper called “allonge” annexed to the instrument
...
It must be signed by the endorser for the purpose of negotiation
...
It must be made by the endorser either by signing on the instrument or by specifying the
name of the person to whom the instrument is payable, in additions to his signature
...
It must be completed by the delivery of the instrument
...
1
...
Full
or
special
3
...
Partial,
and
5
Conditional or
Qualified
...
Blank or General Endorsement: An endorsement is said to be blank or general if
endorser signs his name only on the face or back of the endorsement [Sec
...
In a blank
endorsement endorsee’s name is not written, with the result, the instrument becomes
payable to bearer even though originally it was payable to order
...
2
...
16 (1)]
...
Restrictive Endorsement: An endorsement restricting or prohibiting further
transferability of the instrument is called a restrictive endorsement
...
133
4
...
A partial endorsement does not result
in the negotiation of the instrument
...
5
...
while a restrictive endorsement places restriction on the
negotiability of the instrument a conditional endorsement limits or removes the liability of
the endorser
...
(a) Sans Recourse Endorsement: When an instrument is endorsed by adding the words
“Sans Recourse” to the Endorsement he does not incur the liability of an endorser to the
endorsee
...
After such an endorsement if the instrument
is dishonoured the holder of the instrument cannot claim payment from the endorser
...
Example: “Pay ‘X’ or order on his marriage with ‘C’
...
(e) Facultative Endorsement: The endorser by express words abandons some right or takes
up some liability under this type of endorsement
...
The endorser has a right to
get
notice
of
dishonour
...
(d) ‘Sans Frais’ Endorsement: An endorsement which does not make the endorsee or the
holder of the instrument to incur any liability on account of the instrument, is called a sans
frais Indorsement
...
Example: ‘X’ is the holder of a bill of exchange payable to the order of ‘A’, which
contains the following endorsements:
First endorsement ‘A’, Second endorsement ‘B’, Third endorsement ‘C’ and Fourth
endorsement ‘D’
...
this action destroys the remedies
available to ‘D’ against ‘C’ and ‘B’
...
Negotiation Back: When a negotiable instrument after many negotiations comes back to
an earlier endorser before its maturity it is called Negotiation back
...
Example: ‘A’ negotiates a bill to ‘B’, ‘B’ to ‘C’, ‘C’ to ‘D’ and ‘D’ to ‘A’
...
Stolen and Lost Instruments: A person who steals or finds a lost negotiable instrument
does not acquire a title to the instrument
...
If he obtains payment on it, he is liable to return
it to the owner
...
But if the bill of exchange or promissory note payable to
order is lost and the finder forges the endorsement the purchaser cannot acquire the rights
of a holder in due course, even when he gets it for value in good faith
...
But the defence of coercion or fraud shall be lost generally when it reaches
the hands of a holder in due course
...
The defence of
failure of consideration is available only between immediate parties of the instrument and
not between remote parties
...
Presentment of a Negotiable Instrument
Presentment of a negotiable instrument means showing it to the drawer, acceptor or
maker for any of the following viz
...
1
...
Through acceptance the drawee signifies his assent to the order
of the drawer that he will honour the bill at the appropriate time
...
The essentials of a valid
acceptance are as follows:
(1) It may be written on the bill “accepted”, across the face or on the back of the bill
...
(3) The accepted bill must be delivered to the holder
...
But, for a bill payable some period after sight,
the bill on which there is a provision that it should be presented for acceptance before it is
presented for payment, presentation for acceptance is required
...
Modes of Acceptance
An acceptance may be classified into (a) General and (b) Qualified
...
b) Qualified Acceptance: When the acceptance is subject to some qualification or
conditions it is called a qualified acceptance
...
Instead if he takes it as acceptance, it is at his own
risk
...
A qualified acceptance may be in any of
the following ways viz
...
To the drawee or his duly authorised agent
...
To his legal representative if the drawee is not alive
...
To his assignee, if the drawee has been declared insolvent
4
...
5
...
When is Presentment for Acceptance Excused?
Presentment for acceptance for a bill payable after sight is excused under the
following situations:
1
...
2
...
It is enough if it is presented to the legal
representative or the official assignee as the case may be
...
The drawee is not found after a reasonable search
...
Even when the presentment is irregular and acceptance is refuse on some other
ground
When the presentment for acceptance is excused the bill is deemed to be
dishonoured on the due date
...
However when a bill payable
after sight is dishonoured by non-acceptance, the holder of the bill can allow anyone to
accept the bill on behalf of the drawer or any other party to the bill
...
Presentment for Sight
A promissory note payable after sight must be presented to the maker in order to fix its
maturity
...
The presentment should be
made on a business day during the business hours
...
If default is made, the
parties other the parties primarily liable are discharged of their liability (Sec
...
Payment for Honour
When a bill is accepted by the drawee and later dishonoured by non-payment it can be paid
by any other party for the honour of the drawee or the drawer, after declaring before a
Notary Public, as to whose honour he is paying
...
Dishonour of a Negotiable Instrument
A bill of exchange may be dishonoured by non-acceptance or by non-payment, whereas a
promissory note can be dishonoured only by non-payment
...
In case of failure to give a notice of dishonour all
the prior parties liable thereon are discharged of their liability (Sec
...
The notice is to be
given by the holder or any of the parties liable to the instrument to the prior parties
...
Noting and Protesting
Noting means the recording of the fact of dishonour by a Notary Public on a dishonoured
bill or upon a paper attached thereto or party upon each (Sec
...
The formal certificate
issued by the Notary Public showing the dishonour of a negotiable instrument is called
protest
...
The Notary Public issues a notice of protest to the party concerned
...
Amount of Compensation: The amount of compensation payable to the holder of a
negotiable instrument includes the principal amount interest due, expenses of
noting and protesting, etc
...
Compensation to Endorser: An endorser who paid the amount of the instrument is
entitled to get back the amount with interest at the rate of six percent per annum
from the date of payment until realisation thereof
...
3
...
The party
eligible for compensation may draw a
...
Such a bill
is called “re-draft”
...
Discharge of Negotiable Instrument
A negotiable instrument is said to be discharged when all rights of action under it
are completely extinguished and it ceases to be negotiable
...
HUNDIES
The term ‘hundi’ is derived from the Sanskrit word hund which means ‘to collect’
...
But
they are written in a vernacular language
...
But when there is no customary rule on a certain point, the provisions of the Negotiable
Instrument Act apply
...
(2) Darshni hundi which is payable at sight, and
(3) Muddati or Miadi hundi which is payable after a specific period
...
Shah-jog hundi
2
...
Dhani-jog hundi
4
...
Jawabee hundi
6
...
Shah-Jog Hundi: Shah means a respectable person
...
Such hundies are freely transferable from
person to person by mere delivery
...
Nam-Jog Hundi: Nam means name
...
It can be negotiated like a bill of exchange
...
Dhani-Jog Hundi: Dhani means a ‘Holder’
...
It can be negotiated by mere delivery like a bearer
instrument
...
Firman-Jog Hundi: Firman means order
...
It can be negotiated by endorsement and delivery like instruments payable to
order
...
Jawabee Hundi: Jawab means reply
...
When the person who should get the money receives it, sends
a reply to the sender
...
Jokhami Hundi: In this type of hundies money is payable by the buyer of goods who is
the drawee of the instrument only in the event of safe arrival of goods against which the
bill is drawn
...
140
QUESTIONS
1
...
What are the types of negotiable instruments?
3
...
Distinguish between (a) a bill and a promissory note and (b) a bill and a cheque
...
What is meant by crossing a cheque? Who can cross a cheque? What is the difference
between a general crossing and a special crossing?
6
...
7
...
What is the effect of the words ‘not negotiable’ written in the crossing of a crossed
cheque?
9
...
10
...
11
...
12
...
How is it effected and in what way does
it differ from an ordinary assignment?
13
...
14
...
Write notes on: (a) endorsement sans recourse (b) allonge (c) negotiation back
...
What is meant by acceptance of a bill of exchange? When must a bill be accepted? If
acceptance is refused, what steps should the holder take?
17
...
When is a negotiable instrument considered as dishonoured? what are the duties of a
holder upon such dishonour?
19
...
What is a hundi? What are its various kinds?
141
UNIT – VI
Unit Structure:
Lesson – 6
...
2 Classification of Companies
Lesson – 6
...
1 COMPANY – NATURE AND FEATURES
Introduction
The origin of Indian company law can be traced back to the year 1850, when the
first Indian companies Act providing for the registration of joint stock companies was
passed in the year 1850, on the lines of English Companies Act of 1844
...
The principle
of limited liability was first introduced in England by the Limited Liability Act of 1855
under which a company was entitled to obtain certificate of registration with limited
liability
...
The
concept of limited liability is not alien to India
...
The first
Comprehensive Act providing for the incorporation, regulation and winding up of
companies was passed in India in 1866, in the lines of English Companies Act, 1862
...
Thereafter, some minor amendments to the Act were carried
out in 1914, 1915, 1920, 1926, 1930 and 1932
...
This amending Act, for
the first time, introduced various provisions relating to the powers and limitations of
Managing Agents and devoted a separate chapter for Banking Companies
...
From 1936 to
1946, the Act was amended several times with minor changes arising out of specific needs
...
The growth of industrial activity during and after the second world war brought
about a spurt in the formation of companies in India
...
Need was felt for a thorough
revision of the existing Act and enactment of a Comprehensive Companies Act and
provide for the changed situation
...
The
government of India appointed on 25
...
1950, a committee of 12 members representing
various interests under the chairmanship of Mr
...
C
...
The Bhalha committee
reported in 1952, made a thorough enquiry into the development of joint stock companies
in the country, the abuses of the Managing agency system, the loopholes in the existing
legislation and the social and economic requirements of the fast changing society after the
independence
...
the Companies Act, 1956 came into force with effect from
April 1, 1956
...
It contains 658
sections, 12 schedules and numerous forms
...
This Act is based largely on the report of the company law committee, 1952
...
As regards Nagaland, it applies subject to
modifications, if any, notified by the Central Government
...
The Amendment Act of 1969 brought a farreaching change in that the managing agency system and the institution of Secretaries and
treasurers was abolished altogether with effect from April 3, 1970
...
