Xaviers Institute of Business Management Studies

MARKS: 80 COURSE: MBA

SUB: CORPORATE LAW

N.B.: 1 Attempt any Twelve Questions

2) Last two Questions are compulsory

Q.1. In the following statements only one is correct

statement. Explain Briefly?

(5 Marks)

i) An invitation to negotiate is a good offer.

ii) A quasi-contract is not a contract at all.

iii) An agreement to agree is a valid contract.

Ans: Agreements to agree An "agreement to agree" is not a contract. This

type of agreement is frequently employed in industries that require

long-term contracts in order to ensure a constant source of supplies and

outlet of production. Mutual manifestations of assent that are, in

themselves, sufficient to form a binding contract are not deprived of

operative effect by the mere fact that the parties agree to prepare a

written reproduction of their agreement. In determining whether, on a

given set of facts, there is merely an "agreement to agree" or a

sufficiently binding contract, the courts apply certain rules. If the

parties express their intention-either to be bound or not bound until a

written document is prepared-then that intention controls. If they have

not expressed their intention, but they exchange promises of a definite

performance and agree upon all essential terms, then the parties have

formed a contract even though the written document is never signed. If

the expressions of intention are incomplete-as, for example, if a

material term such as quantity has been left to further negotiation-the

parties do not have a contract. The designation of the material term for

further negotiation is interpreted as demonstrating the intention of the

parties not to be bound until a complete agreement has been reached

An agreement to agree is an unenforceable agreement which implies to

bind two parties in order to negotiate and enter into a contract, which

is a proposed agreement negotiated with the intent that the final

agreement will be embodied in a formal written document and that neither

party will be bound until the final agreement is executed. An agreement

to agree can also be a fully enforceable agreement containing

sufficiently definite terms and adequate consideration, however leaving

certain details to be worked out by the parties. Even though the parties

expect to reach on an agreement regarding the missing terms, what they

expect to happen on their failure to reach an agreement is often

unclear. If they understand that there will be a contract with the

missing term supplied as a matter of law, a question arises whether the

agreement is one with open terms sufficiently definite to be enforceable

or whether it is a mere unenforceable “agreement to agree.”

Q.2. A ship-owner agreed to carry to cargo of sugar

belonging to A from Constanza to Busrah. He knew

that there was a sugar market in Busrah and that A

was a sugar merchant, but did not know that he

intended to sell the cargo, immediately on its

arrival. Owning to Shipment’s default, the voyage

was delayed and sugar fetched a lower price than

it would have done had it arrived on time. A

claimed compensation for the full loss suffered by

him because of the delay. Give your decision.

Explain Briefly?

(5 Marks)

Q.3. The proprietors of a medical preparation called

the “Carbolic Smoke Ball” published in several

newspapers the following advertisement:-

“£ 1000 reward will be paid by the Carbolic Smoke

Ball Co. to any person who contracts the

increasing epidemic influenza after having used

the Smoke Ball three times daily for two weeks

according to printed directions supplied with each

ball. £ 1000 is deposited with the Alliance Bank

showing our sincerity in the matter.

On the faith in this advertisement, the plaintiff

bought a Smoke Ball and used it as directed. She

was attacked by influenza. She sued the company

for the reward. Will she succeed? Explain

Briefly (5 Marks)

Q.4. Fazal consigned four cases of Chinese crackers

at Kanpur to be carried to Allahabad on the 30th

May, 1987. He intended to sell them at the

Shabarat festival of 5th June 1987. The railway

discovered that the consignment could not be sent

by passenger train and asked Fazal either to

remove them or authorize their dispatch by goods

train. He took no action and the goods arrived at

Allahabad a month after they were booked.

Fazal filed a suit against Railways for damages

due to late delivery of the goods which deprived

him of the special profits at the festival sale.

Decide & explain briefly ?

(5 Marks)

Q.5. ‘Lifeoy’ Soap company advertised that it would

give a reward of Rs. 2000 who contracted skin

disease after using the ‘Lifeoy’ soap of the

company for a certain period according to the

printed directions. Mrs. Jacob purchased the

advertised ‘Lifeboy’ and contracted skin disease

inspite of using this soap according to the

printed instructions. She claimed reward of Rs.

2000. The claim is resisted by the company on the

ground that offer was not made to her and that in

any case she had not communicated her acceptance

of the offer. Decide whether Mrs. Jacob can claim

the reward or not. Give reasons. Explain briefly?