Since then the Act has been further amended in 1977
...
The main objectives underlying the companies act, 1956 may be briefly stated as
under:
(1) To protect the interests of a large number of shareholders as there exists separation of
ownership from management in a joint stock company
...
(3) To help the growth of companies on healthy business lines
...
(5) To equip the Government with necessary powers to intervene directly in the affairs of
company in the public interest so that the interests of consumers
...
Machinery for the Administration of the Companies Act, 1956
The Central Government is charged with the overall responsibility for
administration and enforcement of the Companies Act
...
Till recently the task of looking after the Department of Company
Affairs was entrusted to the Ministry of Law, Justice and Company Affairs
...
THE COMPANY
Literally the word ‘Company’ means a group of business, charity, sports, research
etc
...
The dictionary meaning of the word,
“Company”, includes a number of persons united for performing or carrying on anything
jointly
...
However, when the
word is used in connection with ‘Company Law’ it has a somewhat different meaning
...
Quite often the word, “company” is used as part of
partnership firm name, but that does not make the firm a company in the sense in which
the word is used in Company Law
...
Such an association of persons may be registered or incorporated
or it may be unincorporated
...
After incorporation or registration, a company becomes a ‘body corporate’
...
One of the most important conceptions of jurisprudence is the
corporation, a legally recognized person
...
The type of corporation or company may be a corporation aggregate as
distinguished from a corporation sole
...
The rights and liabilities which attach to him in his corporate
capacity are entirely distinct from those which attach to him in his capacity of a natural
person
...
g
...
Company – Definition
Section 3(1)(i) of the Companies Act defines a company as, “a company formed
and registered under this Act or an existing company”
...
Section 2(7) of the Indian Companies Act, 1956 defines a body corporate to
include a company incorporated outside India, but does not include (a) a corporation sole
(b) a co-operative society registered under any law relating to co-operative societies and
(c) any other body corporate (not begin a company as defined in this Act) which the
Central Government may
...
145
In the words of Linsly, L
...
a company is defined as, “an association of many
persons who contribute money or money’s worth to a common stock and employ it in
some common trade or business and who share the profit or loss arising there from
...
The
persons who contribute it or to whom it belongs, are members
...
Shares are always transferable although the
right to transfer them is often more or less restricted”
...
Haney “a company is an artificial person created by law, having
separate entity, with a perpetual succession and a common seal”
...
A company which is created by law, will be dissolved only by
law
...
Incorporated Association: A company must necessarily be incorporated and registered
under the companies Act
...
2
...
It has an
independent corporate existence
...
It can make contracts
open a bank account, can sue and be sued by others: it can own property in its own name
...
The law has recognized that even if a person holds virtually all the shares, the
rights and obligations of the company shall be different from its members
...
The member’s
personal property cannot be held liable to pay the creditors of the company
...
Solomon & Co
...
, it was held that company is a different person altogether forms its
members
...
3
...
The life of a company is not related to the life of its members
...
The existence of a company is not
affected by death, insolvency, retirement or transfer of shares of members
...
Gower, L
...
B in
his book has given an interesting example
...
But the
company survived, not even a hydrogen bomb could have destroyed it
...
Limited Liability: It is the most important advantage of a corporate form of business
organization
...
Once he has paid the full amount on the shares held by him, he
cannot be called upon to bear the loss from his personal property
...
In case of partnership the liability of members is unlimited
...
A company, in fact, incurs unlimited liability
...
Transferability of Shares: The shares of a joint stock company are freely transferable
except in the case f a private company
...
A company cannot impose absolute restrictions on
the rights of members to transfer their shares
...
6
...
Although the shareholders have contributed to the
capital of the company, they do not become the part owners of its property
...
The property of the
company should be used for the company’s business and not for the personal benefit of
any shareholders
...
Ltd
...
Stanley, it was held that the
property of the company is not the property of the shareholders; it is the property of the
company
...
Guzdar V
...
John Deauin the courts held that “no member can claim himself to be the
owner of the company’s property during its existence or on its winding up
...
Capacity to Sue: A company being a juristic person, it can sue inn its own name and be
sued by others
...
Das Mal, an employee was not paid his salary for several
months
...
It was held that he will not succeed because the remedy lies against
the company and not against the directors or members of the company
...
Perpetual succession: A company is a legal person having perpetual succession
(Section 34)
...
2
...
No
member is bound to contribute anything more than the nominal value of the shares
held by him
...
Transferable shares: The shares in a company as per Section 82 of the Act, are a
movable property transferable in the manner provided by the Articles of the
company, shares of public company can be listed on stock exchanges which makes
the selling or purchasing of shares extremely easy
...
4
...
Thus by making large number of shareholders, the
company can grow to the size of a giant as in the case of, say Hindustan Lever Ltd
...
148
5
...
6
...
The directors or shareholders cannot be sued for the dues against a company
...
Flexibility and autonomy: A company has an autonomy and independence to form
its own policies
...
8
...
Even a member holding majority shares or a managing director of a
company is liable for criminal misappropriation of the funds of the company or its
property
...
Preference by creditors: Persons who want to deal; with the company can have full
information about its set-up, directors, shareholders, working results etc
...
10
...
Even banks and financial institutions prefer a company while
giving credit
...
The
famous Solomon case well established the existence of the ‘veil of corporate personality’
through which the identity of the members cannot be perceived
...
Thus, where the law
disregards the corporate entity and pays regard instead to the individual members behind
the legal façade
...
The decisions on
which the law will lift the corporate veil may be broadly study under the following heads
...
Under Judicial interpretation
B
...
Under Judicial Interpretation
(1) For determining the character/status of a company: When it is suspected that the
company is owned or controlled by enemies of the country
...
Ltd
...
Continental Tyre & Rubber Co
...
(2 ) For the protection of revenue: when a company is used as a means to evade tax, the
courts may disregard the corporate veil
...
(3) To prevent fraud/improper conduct: The court may also lift the corporate veil of a
company where it appears that the company was formed only for some fraudulent purpose
to defraud creditors or to avoid legal obligations [Tata Engg
...
Ltd
...
State of Bihaj]
...
The corporate entity of the
company will be disregarded and shareholders will be held liable for the acts of the
company
...
, Vs Birmingham Corporation]
...
[Connurs Bros
...
Coonors]
...
Under Statutory Provisions
The Companies Act, 1956 itself has provided for certain cases making the members or
directors personally liable
...
45]: If a company carries on business for more than 6
months after the number of members has been reduced below 7 in the case of a public
company and 2 in the case of private company, every person who was a member during
that time and knew of this fact
...
150
(2)Misdescription of the company: If any officer of a company or any other person acts on
its behalf and enters into a contract or signs a negotiable instrument without fully writing
the name of the company
...
[Sec
...
(3) Failure to refund application money [Sec
...
a
...
(4) Fraudulent trading [Sec
...
(5) Ultra vires acts: Directors of a company shall be personally liable for all such acts
which they have done on behalf of the company
...
Questions
1
...
Stat the history of company law in India
...
Define a ‘Company’
4
...
5
...
“A company is a legal person distinct from its members” – Explain
...
What is meant by (i) Corporation sole and (ii) Corporation aggregate
...
What is meant by limited liability?
9
...
Under what circumstance veil is pierced?
151
LESSON – 6
...
On the basis of incorporation, there are three types of
companies:
(i) Chartered Companies
(ii) Statutory Companies
(iii) Registered Companies
(1) Chartered Companies
A chartered company is one which is incorporated under a special charter granted
by the King or Queen of England
...
The powers and nature of
business of chartered company are defined by the charter which incorporated it
...
(2) Statutory Companies
These companies are incorporated by a special Act of Legislature (i
...
, by the Act
of Parliament or State Legislature)
...
The special enactment contains its constitution, powers and scope of its
activities
...
They
derive their powers from the Acts which constitute them, change in is structure or powers
is possible only by a legislative amendment
...
The main objective of such companies is
to serve public interest
...
A registered company comes
into existence when it is registered under the Companies Act and a certificate of
incorporation is issued by the Registrar of Companies
...
These are the
companies commonly found in India
...
152
These companies may be:
(a) Companies limited by shares;
(b) Companies limited by guarantee; or
(c) Unlimited companies
...
12(2) (a)]
...
On the other hand, in case of partly paid-up shares, his
liability will extend to the amount unpaid on shares held but him
...
(b) Companies limited by guarantee: Where the liability of the members of a company is
limited by the Memorandum to a fixed amount which the members undertake to contribute
to the assets of the company in case of its winding up, the company is called a company
limited by guarantee [Sec
...
Such companies are generally non – trading companies, and they are not formed
for the purpose of earning profits, rather they are formed for the promotion of art, science,
sports, culture etc
...
The
Articles of such a company must state the number of members with the company is to be
registered [ Sec
...
]
(c) Unlimited companies: A company not having any limit on the liability of its members
is termed as an unlimited company [Sec
...
The members are personally liable for
the debts of the company
...
The creditors of an unlimited company cannot sue the members directly
...
Such companies may or may not have share
capital
...
27(1)]
...
Sec
...
However, a special resolution must be passed to this effect,
...
32(3) ]
...
Besides the above, the companies may also be
classified as:
(a)
Associations not for profit having license under Section 25 of the Act; or
licensed companies;
(b)
Government companies;
(c)
Foreign Companies;
(d)
Holding and subsidiary companies
...
Licensed Companies
Popularly known as Section 25 companies, these companies are also registered under the
Companies Act like any other Company but before they are registered, a license may be
obtained from the Central Government
...
On registration, it enjoys certain exemptions and privileges as compared
to an ordinary limited company, such companies may exclude the words ‘limited’ or
‘private limited’ from their names
...
These companies are also exempted from complying with
the provisions of Sections 147
...
S
...
1578 dated 8 July 1961
...
It is worth nothing that a partnership firm may be a member in a licensed company
in its firm name and it is only on the dissolution of the firm that its membership shall cease
[Sec
...
2
...
Salomon & Co
...
3
...
591(1)]
...
If the instrument is not in English
language, a certified translation thereof
...
(3)
A list of directors and secretary of the Company giving name in full,
usual
residential address, nationality of origin, his business and particulars of other directorships
held by him
...
(5)
The full address of that office of the company in India which is to be deemed as its
principal place of business in India
...
593)
...
Section 594 provides that every foreign company, unless exempted by the
central Government, is required to file with Registrar every year three copies if its Balance
Sheet and profit and Loss A/c and other documents, required under the Act, Along with
these documents, it must also send to the Registrar three copies of a list in the prescribed
form of all the places of its business in India [Sec
...
Other obligations [Sec
...
It may be noted, however, that a
foreign company may issue a prospectus even if it has no place of business in India
(Sec
...
(ii)Conspicuously exhibit on the outside of every office or place of business, its name
and the country of incorporation in English and in the regional language;
(iii)Give the name of company and the country of incorporation in English language in
all business letters, bill heads and letter paper and in all notices and other official
publications of the company; and
(iv)State in every prospectus and in all official publications and exhibit outside every
office or place of business, whether the liability of the members is limited
...
597]; Any document which any foreign
company is required to deliver to the Registrar of Companies shall be delivered to the
Registrar having jurisdiction over New Delhi and also to the Registrar of the State in
which the principle place of business of the company is situated
...
Penalties: If any foreign company fails to comply with any of the foregoing provisions,
the company and every officer or agent of the company, who is in default, shall be
punishable with fine extending upto Rs
...
100 for every day during which the default
continues (Sec
...
Further, any such defiant foreign company shall not be entitled to
enforce any contract by way of a suit or set – off or counter claim though it will be liable
to be sued in respect of any contract it may have entered into (Sec
...
Application of other provisions of the Companies Act: The provisions of Section 124 to
145 relating to the registration of charges will apply to foreign companies in respect of
charges on property created in India, The provisions of Section 118 relating to the rights of
members and debenture – holders to have a copy of the ‘trust deed’ for securing any issue
of debentures of the company will also apply to foreign companies to the extent of
requiring them to keep at their principle place of business in India the books of account
with respect to moneys received and expended, sales and purchases made, and assets and
liabilities in relation to their business in India
...
600)
...
Accordingly:
(i)The provisions of Section 159 relating to the filing of Annual Returns with the
Registrar shall, subject to such modifications or adaptations as may be made
therein by the rules made under this Act, apply to a foreign company
[Sec
...
(ii)The provisions of Section 209A (inspection of books of account, etc
...
600 (3) (b) (ii) and (iii)] In
respect of foreign companies, in which fifty per cent or more of the paid – up share
capital (whether equity or preference or partly equity and partly preference) is held
by Indian citizens and/or companies incorporated in India, such other provisions of
the Act as may be notified by the Central Government with regard to business
carried on by them in India, will become applicable to such foreign companies as
they apply to a company incorporated in India
...
591 (2)]
...
4
...
The special provisions of the Companies Act relating to Government companies
are as follows:
(1) Audit: (a) The auditor of a Government company shall be appointed or reappointed by
the Central Government on the advice of the comptroller and Auditor General of India,
provided that the auditor so appointed or reappointed does not hold appointment as the
auditor in more than twenty companies, of which not more than ten could be
companies with paid – up share capital of Rs
...
In the case of an audit
firm so appointed the ceiling of twenty companies shall be per partner of the firm who
is not in full – time employment elsewhere
...
He shall also have the power to conduct a supplementary test audit of the
company’s accounts by persons appointed by him; and (b) The auditor is required to
submit a copy of his audit report to the comptroller and Auditor General, who shall
have the right to comment upon the report
...
619)
...
(2) Annual report: (a) Where the Central Government is a member of a Government
company; the Central Government shall prepare an annual report on the working and
affairs of the company within three months of its annual general meeting before which the
audit report is placed
...
158
(b)Where in addition to the Central Government, any State Government is also a
member of Government company, that State Government shall place a copy of the annual
report (prepared by Central Government) together with a copy of the audit report and the
comments (referred to earlier) before the House or both Houses of the State Legislature
...
(3) Application of the Companies Act: A Government company is to be registered under
the Companies Act
...
The Central
Government may, however, by notification in the Official Gazette, direct that any of the
provisions of this Act shall not apply to any Government company or shall apply only with
such exceptions, modifications shall be effective to the extent to which it is approved by
Parliament (Sec
...
Subject to such notification, such companies are governed by the
Companies Act like any other limited company without any discrimination
...
Similarly, Section 255, 256and 257 pertaining to appointment and retirement of
directors, and Section 370 relating to making of loans, etc
...
In a bid to streamline the functioning of Government companies and to cut down
delays, the Central Government has again issued five notifications (published in the
Gazette of India, dated 16-7-85) granting exemption to Government companies from the
application of the following Sections of the Companies Act:
(i)
Section 165,187D, 294, 294AA(2) and (3)
...
159
A Government company, no doubt, has certain special features but it should not be
placed on the same footing as a State or Government, it basically remains a company in the
ordinary sense, having a legal entity of its own, separate from that of its shareholders
whoever they may be
...
In no case a Government company is identified with the State and its employees do
not become Government servants, holders of civil posts under the Union or State
Governments
...
Investment Companies
An investment company is a company, the main business of which consists in
acquiring, holding and dealing in shares and securities
...
With regard to statutory definition, the provision to Sec
...
Section 2(10A) of the
insurance Act 1938 also defines an investment company similarly
...
As a general rule
it can be said that an investment company should acquire shares and securities etc
...
6
...
However, the Companies (Acceptance of Deposits)
Rules 1975 define a financial company
...
In other words, financial institution means any non-banking institution which carries on as
its business or part of its business any of the following:
(i) Financing business whether by way of making loans or advances or otherwise
...
(iii) The letting of goods on hire under a hire-purchase agreement
...
(v) Managing or conducting or
supervising or in any other capacity, of chits or kuries
...
Public Companies and Private Companies
Companies limited by shares or guarantee may be divided into two categories,
depending upon the interest of the general public in the companies; (i) Public Companies
and (ii) Private Companies
...
3(1)(iii) of the Companies Act, a private company one which by
its Articles of Association
(a) restricts the right to transfer its shares
...
It is further provided that where two or more persons hold one or
more shares in a company jointly; they shall for the purpose of this definition be
treated as a single member
...
Ltd
...
Private
companies may again be (i) independent private companies (ii) private companies
which are subsidiaries of Public companies
...
3(1) (iv) a Public company means a company which is not a private
company
...
As the public is substantially interested in
the affairs of such companies they are also subject to a somewhat strict legal control
...
The minimum number of members to form a public company is seven
...
2
...
3
...
A private company
must have two directors
...
For taking up directorship of a public company a director has to file a consent to
act as such to the Registrar
...
5
...
6
...
7
...
8
...
No such restriction applies to a private company
...
Exemptions available to all Private Companies
1
...
2
...
3
...
4
...
There is no such provision in case of private companies
...
A private company may issue share capital of such kinds, in such forms, and with
such voting rights, as it may think fit
...
It can commence business immediately on incorporation
...
A private company need not keep and index of members
...
It need not hold statutory meeting or file statutory report with the Registrar
...
If the members personally present do not exceed seven, even one member can
demand poll, and if the members personally present exceed seven two members can
demand poll
...
Managerial remuneration paid by a private company can exceed 11% of net profits
of the company
...
Two directors are enough for a private company
12
...
a
...
b
...
c
...
2
...
e
...
An independent private company may give financial assistance for purchase of or
subscription for shares in the company itself (Sec
...
2
...
3
...
85), new issues of share capital
(Sec
...
87), issues of shares with disproportionately excessive
4
...
89) do not apply to an independent private company
...
Company to register a transfer of its shares (Sec
...
Provisions relating to
general meeting are not applicable to an independent private company
...
An independent private company is not governed by the restrictions imposed by
Sec
...
7
...
163
8
...
9
...
10
...
372, it can subscribe for shares or debentures of other companies in the
same group
...
The Company Law Board cannot prevent the change in the Board of directors even
if it is prejudicial to the interest of the Company (Sec
...
12
...
b) The directors need not retire by rotation
...
d) The provision requiring the giving of fourteen days notice by new
candidates seeking election as directors is not applicable
...
f) The directors need not hold the qualification shares
...
i) An interested director may participate in Board’s proceedings and vote
...
Conversion by default (Sec
...
The
Company Law Board may relieve the company, if it is of opinion that the non-compliance
was accidental or due to inadvertence or other sufficient cause
...
Conversion by operation of law: A private becomes a public company:
a
...
164
b
...
10 crores for three consecutive
financial years
...
Where it holds not less than 25 per cent of the paid-up share capital of a public
company, having a share capital
...
Where it invites, accepts or renews deposits from the public, Acceptance of deposits by
a private company from its members, directors, or their relatives is excluded from the
purview of this provision
...
43-A, may continue to have the
essential requirements (viz
...
A private company which becomes a public company by virtue of Sec
...
3
...
44): A private company may deliberately choose to become
a public company
...
Conversion of public company into a private company
A public company may be converted into a private company without resorting to
winding up of the company
...
According to Sec
...
The company must amend its articles by a special
resolution so as to include therein the necessary restrictions and file with the Registrar
within thirty days
...
According to Sec 11, no company, association or partnership consisting of
more than 20 persons (10 in the case of banking business) can be formed to carry on any
business for profit unless it is registered under the Companies Act, 1956
...
11
does not apply to foreign Companies, members of chit fund, charitable associations etc
...
This Section does
not apply to a HUF even though the number of adult members may be more than twenty
...
Illegal Association – Consequences:
(i)
It cannot enter into any contract
...
(iii)
The law does not recognize such existence
...
1000
...
(vi)
It cannot be wound up under the provisions of the Companies Act, 1956
Holding company and Subsidiary company
On the basis of control, companies may be classified into:
(i) Holding companies, and
(ii) Subsidiary companies
Where one company controls the management of another company the
former is called the ‘Holding Company’ and the latter over which the control is exercised
is termed as a ‘Subsidiary Company’
...
4(4)]
...
4(1)]
...
Thus a subsidiary company is one whose composition of Board of Directors is controlled
by another company by another company or whose more than half of the nominal value of
the equity capital is held by another company
...
Explain the classification of Companies
...
Define a ‘private company’ and ‘public company’
...