(5 Marks)

Q.6. In each set of statements, only one is correct.

State the correct statements & Explain briefly?

a) i) A bailee has a general lien on the goods

bailed.

ii) The ownership of goods pawned passes to the

pawnee.

iii) A gratuitous bailment can be terminated by

the bailor even

before the stated time.

b) i) A substituted agent is as good an agent of the

agent as a sub-

agent.

ii) An ostensible agency is as effective as an

express agency.

iii) A principal can always revoke an agent’s

authority. (5 Marks)

Q.7. A, an unpaid seller, sends goods to B by

railway. B becomes insolvent

And A sends a telegram to Railway authorities not

to deliver the goods to B. B. goes to the Parcel

office of Railway Yard and by presenting R. R.

(Railway Receipt) takes delivery of the goods and

starts putting them in the cart. Meanwhile the

Station Master comes running with the telegram in

hand and takes possession of the goods from B.

Discuss the rights of A and B to the goods in

possession of Railway authorities.

(5 Marks)

Q.8. X needs Rs. 10,000 but cannot raise this amount

because his credit is not good enough. Y whose

credit is good accommodates. X by giving him a

pronote made out in favour of X, though Y owes no

money to X. X endorses the pronote to Z for value

received. Z who is holder in due course demands

payment from Y. Can Y refuse and plead the

arrangement between him and X Explain briefly?

(5

Marks)

Q.9. Will C has the right of further negotiation in

the following cases: (B signs the endorsements)

Explain briefly?

(5 Marks)

i) ‘Pay C for my use’

ii) ‘Pay C’)

iii) ‘Pay C or order for the account of B’

Q.10. A promissory note was made without mentioning

any time for payment. The holder added the words’

on demand on the face of the instrument. State

whether it amounted to material alteration and

explain the effect of such alteration. Explain

briefly? (5

Marks)

Q.11. State whether the following instruments are

valid promissory notes:

i) I promise to pay Rs. 5000 to B on the dearth of

‘B’s uncle provided that D in his will gives me

a legacy sufficient for the promise of payment

of the said sum.

ii) I hereby acknowledge that I owe X Rs. 5,000 on

account of rent due and I agree that the said

sum will be paid be me in regular installments.

iii) I acknowledge myself indebted to B in Rs.

5000 to be paid on demand for value received.

(5

Marks)

Q.12. A Payee holder of a bill of exchange. He

endorses it in blank and delivers it to B. B

endorses in full to C or order. C without

endorsement transfers the bill to D. State giving

reasons whether D as bearer of the bill of

exchange is entitled to recover the payment from A

or B or C. Explain briefly?

(5 Marks)

Q.13. Write a short note on the Doctrine of Indoor

Management? Explain briefly?

Ans: Under the Indian law relating to companies, a publiccompany is managed by a Board of Directors which is entrustedwith the responsibility of managing the company in the mostefficient and transparent manner.

However, in an era of recurring business scams, it would not beastonishing if the prospective shareholders feel insecure aboutinvesting in a particular company.Over the years, the shareholders havebeen given various tools to keep a check on the methods and practicesadopted by the directors of a company for its internal management, butto what extent can one go in finding out about such methods andpractices, is the question to which the answer remains ambiguous.Nevertheless, some explanation in this regard can be sought in theTurquand's Rule or the Doctrine of Indoor Management.

'Doctrine of Indoor Management', popularly known as the Turquand’s Ruleinitially arose from 150 years ago in the context of the 'Doctrine ofConstructive Notice'. The rule of the doctrine of indoor management isopposed to the rule of constructive notice. The latter seeks to protectthe company against the outsider while the former seeks to protect theoutsiders against the company.

The rule of constructive notice is confined to the external position ofthe company, and therefore, it follows that there is no notice as to howthe company's internal machinery is handled by its officials. If thecontract is consistent with the public documents, the person contractingwill not be prejudiced by irregularities that may beset the indoorworking of the company.

The Doctrine of Indoor Management lays down that persons dealing with acompany having satisfied themselves that the proposed transaction is notin its nature inconsistent with the memorandum and the articles, are notbound to inquire the regularity of any internal proceeding. In otherwords, while persons contracting with a company are presumed to know the

provisions of the contents of the memorandum and articles, they areentitled to assume that the officers of the company have observed theprovisions of the articles.

It is no part of duty of any outsider to see that the company carriesout the requisite internal proceedings. It is important to note that therule of constructive notice can be invoked by the company and it doesnot operate against the company. It operates against the person who hasfailed to inquire but does not operate in his favour.