Distinguish between a private company and public company
...
Define a company limited by guarantee
...
How can private company be converted into a public company?
6
...
What is an illegal association?
8
...
Enumerate the exemptions available to an independent private company?
10
...
What is a foreign company? How far is it governed by the Companies Act 1956?
12
...
Explain the special provisions of the Companies
Act relating to Government companies
...
3 COMPANY INCORPORATION
A Company is said to have been formed when it has been registered under the
Companies Act
...
The
various stages in the formation of a company are:
(i)
Promotion
(ii)
Incorporation or Registration
(iii)
Capital subscription
(iv)
Commencement of Business
While a private company can commence company business as soon as it is
registered or incorporated, a public company cannot commence its business unless it has
obtained a Certificate of Commencement of Business
...
A promoter may be an individual, a firm or
association of persons or even a company
...
According to C
...
J in Twycorss vs Grant, a promoter is one who undertakes to form a company
with reference to a given project and to set it going project and to set it going, and who
takes the necessary steps to accomplish that purpose
...
For instance, under the
companies Act, persons acting in a professional capacity to assist persons engaged in
procuring the / formation of a company (solicitors, values, chartered Accountants) are not
liable as promoters under the companies Act
...
The promoter after conceiving an idea of starting a business and having carried out
a detailed investigation as to the possibility and profitability of formation of a company
will do the following functions:
168
(i)
Instructs and directs the solicitors to draft the Memorandum, Articles and
other documents necessary for the registration of the company
...
(iv) decides about the name, location of its registered office, the bankers,
auditors, legal advisers, brokers etc and arranges for minimum subscription to be
raised (in case of public company) and obtains the certificate of commencement
of business
...
However, the Companies Act, impose on him certain obligations which are fiduciary
in nature
...
However, it
must be noted that although the fiduciary relation of the promoter begins only when the
company is actually formed, the fiduciary obligation of the promoter begins as soon as he
sets out to act as a promoter of that company
...
Duties of Promoter
1
...
If he has made any secret
profit, it is his duty to disclose all the money secretly obtained by way of profit
...
A promoter is not forbidden to make profit but to make secret profit
...
Barnes, the ‘Old Olympia Co’, was in difficulties and the debentures were worth very
little
...
The Syndicate first
bought the debentures of the old Olympia Company at a discount
...
Out of this money provided by themselves the debentures
were repaid in full and a profit of 20,000 made thereon
...
The profit of 40,000 was revealed in the prospectus
169
but not the profit of 20,000
...
2
...
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
...
The material fact may be disclosed
to an independent and competent board of director or to the whole body of shareholders
...
To make good profits obtained as trustee: The promoter must make good to the
company what he has obtained as a trustee
...
It is the duty of the promoter to make good to the company what he
has obtained as trustee and not what he may get at any time
...
Must not make an unfair use of his position: The promoter must make a fair and
reasonable use of his power and position
...
5
...
He must disclose all the private arrangements
resulting in profit by the formation of the company
...
Liability to account for the profits: The promoter stands in a fiduciary position to the
company
...
When he does not
make full disclosure to the company, the company may either
(a)
Rescind the contract and recover the purchase price where he sold his own
property to the company, or
(b)
Sue the promoter for the amount of profit and recover the same with
interest, or
170
(c)
Claim damages for breach of fiduciary duties
...
2
...
Thus, it is clear that his
liability does not extend to subsequent allottees
...
The promoter may also be punished
with fine up to Rs
...
3
...
The death of a promoter does not relieve him from liabilities
...
Where there are more than one promoter, they are jointly and severally liable in any
action against one of them
...
Liability in course of winding up: In the course of winding up of the company, on an
application made by the official liquidator, the court may make a promoter liable for
misfeasance of breach of trust
...
5 Curbs on promoters: Where a promoter is convicted of any offence in connection with
the promotion of the company, or if in the course of winding up of the company, it is
found that he is guilty of misfeasance or breach of trust, the court may debar him from
being a director or forbid him from taking part in the promotion, formation or management
of a company for a period not exceeding five years without the sanction of the court
...
But it is interesting to note that the promoters cannot claim any
remuneration form the company as a matter of right
...
In Re
...
it has been held that, in the absence of an agreement
...
In the absence of any agreement with the company after its incorporation, a
promoter cannot sue the company for the recovery of his remuneration and preliminary
expenses
...
This is simply an authority
vested in the directors of the company
...
The remuneration may be paid in any of the following ways:
(i) A commission on the purchase price of the business or property taken over by the
company through him
...
(iii) He may be given fully or partly paid shares in consideration of his services
rendered
...
(v) He may sell his own property to the company at a higher price and make profits
...
(vi) He may be given an option to buy the shares of the company at par when their
market price is higher
...
Whatever be the nature of remuneration, it must be disclosed in the prospectus if it
is paid within the preceding two years from the date of the prospectus
...
Pre-Incorporation Contracts
Contracts which are made by promoters with parties to acquire some property or
right for and on behalf of a company yet to be formed are termed as ‘pre-incorporation’ or
‘preliminary’ contracts
...
The company has no legal existence until
it is incorporated
...
Effects of Pre-incorporation Contracts
1
...
This is so even if the company has taken some benefit from
the contract
...
English and Colonial Produce Co
...
a solicitor prepared the
Memorandum and Articles of Association and paid the necessary registration fees on the
instructions of persons who later became directors
...
It was held, that the company was not liable to pay the
solicitor’s costs though it had taken the benefit of his work
...
Cannot ratify the agreement: A company when registered cannot ratify or adopt the
pre-incorporation agreements, because a contract can be ratified only when it is made by
an agent for a principal who is in existence and is competent to contract at the time when
the contract is made
...
However, after incorporation a company may enter into a new contract to carry
into effect the contract made by the promoters before incorporation
3
...
In Kelner V
...
Wine supplied under the contract was
used by the company which had ratified the agreement after incorporation
...
It was held that B was personally liable and
no ratification could release him from his liability
...
Company cannot sue: The Company is also not entitled to enforce the preliminary
agreements
...
Pauline Colliery Syndicate, it was held
that a company cannot benefit from a contract purporting to have been made on its behalf
before the company came into existence
...
173
5
...
Since contracts
prior to incorporation were void and also could not be ratified, people hesitated to either
supply any goods or work for the cause of incorporation
...
The Specific Relief Act, 1963 came as a big sigh of
relief to the promoters of a company who have, before its incorporation, entered into
contracts for the purposes of the company and such contracts are warranted by terms of
incorporation
...
INCORPORATION OF COMPANY
Incorporation of a company is the second stage of the company formation
...
The promoters will choose a few appropriate
names and apply to the ROC to ascertain as to which of the names is available for
adoption
...
They will embody their decisions on these matters in a
document called the Memorandum of Association
...
The formalities to be gone through in registering a new company under the Act are
enumerated below:
1
...
A fee of
Rs
...
174
2
...
and Articles of Association and for having them stamped according to the
Indian Stamp Act
...
The Memorandum and Articles are to be signed by at least 7 or 2 subscribers
depending upon the nature of the company and each subscriber should add his address,
description and occupation and the number of shares subscribed for; the documents should
also be dated
...
The promoters of the company should make arrangements for filing the
following documents with the Registrar of Companies and paying the necessary fees for
the incorporation of the company
...
(d) Name availability letter received from the Registrar
(e) In case the name of first directors are given in the Articles or in the Prospectus,
then the written consent of the directors to act as such in Form No
...
Such
persons shall have to give a written undertaking to take up and pay for their
qualification shares
...
The declaration may
be signed by any of the following:
(i) An advocate of the Supreme Court or of a High Court
(ii) An attorney or pleader entitled tb appear before a High Court
(iii) A chartered Accountant in whole time practice in India
(iv) A company secretary in whole time practice in India
(v) A person named in the Articles as a director, managing director, manager or
Secretary of the Company
...
(g) The prescribed fee should be paid along with application
...
The fee can be
175
paid to the Registrar of Companies in cash or by postal order or by money order or
by demand draft or by cheque
...
On receiving the
certificate, the company becomes a body corporate with perpetual succession and a
common seal
...
18 within 30 days after the date of incorporation
...
with perpetual succession and a common seal,
from the date on the certificate, even if that is not in fact the date when it was issued
...
If there has been any procedural
irritation in the incorporation of the company, it is immaterial and will not invalidate the
registration of the Company
...
Sec
...
The
company shall be a body corporate by the name contained in the Memorandum, capable
forthwith of exercising all the functions of an incorporated company
...
176
INVITING SUBSCRIPTIONS
According to Sec
...
The amount so stated in the prospectus shall be reckoned exclusively of any
amount payable otherwise than in money and it is known as minimum subscription
...
According to SEBI’s Guidelines on disclosure and investors’
protection, if the company fails to receive 90% of issued amount from public subscription
plus accepted devolvement from underwriters within 120 days from the date of opening of
the issue, the company shall refund the amount of subscription
...
If the company has a share capital and has issued a prospectus inviting the public to
subscribe to
its
shares
or debentures,
It
cannot
commence
business
until:
a
...
Every director has paid in cash the application and allotment money on the
shares taken by him
...
No money is liable to be repaid to the applicants for failure to apply or obtain
permission for the shares or debentures to be dealt in on any recognised stock
exchange
...
A statutory declaration duly verified by one of the directors or the secretary or
where the company has not appointed a secretary, a secretary engaged in whole
177
time practice in the prescribed form that the above conditions have been
complied with has been filed with the Registrar [Section 149 (1)]
...
Statement in lieu of prospectus has been filed with the Registrar
...
Every director has paid in cash the application and allotment money on the shares
taken by him
...
A statutory declaration duly verified by one of the directors or the secretary or
where the company has not appointed a secretary, a secretary in whole time
practice in the prescribed form that the above conditions have been complied with
has been filed with the Registrar (Section 149(2))
...
The certificate is a conclusive evidence that
the company is so entitled (Section 149(3))
...
It had added two new Sub-Sections to Section
149
...
If a company (formed after the commencement of the Amendment Act 1965)
having a share capital, whether or not it has issued a prospectus inviting the public
to subscribe for Its shares, wants to start a business included in the ‘other objects’
it shall have to obtain the authority of a special resolution of its shareholders
...
If an existing company (i
...
a company in existence before the commencement of
the Amendment Act, 1965) wants to commence any business connected with the
objects stated in its memorandum, it shall have to obtain the authority of a special
resolution
...
In both the above cases a declaration has to be filed by one director or the
secretary or, where the company has not appointed a secretary, a secretary in
whole time practice, with the Registrar that the requirement as to resolution has
been complied with
...
Where in cases (1) and (2) referred above, a special resolution has not been passed
but the votes cast in favour of the resolution exceed the votes cast against it, the
Central Government may, on an application by the board of directors allow the
company to commence such business
...
5
...
500/- for every day during which the contravention continues
...
Where for any reason, the company cannot obtain the certificate of commencement
and is not entitled to commence its business, the contract entered into after incorporation
cannot be enforced against the directors or the company
...
Where a company commences business or exercises borrowing powers in
contravention of Section 149, every person who is responsible for contravention Is liable
to a fine upto Rs
...
This is in
addition to any other liability (Section 149 (6))
...
179
Questions
1
...
“A promoter stands in a fiduciary relation towards the company”— Explain
...
State the duties and liabilities of a promoter
...
How is a company formed under the Companies Act, 1956?
5
...
6
...
7
...
Write notes on:
(1) certificate of incorporation
(2) certificate of commencement of business
9
...
10
...
11
...
1 Memorandum of Association
Lesson – 7
...
3 Prospectus
LESSON – 7
...
Every company must have a memorandum of
association
...
The
memorandum may be described as the company’s charter, defining and limiting its powers
and thereby helping to govern its relations with the outside world
...
It would appear reasonable that members, debenture holders, creditors having invested
in or entrusted to the company their hard earned capital, have the right to be assured of the
activities to be pursued and be able to rely on that assurance
...
Lord Cairns in Ashbury
Carriage Company Vs
...
181
Form of Memorandum
According to Section 14 of the Companies Act, the memorandum of association
should be in any one of the forms specified in Table B,C,D and E of schedule I to the
Companies Act, 1956, as may be applicable to it, or in a form as near thereto as the
circumstances permit
...
, Table B for companies limited by shares, Table C for companies
limited by guarantee and not changing a share capital, and so forth
...
The memorandum of Association must be (a) printed, (b) divided into paragraphs,
numbered consecutively, and (c) signed by each subscriber who shall add his address,
description and occupation in the presence of at least one witness who shall attest the
signature and likewise add his address, description and occupation (Sec
...
Contents of Memorandum
The memorandum of association of every company shall contain the following
clauses:
1
...
Situation clause
3
...
Liability clause
5
...
Association or Subscription clause
Each of these clauses is analysed below
...
Name clause: Under this clause the corporate name- of the company is mentioned
...
There is, however, one exception to this rule as provided in
Section 25 of the Act, which permits “charitable companies” formed to promote
182
commerce, art, science, religion, etc
...
In the case of unlimited companies, only the name is to be given
...
(b) As per Section 20 the name chosen must not be undesirable, in the opinion of
the Central Government
...
Ordinarily
a name is considered undesirable and therefore not allowed if it is either:
(i) too identical or similar to the name of another existing company or firm
(whether registered or unregistered) so as to lead to confusion or
(ii) misleading
...
Buttercup Margarine Co
...
The Central Government may also direct a
company within 12 months of its registration
...
The company must act according
to the direction within 3 months of the direction
...
Situation clause: Every company shall have a registered office from the day on which it
begins to carry on business, or as from thirtieth day after the date of its incorporation
whichever is earlier
...
Notice of the situation of the registered office and every change shall be given to
the Registrar within thirty days after the date of incorporation of the company or after the
date of change
...
50
for every day during which the default continues
...
Objects clause: Of all the clauses in the memorandum the object clause is the most
important
...
Great care should be taken in drawing up this clause, as the company will not be
allowed to do any business which is not specifically mentioned here
...
Although it Is
best to state all powers in addition to the objects clause, yet If the company does anything
which is incidental to and consequential upon the powers specified, such an act will not be
illegal
...
According to the amendment to the Companies Act made in 1965, the objects
clause of a company formed after the commencement of the Amendment Act must
contain:
(i) Main Objects of the company and objects incidental or ancillary to the
attainment of these main objects;
(ii) Other objects of the company not included above
...
A company which has a main object together
with a number of subsidiary objects cannot continue to pursue the subsidiary object after
the main object has come
...
Liability clause: This clause has to state the nature of liability that members incur
...
In the case of a company limited by guarantee, the
members are liable to the amount undertaken to be contributed by them to the assets of the
company in the event of its being wound up
...
Any alteration in the memorandum compelling a member to take up more
shares, or which increases his liability would be null and void
...
5
...
The capital of a company may be divided into shares of two different classes,
namely preference and equity shares
...
A company u/s 95 of the Act, may alter the conditions of its memorandum with
respect to its share capital by ordinary resolution if authorised by the articles
...
100 a company limited by shares or a company limited by guarantee and having a
share capital may reduce its share capital by special resolution if authorised by the Articles
and confirmed by the Court
...
Subscription clause: Subscribers to the Memorandum express their assent to form a
company and signify their agreement to associate for that purpose
...
Under this clause we have the declaration of association which Is made by the
signatories of the memorandum under their signature duly attested by witnesses, that they
desire to be formed into a company and that they agree to the purchase of qualification
shares
...
The subscribers usually act as first directors of the
company
...
185
ALTERATION OF MEMORANDUM
Section 16 provides that the company cannot alter the conditions contained in
memorandum except in the cases and in the mixes and to the extent for which express
provision has been made in the Act
...
But no such approval is
required in cases of addition or deletion of the word ‘Private’ consequent on the
conversion of a public company into a private company and vice versa
...
The change of name must be communicated to the Registrar of companies within
30 days of the change
...
23(1)]
...
23(2)]
...
name
shall
not
affect any rights or obligations of the company or render defective any legal proceedings
by or against it
...
(b) Change of registered office from one town to another town in the same state
...
186
In case (a), notice is to be given within thirty days after the date
of the change to the Registrar who shall record the same [Sec
...
In case (b), special resolution is required to be passed at a general meeting of the
shareholders and a copy of it is to be filed with the Registrar within thirty days
...
Change of Registered Office from one State to another [Sec
...
17(1)
...
(Procedure is similar to alteration of objects)
...
17(3))
...
All the records of the company shall then be transferred to the Registrar of the
state in which the registered office of the company is transferred [Sec
...
Alteration of Objects clause
Section 17 empowers a company by a special resolution duly confirmed by the
Company Law Board (CLB) to alter the objects (or to change the places of its registered
office from one state to another) if the alteration is required to enable the company
1
...
2
...
3
...
4
...
5
...
to restrict or abandon any of the objects specified in the memorandum
...
to amalgamate with any other company or body of persons
...
Also a petition is to be
filed to the CLB for confirmation of the special resolution
...
By the alteration, including the Registrar of companies and the State
Government, and having heard them, may confirm the alteration either wholly or in part
...
The Registrar will register the documents and issue, within one month, a
certificate which will be conclusive evidence that everything required has been done
(Section 18)
...
38 of the Act, a company limited by shares or guarantee cannot
change its memorandum as to impose any additional liability on the members or to compel
them to buy additional shares of the company unless all the members agree in writing to
such change either before or after the change
...
If the Articles do not
authorize such alteration, the Articles must first be altered to that effect by passing a
special resolution
...
Consolidation is the process of combining of specified number of shares
into one new share having a nominal value equal to the aggregate of the shares so
consolidated
...
, subdivision of one
Rs
...
10
...
Such stock can be
reconverted into shares as and when found necessary V
...
188
Alteration of share capital can be effected by the company by passing an ordinary
or special
...
If it is
a special resolution, a copy of the resolution along with the explanatory statement must be
filed within 30 days of the passing of the resolution
...
Thereupon,
the Registrar records the notice and makes necessary changes in the Memorandum and
Articles of Association
...
Thus, ultra vires means ‘doing an act beyond the powers
...
These
activities
can
be
categorised
as
follows:
(i) an act ultra-vires the directors
(ii) an act ultra-vires the Articles of Association
(iii) an act ultra-vires the Memorandum of Association
(iv) an act ultra-vires the Companies Act
If an act is ultra vires the directors, it is not altogether void, because this act can be
ratified by the general body of shareholders, and on such ratification the act becomes
binding on the company
...
In respect of Memorandum of Association when the company does
any act which is contrary to the objects clause of memorandum it shall be termed as ultra
vires the memorandum and it shall be wholly void or inoperative
...
The doctrine of ultra-vires was first applied in the case of Ashbury
Railway Carriage Co
...
The court held that the whole body of shareholders cannot
ratify an ultra vires transaction
...
It cannot become intra vires by reasons of estoppel, lapse of time, ratification
189
etc
...
)
Consequences or effects of ultra vires transactions
1
...
If directors make an ultra
vires payment, then they can be compelled to make good the funds used
...
Act null and void: A contract which is ultra vires the company is wholly void ab initio
and of no legal effect
...
3
...
4
...
e
...
Hence, whenever a company goes beyond the scope of the objects clause,
any of its members can get an injunction from the court to restrain the company from
undertaking the ultra vires act
...
Ultra vires torts: A company shall not be liable for torts committed outside its objects
...
190
Questions
1
...
Explain the various clauses that are contained in memorandum of association
...
Explain the necessity of setting out clearly the objects in the
memorandum
...
State the procedure for alteration of memorandum of association
...
Enumerate the procedure for changing the situation of the
registered office of a company from state to state
...
Define the doctrine of ultra vires
...
How can a company changes its name?
8
...
A memorandum of association is a fundamental document of a
company - Why?
10
...
191
LESSON-7
...
The articles of association of a company and its by-laws are regulations which govern the
management of its internal affairs and the conduct of is business
...
And the mode and form in which the business of the
company is to be carried out
...
REGTRATION OF ARTICLES OF ASSOCIATION
According to Sec
...
If however, it does not
register its own articles then the articles given in Table A of schedule I becomes
applicable
...