 

Doctrine of Indoor Management according to theCompanies Act, 1956The Doctrine of indoor management is a presumption on the part of thethe people dealing with the company such as the shareholders that theinternal requirements with regard to the articles of association andmemorandum of association have been complied with.

The doctrine of indoor management helps in protection of externalmembers from the company and states that the people are entitled topresume that the internal proceedings are as per the documents submittedwith the registrar of companies.

They are not allowed to go into the procedural aspect, such as the factthat the internal proceedings might not happen regularly, or what arethe proceedings before the directors, in an extraordinary generalmeeting.

The rule is based on public convenience and justice and the following obvious reasons:

1.     the internal procedure is not a matter of public knowledge. An outsider is presumed to know the constitution of a company, but not whatmay or may not have taken place within the doors that are closed to him.

2.     the lot of creditors of a limited company is not a particularly happy one; it would be unhappier still if the company could escape liability by denying the authority of officials to act on its behalf. 

Exceptions to the doctrine of indoor management:

The exceptions to the doctrine of indoor management are as under:

1.     Knowledge of irregularity: when a person dealing with a company has actual or constructive notice of the irregularity as regards internal management, he cannot claim benefit under the rule of indoor management. He may in some cases, be himself a part of the internal procedure. The rule is based on common sense and any other rule would encourage ignorance and condone dereliction of duty.

T.R Pratt (Bombay) Ltd. V. E.D. Sassoon & Co. Ltd., Company A lent moneyto Company B on a mortgage of its assets. The procedure laid down in thearticles for such transactions was not complied with. The directors of the two companies were the same. Held, the lender had notice of the irregularity and hence the mortgage was not binding.

In Howard v. Patent Ivory Co, the directors had the authority under the articles to borrow only up to £1000 without the resolution of general meeting. For any amount beyond £1000, they needed the consent of generalmeeting. But the directors borrowed £3500 from themselves without the consent of general meeting or shareholders and accepted debentures. It was held that they had knowledge of internal irregularity and debentureswere good only up to £1000.

2.     Negligence: where a person dealing with a company could discover the irregularity if he had made proper inquiries, he cannot claim the benefit of the rule of indoor management. The protection of the rule is also not available where the circumstances surrounding the contract are so suspicious as to invite inquiry, and the outsider dealing with the company does not make proper inquiry. If, for example, an officer of a company purports to act outside the scope of his apparent authority, suspicion should arise and the outsider should make proper inquiry before entering into a contract with the company.

Anand Bihari Lal v. Dinshaw & Co, the plaintiff, in this case, accepted a transfer of a company's property from its accountant. Held, the transfer was void as such a transaction was apparently beyond the scope of the accountant's authority. The plaintiff should have seen the power of attorney executed in favour of the accountant by the company.

3.     Forgery: the rule in turquand's case does not apply where a person relies upon a document that turns out to be forged since nothing can validate forgery. A company can never be held bound for forgeries committed by its officers. The leading case on the point is :

Ruben v. Great Fingall Consolidated Co., the secretary of a company issued a share certificate under the company's seal with his own signature and the signature of a director forged by him. Held, the sharecertificate was not binding on the company. The person who advanced money on the strength of this certificate was not entitled to be registered as holder of the shares.

4.     Acts outside the scope of apparent authority: if an officer of a company enters into a contract   with a third party and if the act of the officer is beyond the scope of his authority, the company is not bound. In such a case, the plaintiff cannot claim the protection of the rule of indoor management simply because under the articles the power todo the act could have been delegated to him. The plaintiff can sue the company only if the power to act has in fact been delegated to the officer with whom he entered into the contract.

Kreditbank Cassel v. Schenkers Ltd,a branch manager of a company drew and endorsed bills of exchange on behalf of the company in favour of a payee to whom he was personally indebted. He had no authority from the company to do so. Held, the company was not bound. But if an officer of a company acts fraudulently under his ostensible authority on behalf of the company, the company is liable for his fraudulent act. 

Conclusion: Thus the doctrine of indoor management seeks to protect the interest of the shareholders who are in minority or who remains in dark about whether the working of the internal affairs of the company are being carried out in accordance with the memorandum and articles. It lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding. 

Q.14. The shareholders at an annual general meeting

passed a resolution for the payment of dividend at

a rate higher than that recommended by the Board

of Directors. Examine the validity of the

resolution. Explain briefly?