The articles of a company must be:
(i) printed (ii) divided into paragraphs numbered consecutively (iii) signed by subscribers
to the memorandum in the presence of at least one witness who shall attest the signatures
...
Contents of Articles
The articles of a company usually deal with the following matters:
(1) The business of the company, the amount of capital issued and the classes of
shares into which the capital is divided; the increase and reduction of share
capital
...
(3) The execution or adoption of a preliminary agreement
...
(5) Transfer and transmission of shares
(6) Company’s lien on shares
(7) Exercise of borrowing power
(8) General meetings, notices, quorum, proxy, poll, voting, minutes
...
(10) Dividends,
(11) Accounts and audit
(12) Keeping of books both statutory and others
...
giving the company power to adopt contracts entered into by promoters
...
setting out how capital is to be divided into shares of two classes
...
giving the directors power to appoint one or more of their body to the office of
managing director and whole time director
...
Alteration of Articles
Subject to the provisions of the Act and to the conditions contained in its
memorandum, a company may, by special resolution, alter its articles
...
A copy of the alteration must be filed with the Registrar
within 30 days of passing the said resolution
...
However, the company cannot in any
manner deprive itself of the statutory power to alter its own Articles
...
This flexibility of the company to
alter its articles is however, subject to certain limitations
...
The alteration must not be inconsistent with the provisions of the Companies Act or
any other statute
...
The alteration must not be inconsistent with the conditions contained in the
memorandum
...
The alteration must not deprive any person of his rights under a contract
...
The alteration must not contain anything which is illegal or against public policy
...
The alteration must be bonafide for the benefit of the company as a whole
...
The Memorandum is the charter of the company which defines its objects and
powers
...
2
...
If there is any conflict between the Memorandum and
Articles, the memorandum shall prevail
...
Memorandum of Association should not contain any provisions contrary to the
Companies Act
...
4
...
But a public Company limited by
shares may or may not have its own Articles
...
5
...
6
...
But Articles are not required to
before
be filed for
the purpose of registration
...
7
...
But any act which is
ultra
vires the Memorandum can be ratified by shareholders by passing a special resolution
...
The Memorandum cannot be altered easily
...
In some cases the
194
must
approval of the Company Law Board is required
...
Articles can be altered by passing a special resolution and the approval of the
Company Law Board is not necessary
...
The Memorandum and Articles of Association constitute a binding contract between the
company and its each member
...
The effect and Implication of this Section may be better understood by
considering how far they- do bind: (1) the members to the company; (2) the company to
the e members; (3) the members inter se; and (4) the company to the outsiders
...
Members to the company: Every member of the company is bound to observe the
provisions of the Memorandum and the Articles as if each member had signed the same
(Hanuman Prasad Gta Vs
...
A company can sue its members for the enforcement
of these provisions and- the members may also be restrained by court from committing the
breach of provisions of these documents
...
Steel Brothers & Co
...
, the Articles of the company
provided that the shares of any member who became bankrupt should be sold to some
other persons at a price to be fixed by directors
...
In Boreland Banking Company Vs
...
One of the shareholders owing money to the company borrowed money from a bank on
195
the security of the shares
...
It
was held that the shares deposited with the bank were bound by articles and the company
will have priority because of this provision in the articles of the company
...
Shareholders cannot among themselves enter into an agreement which is contrary
to or inconsistent with the Articles of Association of the company
...
Company to the members: The Company is also bound to Its members by the
provisions of the Articles of Association
...
The company is bound to each member in respect of their
rights as members
...
In Hohnson Vs
...
In Wood Vs
...
Instead of paying the dividend in cash, a
resolution was passed whereby the dividend was to be paid by issue of debenture bonds
...
The court
granted an injunction restraining the company from acting on the resolution
...
3
...
The Memorandum and Articles of Association do not constitute
express agreement among the members of the company, but each member Is bound by
these documents on the basis of the implied contract
...
But such rights can be enforced only through the company
...
Saffrey observed, ‘It is quite clear that the articles constitute a contract between each
member and the company and there is no contract in clear terms between the individual
members of the company, but the Articles regulate their rights inter se
...
4
...
An outsider cannot take advantage of the provisions of the
Articles because he is not a party to the contract and, therefore, he cannot sue the
company
...
In Browne Vs
...
But he was removed
earlier
...
Similarly, where the Articles provided for remuneration to be paid to promoters, it was
held that the promoters had no right of action against the company
...
DOCTRINE OF CONSTRUCTWE NOTICE
The Memorandum and Articles of Association of every company are required to be
registered with the Registrar of Companies
...
These documents are available for public Inspection
either in the office of the company or in the office of the Registrar of Companies on
payment of one rupee for each inspection
...
This is known as ‘Doctrine of Constructive
Notice’
...
Every person dealing with the company must inspect these documents and make
sure that his contract is in conformity with their provisions
...
A party, subsequently,
cannot plead ignorance of the contents of these documents and seek exemption from being
liable
...
Ram MurthL the Articles provided that all deeds, etc
...
A deed
signed by the working director and secretary was held to be inoperative and the party was
not allowed to seek exemption on the plea that he had not read the Articles
...
East Holyford Mining Co
...
Accordingly, if a person deals with a company and the transaction turns out to be
beyond the powers of the company or its officers as contained in these documents, he
cannot enforce it against the company and he shall be personally liable to bear the
consequences of such dealings
...
This rule is
known as the “doctrine of indoor management” which is explained below:
DOCTRINE OF INDOOR MANAGEMENT
Memorandum and Articles of Association, when registered with the Registrar of
Companies, assume the character of ‘public documents’ under Section 6l0 of the Act and
every person dealing with the company is deemed to be covered by the doctrine of
constructive notice
...
The doctrine of indoor management imposes an important limitation on the
doctrine of constructive notice
...
He is not required to examine whether the
internal proceedings have been complied with or not
...
Thus, every person
198
dealing with the company is entitled to assume that everything has been done regularly so
far as the internal proceedings of the company are concerned
...
This doctrine seeks to protect the outsiders against the company
...
He is entitled to assume
that what has been done has been done regularly and can hold the company liable even if
internal formalities are found not to have been complied with, the contract shall be binding
on the company and it shall be liable to outsiders
...
Turquand
...
They had the power to issue such bonds but
only subject to the resolution passed at a general meeting of the company
...
It was held that T could recover the amount of the bond
from the company on the ground that he was entitled to assume that the resolution had
been passed
...
The doctrine of indoor management is of great practical value
...
First, no business could possibly be carried on if a
person before dealing with the company was required to find out whether all the internal
rules and regulations have been duly complied with
...
In Premier Industrial Bank Ltd Vs
...
Co
...
, the doctrine of indoor
management was summed up as under: “If the directors have power and authority to bind
the company, but certain preliminaries are required to be gone through on the part of the
company before that power can be duly exercised, then the person contracting with the
directors is not bound to see that all these preliminaries have been observed
...
199
Exceptions to the Doctrine
The doctrine of indoor management is subject to the following limitations:
1
...
Sangli Bank Ltd
...
Patent Ivory
Manufacturing Co
...
And for any amount exceeding this sum, the sanction of the
shareholders in the general meeting was required
...
It was held
that the company was liable for 1,000 only
...
Negligence on the part of the outsider: Where the circumstances are of a suspicious
nature as to invite further inquiry and the person has failed to enquire into it, he shall not
be entitled to protection under this rule
...
Similarly, where the transaction is of an unusual nature, the outsider must make
detailed inquiries
...
Dinshaw & Co
...
The
plaintiff should have seen the power of attorney executed in favour of the accountant by
the company
...
Forgery: The protection under this doctrine shall not be available where the outsiders
have relied upon a forged document, because forgery is a nullity
...
In Ruben Vs
...
, the secretary of the
company issued a share certificate by forging the signature of two directors under the seal
of the company
...
Ruben
claimed damages relying on the Turquand rule
...
4
...
200
The Turquand’s rule is based on the principle of estopped and, therefore, it cannot be
applied in favour of a person who did not in fact consult the Memorandum and Articles of
the company and consequently did not act on relying on these documents
...
Vs
...
, T was a
director in the investment company
...
The Articles
of the company did contain a clause that the directors could delegate their powers to one of
them
...
Later it was found that the directors
of the company did not delegate their power to T
...
It was held that a person who at the time of entering into a contract with a
company has no knowledge of company’s Articles, he cannot rely on those Articles
...
Acts outside apparent authority: An outsider will not be protected by the rule laid down
in Turquand’s case if the act of an officer of a company is one which would not ordinarily
be within his powers simply because under the Articles power to do the act could have
been delegated to him
...
Schenkers Ltd
...
It was held that the company was not
liable on these bills of exchange
...
What is meant by ‘Articles of association’ of a company?
2
...
How can the articles of a company be altered?
4
...
Turquand
...
State the contents of articles of association
...
Explain the doctrine of indoor management
...
7
...
8
...
Discuss the effect of memorandum and articles on their registration with the ROC
...
The Articles constitute a contract between the company and its members and also
members’ interest’ - Examine the statement
...
3 PROSPECTUS
Definition
A prospectus as per Section 2(36) and along with Sec
...
Thus, a prospectus is not merely an advertisement; it may be a circular or even a
notice
...
It invites subscriptions to shares or debentures or invites deposits; and
2
...
Section 67 lays down two-way criteria as to what shall constitute an invitation to the
public:
1
...
However, a document by way
of Invitation to existing members or debenture holders to subscribe to shares, or
debentures by way of right is not prospectus [Sec
...
2
...
Thus, it will not be an
invitation to public where B, a friend of A who receives the invitation, also desires to
subscribe, but his offer shall be refused because he was not invited to make the same
...
Any document to be construed as prospectus should have the following essentials:
(a) There must be an invitation offering to the public,
(b) The invitation must be made by or on behalf of the company or in relation to an
intended company;
202
(c) The invitation must be to subscribe or purchase;
(d) The invitation must relate to shares or debentures
...
Issue after Incorporation
A prospectus is generally issued after incorporation of the company
...
2
...
55]: A prospectus must be dated and that date, unless the contrary is proved,
shall be taken as the date of publication of the prospectus
...
Registration of Prospectus
Section 60 provides that no prospectus shall be issued by or on behalf of a
company or In relation to an intended company unless on or before the date of its
publication, there had been delivered to the Registrar for registration, a copy thereof
...
The copy of the prospectus should be accompanied by the following documents:
1
...
2
...
3
...
4
...
years before the date of the prospectus
...
A written statement by the persons making any report required by part II of schedule II
relating to the adjustments, if any, as regards the figures by any profits or losses or
assets and liabilities dealt with by the report set out in the prospectus in pursuance of
part II of schedule II, giving reasons therefore
...
Consent of Director under Sec
...
It is relevant in case of new
directors only
...
A copy of the underwriting agreement, if any
...
Where a prospectus is issued in more than one language, a copy of it as issued in each
language should be delivered to Registrar of companies
...
The prospectus must be issued within 90 days after the date on which a copy thereof
has been delivered for registration
...
5,000 [Sec
...
10
...
57]: A prospectus must not include a statement purporting to be made by an expert
...
11
...
A
company cannot vary the terms of a contract referred to in the prospectus except
subject to the approval of, or except on authority given by, the company in general
meeting
...
The format of
schedule II was revised by the Government vide its notification dated 3
...
1990
...
In the first part particulars are to be given about matters detailed below:
Part I of Schedule II
1
...
Name and address of registered office of the company
...
Name(s) of stock exchange(s) where application for listing is made
...
Declaration about refund of the issue if minimum subscription is not received,
within 90 days from closure of the issue
...
Declaration about the issue of allotment letters/refund within a period of 10
weeks and interest in case of any default in refund at the prescribed rate under Sec
...
5
...
6
...
7
...
204
8
...
If no rating has been obtained this
should be answered as ‘No’
...
Names and addresses of the underwriters and the amount underwritten by them
...
Capital Structure of the company:
1
...
2
...
3
...
Terms of payment
...
How to apply
3
...
Particulars of the issue
1
...
Project cost
3
...
Company management and project
1
...
Promoters and their background
3
...
Collaborations, if any
5
...
6
...
Stock market data
...
Certain prescribed particulars in regard to the company and other listed companies
under the same management which made any capital issue during the last 3 years
...
Outstanding litigations relating to financial matters or criminal proceedings against
the company or directors under Schedule XIII
...
Management perception of risk factors (e
...
sensitivity to foreign exchange rate
fluctuations, difficulty in availability of raw materials or in marketing of products,
cost/time over-run etc
...
This part Is further sub-divided
into three parts, viz
...
General Information shall include information on matters like
1
...
2
...
3
...
4
...
Financial information includes
1
...
2
...
Statutory and other information includes information about
1
...
Expenses of the issue
3
...
4
...
5
...
6
...
7
...
8
...
Part Ill of the Schedule Gives explanation of certain terms and expressions used
under Part - I and Part — II of the schedule
...
Issue of prospectus by a company is not compulsory in the following cases:
1
...
2
...
In such
cases the company is required to file a statement called “statement in lieu of
prospectus’ with the Registrar of companies
...
As per the Amendment Act, 1988 a company may issue any form of application for
shares or debentures of a company accompanied by a memorandum containing the
prescribed salient features of a prospectus (instead of a prospectus)
...
56(3)]
...
Where the application form is issued in connection with
...
56(3)]
5
...
56(3)]
...
Where the shares or debentures are offered to existing holders of shares or debentures
(i
...
rights issue) with or without the right of remuneration in favour of other persons
[Sec
...
7
...
56(5)]
...
Where invitation to the public for subscription to the shares or debentures of a
company is made in the form of an advertisement ordinarily called as ‘prospectus
announcement’ [Sec
...
Abridged Prospectus
The Central Government had vide SR No
...
The Department of Companies Affairs has vide F
...
1/6188 - CCV, circular No
1/92 dated January 9, 1992 notified that share application forms should be a part of
abridged prospectus being attached to it along a perforated line
...
The particulars that are
required to be furnished in the prescribed format Form 2A according to rule 4CC of
Companies (Central Government) General Rules & Forms 1956, are enumerated below;
1
...
, (8) payment! refunds
...
Refusal Goods for Registration of Prospectus
The Registrar is empowered to refuse registration of the prospectus under the
following grounds: (I) if the prospectus is not dated; (ii) if the prospectus contains a
statement purported to be made by an expert without a statement that he has given and has
not withdrawn his consent; (iii) if it does not contain consent in writing of directors; (iv) if
a copy of the documents mentioned u/s 60(1) has not been filed
...
The prospective buyer of shares is entitled to all true
disclosures in the prospectus
...
In a nutshell the prospectus shall tell the truth, the whole truth and nothing but the truth
...
This ruling was laid down
by V
...
Kindersley in New Brunswick and Canada Railway and Land company Vs
...
Deemed Prospectus
According to Sec
...
Sec
...
Unless the contrary is
proved, it is evidence that an allotment of, or an agreement to allot shares/debentures was
made with a view to, allot the shares/debentures being offered for sale to the public, if it is
shown
...
The document containing the offer for sale must contain the following particulars;
(i) the net amount of the consideration received or to be received by the company in
respect of the shares/debentures offered for sale
...
The persons
making the offer for sale to the public are to be deemed directors of the company for the
purpose of registration of the prospectus
...
Schedule III contains a model form of a statement in lieu of prospectus in
pursuance of Section 70; Schedule IV contains a model form of a statement in lieu of
prospectus when a private company is converted into a public company in pursuance of
Section 44
...
Contravention also renders the
company and every director liable to a fine up to Rs
...
209
MIS-STATEMENT IN PROSPECTUS
According to Sec 62(3), the offer for sale must set out all the details required to be
inserted in a prospectus
...
As all the provisions which
apply to prospectus issued by a company apply to such a document, it must disclose
everything truthfully
...
According to Section 65 of the Act, a statement
Included in a prospectus shall be deemed to be untrue, If the statement is misleading in the
form and content in which it is included
...
Liability for mis-statement in Prospectus
A person who makes the offer will be liable for any mis-statement in that document in the
same manner as persons who authorise the Issue of a false prospectus
...
For any untrue statement or mis-statement in the prospectus, a person who has
subscribed for any shares or debentures on the faith of the prospectus and has sustained
any loss or damage may sue for compensation all or any of the following:
(i) the company (ii) every director (iii) every person whose name appeared in the
prospectus as a proposed director (iv) every promoter (v) V every person who has
authorised the issue of the prospectus
...
This
Golden Rule was enunciated by Kindersley, V
...
in New Brunswick, etc
...
Muggeridge and has come to be known as the golden legacy
...
He must prove the following:
(i) the mis-representation was a fact
(ii) it was in respect of a material fact
...
Civil Liability
A person who has been induced to subscribe on the faith of an untrue statement in
the prospectus has remedies against the (i) Company (ii) the directors and promoters and
experts
...
The
company is liable if though the prospectus is issued by the promoters, the Board ratifies
and adopts the issue, for the prospectus is the basis of the contract for shares
...
He may apply to the court for r the contract to be set aside, and his
name to be struck off from the Register of members
...
Damages are generally claimed from the directors, promoters and other
persons who authorised the issue of the prospectus
...
However, the directors will not be liable for damages for mis-statement if
they believed them to be true
...
However, a director
or other person sued u/s
...
Liability under the General Law
Persons who authorise a false or misleading prospectus can also be held liable in
action for deceit under general law as provided in the Contract Act
...
(ii) The representation related to material fact
...
e
...
However civil liability can be avoided under the following circumstances as specified u/s
62(2) of the Companies Act, if he proves:
(a) that having consented to become a director, he withdrew his
consent before the issue of prospectus and it was issued without his
consent
...
(c) He withdrew his consent after the issue of the prospectus but
before allotment and public notice was given
...
Criminal Liability for mis-statement in Prospectus
According to Section 63 of the Companies Act, where a prospectus Includes any
untrue statement, every person who has authorised the issue of the prospectus shall be
punishable with (a) imprisonment for a term which may extend to 2 years or (b) fine up to
Rs
...
Penalty for fraudulently inducing to invest money: According to Section 68, any person
guilty of fraudulently inducing persons to invest money in a company shall be punishable
with imprisonment up to 5 years or fine up to Rs
...
Prohibition of allotment of shares in fictitious names: Section 68A makes the following
acts punishable with imprisonment for a term extending to 5 years:
(a) making an application to a company for acquiring or subscribing for any shares
therein under fictitious name or (b) inducing a company to allot or register any transfer of
shares therein to him or any other person in a fictitious name
...
SEBI now authorised to institute prosecution: The Department of Company Affairs has
by its two notifications issued on November 24, 1993 and February 15, 1994 authorised
the Securities and Exchange Board of India (SEBI) to institute prosecutions in respect of
certain offences under Sections 56, 57 and 58 of the Companies Act, 1956
...
In other words, it implies that securities
of these companies have been listed by the Stock Exchange concerned
...
Listing imparts liquidity to shares, bonds and debentures by providing for free
marketability, enforces timely disclosure and dissemination of corporate information as
well as proper supervision and control of dealings in the listed securities
...
However, companies having paid up
capital of Rs
...
Companies desirous of getting their
securities listed are required to apply to the stock exchange and enter into a listing
agreement with them
...
The company is required to adhere to all the covenants of the listing
agreement
...
,
(d) the prospectus of the company making the public offer does not conform to the
conditions in regard to public issues
...
On receipt of the
reasons for such refusal, the company may, within 15 days, appeal to the Central
Government against such refusal The Central Government may thereupon (after giving the
stock exchange an opportunity of being heard) vary or set aside, the decision of the stock
exchange
...
Where the stock exchange has omitted or failed to dispose of within Sec
...
The company may within 15 days from
the date of the specified time or within such further period not exceeding one month as the
Central Government may on sufficient cause being shown, allow, appeal to the Central
Government against such omission or failure
...
Advantages of listing of securities
Security listing provides valuable benefits to the company, the investor and the public at
large:
(a) Benefits to the company:
(i) The securities when listed receive intensive advertisement as the name of the company
is carried in the daily official list of the stock exchange and transactions in securities are
reported in the news papers/TV
...
(ii) An official quotation on the floor of the recognised stock exchange is an economic
barometer of the health of the company
...
215
(iii) Listing encourages institutional and other under—writers to participate in the issue of
shares
...
(ii) The regular and latest reports on listed companies help the investing public in
assessing securities of the listed companies
...
(iv) The official quotation of the prices of shares of recognised stock exchanges are taken
as standard for income tax and wealth tax purposes
...
(ii) The dissemination of corporate information, when stored systematically in a scientific
manner, serves as valuable corporate data at the disposal of the society
...
Define a prospectus
...
What is a prospectus? Explain its contents
...
What is a deemed prospectus?
4
...
“Prospectus is the window through which company is displayed without distortion” Comment
...
Distinguish a prospectus from statement in lieu of prospectus
...
Explain the legal provisions relating to issue and registration of a prospectus
...
Who are liable for mis-statement in a prospectus? Explain the extent of civil and
criminal liability for such mis-statement
...
What amounts to a mis-statement in a prospectus? Explain the remedies available to a
subscriber who has taken shares on the basis of a mis-statement in a prospectus
...
Write short notes on:
(a) Golden rule of prospectus
(b) Registration of a prospectus
(c) Deemed prospectus
(d) Prospectus by implication
(e) Mis-statement/untrue statement in prospectus
...
What is listing of shares? Is security listing compulsory?
12
...
State the remedies available to a company against stock exchange refuse listing of
shares?
14
...
217
UNIT- VIII
LESSON - 8 DIVIDENDS, BONUS AND INTEREST
DIVIDENDS
The profits of a company, which can be legally distributed among its shareholders,
are called dividends
...
The term ‘dividend’ is not
defined in the Companies Act, 1956
...
The law does not give the meaning of profit
...
However, Sec
...
The depreciation should be provided as per the
requirement of sub sec
...
205 of the Companies Act and as per the Sec
...
Dividend can be declared by a company for any financial year only after the transfer to the
reserves of the company of such percentage as prescribed by the Central Govt
...
205(2A)]
...
However, it can transfer higher percentage of profit also
...
Dividend to be declared at the annual general meeting
The companies Act does not grant any specific power to the companies registered
there under to declare and pay any dividend
...
Generally the dividend is recommended
by the directors as per the articles of association [Sec
...
It is approved and
declared in the annual general meeting by the shareholders [Reghunadan Newtia V
...
(1964), 34
...
cos
...
Commr
...
com
...
57(Bom)]
...
It is subject to
certain legal requirements and the provisions of the Articles of Association of the
company
...
Arle
...
C
...
But dividend shall not be
paid out of capital
...
205A(3)
...
The same procedure can be adopted for the declaration in the case of
absence of profits by the company in any year
...
The preference shareholders shall have preferential right
for the payment of dividend over the equity shareholders
...
When no
dividend is declared in any year these holders have to go without any dividend
...
(ii) Dividend on equity shares: The equity shareholders do not have the right for fixed
amount or fixed rate of dividend for their shares as the preference shareholders
...
Sometimes they may refuse to declare any dividend to
the equity shareholders
...
Barrow Haematite Steel Co
...
3531
...
e have not redeemed the redeemable preference
shares,
should
pay
dividend
till
the
219
default
continues
for
equity
shares
...
Guzdar
V
...
of
Income
Tax,
Bombay,
(1955,1
...
876:AIR
...
Sec
...
cos 1]
...
No further dividend, for the same year can be declared by the company IBiswanath Prasad
Khaitan V
...
(1961) 31 comp
...
1251
...
Special provisions have been made for the payment of dividends under Sections 93
and 205 to 207 for the payment of dividends
...
The Central Government may if it thinks necessary to do so, in the
public interest allow the company to declare and pay dividend for any financial year or any
previous financial years without providing depreciation
...
205A and 205B are the two new provisions relating to the payment of
dividend
introduced
in
the
Companies
Act
1974
through
Amendment
...
205A deals with the transfer of unpaid dividends within 7 days of the expiring of 42
days from the date of declaration of the dividend to a special account with a scheduled
Bank under the name ‘Unpaid Dividend Account of Co
...
Private Ltd
...
Any such amount transferred to the
Unpaid Dividend Account and which remains unpaid or unclaimed for a period of three
years from the date of such transfer shall be transferred to the “General Reserve Account”
...
After this transfer the central
government will settle such claims
...
500 for every day oi which the
default continues
...
The directors who are responsible for such payment are jointly and severally liable
to repay the amount to the company with interest
...
Payment of Dividend to Registered holders
Dividend can be paid only to the registered shareholder or to his order or to his
bankers or to the producers of coupons in respect of share warrants
...
If there is any default, the director, who has knowingly failed to pay, is liable
for Imprisonment upto 7 days and with a fine, under Sec
...
The following are some of the important provisions regarding dividends:
1
...
2
...
3
...
4
...
to the reserves of the company before the
declaration and payment of dividend
...
205)
...
5
...
205(3)]
...
A company which fails to redeem the irredeemable preference shares cannot declare
dividend till the redemption [Sec
...
221
7
...
8
...
9
...
207)
...
The directors are empowered under its articles to declare Interim dividends with the
consultation of the auditors
...
According to company law only the registered shareholders of a company are eligible
to receive dividend and offers for rights or bonus shares
...
206A
...
The right alone will be kept in abeyance till the title
to the shares is decided
...
Sec
...
205 which enables the company to declare
dividend only out of profits
...
13
...
205A( 1)]
...
14
...
205A(4)]
...
On completion of three years from the date of transfer, which remains in the
“Unpaid
Dividend Account” shall be transferred to the general revenue account of
the Central
Govt
...
[Sec
...
222
16
...
when it
transfers to the general revenue account: a) the nature of the amount, b) the names and
address of the persons entitled for the dividend, c) the entitlement of each person and
d) the nature of his claim thereto and such other particulars as may be prescribed (Sec
...
17
...
fails to follow any of the requirements of Sec
...
500 for every day during
which the failure continues [Sec
...
18
...
When share warrant has been issued the payment can be made to the
bearer
of such warrant or to his bankers [Sec
...
Penalty for defaulting directors: When the directors of the company fail to pay the
dividend or post the warrant within 42 days from the date of declaration, every director at
default is liable for a punishment of simple imprisonment up to 7 days and with a fine
[Sec
...
Generally the capital profit will not be distributed amongst shareholders, as
dividend
...
But in certain cases the capital profit
can also be declared as dividend and paid to the shareholders of the company (Lubbock V
...
BONUS
Every company may transfer part of its profits to a reserve account, every year
...
205(2A) to transfer
certain percentage of profits as prescribed by the Central Government
...
Bonus share may be issued from the share premium Account, and capital Redemption
Reserve Account (Sec
...
Bonus shares cannot be issued as gift
...
223
Conditions for the issue of Bonus Shares
A company can issue bonus shares under the following conditions:
a
...
b
...
c
...
Right to Bonus Shares
Only the registered shareholders are entitled to receive the bonus shares
...
Regarding the offer of bonus shares made
by the company, pending registration of transfer, Sec
...
The offer of bonus shares shall be kept pending until the
registration of transfer and the ‘offer shall be made to the transferee of the shares, after his
name is entered in the register of members of the company
...
1
...
2
...
But the company cannot declare bonus instead of
dividend
...
Though every company is made to get the approval of the Controller of Capital
Issues, for the issue of bonus shares such issue should be authorised in the Articles
Association of the company
...
4
...
Then a
resolution will be passed in the general meeting increasing the authorised capital
...
Any reserve created for fixed asset will not be allowed to be capitalised
...
The development rebate is taken as a free reserve while calculating the residual
reserve test
...
7
...
8
...
9
...
10
...
INTEREST
Interest is the consideration payable to the creditor by the debtor for the use of the
borrowed money
...
It is to be paid compulsorily irrespective of the profit of the company,
as per the terms and conditions, on the agreed percentage
...
Interest on accrual becomes a debt
...
In the case of bearer debentures, the interest is paid
through the coupons, enclosed with them
...
The interest is paid in the same manner as the payment
of dividend
...
208]
Sec
...
Sometimes the company may raise money
by issue of shares for the purpose of meeting the expenses of creating any work, building
or plant which cannot make profit for a long period
...
The company should fulfil the following conditions to make such payments:
225
1
...
2
...
3
...
4
...
5
...
The above payment of interest
should not reduce the capital of the company [Sec
...
INTERIM DIVIDEND
Dividend which is paid on shares before the time of declaring the final dividend is
called the interim dividend
...
Regulation 86 of
Table-A provides that the Board may from time to time pay to the shareholders such
Interim dividends as appear to it to be justified by the profits of the company (Lucas V
...
T
...
R
...
18]
...
After having declared the interim dividend, if the directors have
discovered that the dividend is to be paid out of capital or the available profit is inadequate
for declaration and distribution of dividend, they may reconsider or refuse the payment of
such dividend [Lagunas Nitrate co
...
V
...
& Schmidt
(1901),25,L
...
22J In J
...
Commissioner of Income Tax (1964)34, comp
...
668, the supreme court held that the interim dividend is not a debt and cannot be
enforceable obligation
...
The Board of directors should make sure before considering the declaration that it has
been empowered by the articles of the company to declare interim dividend
...
205 for the financial year;
226
2
...
3
...
4
...
5
...
6
...
7
...
8
...
207 is not applicable for the interim dividend the dividend warrants can
be posted before 42 days from the date of Board resolution
...
For non Resident shareholders the dividend warrant should be posted after getting
permission from Reserve Bank of India as per the provisions of Foreign Exchange
Maintenance Act,1999
...
The interim dividend should be confirmed in the next annual meeting along with a
resolution
...
The warrant is drawn with Payee’s account only
...
The first part is a notice of the dividend to the shareholder
and a certificate of deduction of Income Tax
...
227
CAPITALISATION OF PROFIT
Any company having accumulated reserves may convert part of the reserves into
fully paid shares and issue them to the existing shareholders, with the recommendation of
the Board and subject to the Articles of the company
...
If the articles of the company does not provide authority
to capitalise profits, the shareholders can demand the payment in cash
...
I
...
Commr
...
, (1970) 2
...
80: AIR
...
sce
...
Questions:
1
...
When and under what circumstances can a company pay interest out of capital?
What shall be the maximum rate of interest in such cases?
3
...
228