(5 Marks)

Q.15. In a prospectus issued by a company the

Managing Director stated that the company had paid

dividend every year during 1921 – 27, which was a

fact. However, the company had sustained losses

during the relevant period and had paid dividends

out of secret reserves accumulated in the past.

Examine the consequences of the observation made

by the Managing Director. Explain briefly?

(5 Marks)

Q.16. In a prospectus issued by a company the

Managing Director stated that the company had paid

dividend every year during 1921-27, which was a

fact. However, the company had sustained losses

during the relevant period and had dividends out

of secret reserves accumulated in the past.

Examine the consequences of the observation made

by the Managing Director. Explain briefly?

(5 Marks)

Q.17. A buys from B 400 shares in a company on the

faith of a share certificate issued by the

company. A tender to the company a transfer deed

duly executed together with B’s share certificate.

The company discovers that the certificate in the

name of B has been fraudulently obtained and

refuses to register the transfer. Advise A.

Explain briefly? (5 Marks)

Q.18. A insured his house against fire. Later while

insure, A killed his wife, severely injured his

only son, set fire to the house and died in the

fire. The son survived and sued the insurer for

the fire loss, advice the insurer. Explain

briefly?

(5 Marks)

Q.19. a) Satrang Singh admitted his only infant son in

a private nursing home. As a result of strong

dose of medicine administered by the nursing

attendant, the child has become mentally retarded.

Satrang Singh wants to make a complaint to the

District Forum under the Consumer Protection Act,

1986 seeking relief by way of compensation on the

ground that there was deficiency in service by the

nursing home. Does his complaint give rise to a

consumer dispute? Who is the consumer in the

instant case? Explain briefly?

b) Smart booked a motor vehicle through one of the

dealers. He was informed subsequently that the

procedure for purchasing the motor vehicle had

changed and was called upon to make further

payment to continue the booking before delivery.

On being aggrieved, Smart filed a complaint with

the State Commission under the Consumer Protection

Act, 1986. Will he succeed? Explain briefly?

c) Brittle and Company, a small-scale industry,

sought nursing and financing facilities from its

bankers by means of grant of further advances and

adequate margin money in anticipation of good

demand for its products. In failing to obtain

this and having become sick, it proceeds against

its bankers under the Consumer Protection Act,

1986, Will it succeed? Explain briefly?

(5 Marks)

Q.20. X who was working as a truck driver had taken a

general insurance policy to cover the risk of

injuries for a period from 1.11.1998 to

30.11.1999. He renewed the policy for a further

period of one year on 10.11.1999. On the same

day, he met with an accident and suffered multiple

injuries including fractures. X submitted the

claim along with documents to the insurance

company. The insurance company repudiated the

claim on the ground that the premium for the

renewed policy was received in the office only at

2.30 p.m. on 10.11.1999, while the accident had

taken place at 10.00 a.m. on that day and hence

there was no policy at the time of accident. Will

X succeed if he files a complaint against the

insurance company for this claim? Explain briefly?

(5 Marks)

Q.21. Avinash booked his goods with Superfast Freight

Carriers at Delhi for being carried to Ferozabad.

The goods receipt note mentioned that all the

disputes would be subject to jurisdiction of the

Mumbai Court. Avinash lodged a complaint for

certain deficiency in service against the

transporter in the District Forum at Delhi.

Superfast Carriers contested that District Forum

at Delhi had no jurisdiction to entertain the

complaint as the head office of the transporter

was at Mumbai and the jurisdiction has been

clearly stated in the goods receipt not. Is the

contention of the transporter tenable? Explain

briefly?

(5 Marks)

Q.22. With reference to the provisions of the

Consumer Protection Act, 1986, decide the

following giving reasons in support of your

answer.

i) Sukh Dukh Ltd. dispatched certain consignments of

goods by road through Fastrack Roadways Ltd. The

goods were unloaded and stored in a godown enroute

on the suggestion of consignee. A fire broke out

in the neighbouring godown spread to the godown

and goods were destroyed. The Fastrack Roadways

Ltd. claimed that there was neither negligence nor

deficiency in service on their part and goods were

being carried at “Owner risk” and since no special

premium was paid, they were not responsible for

the loss caused by fire. Whether Fastrack

Roadways Ltd. is liable to pay damages to

consignor?

ii) Life Insurance Corporation (LIC) formulated a

scheme called ‘salary saving scheme’ under which

employees of an organisation could buy an

insurance policy. Premium due on each policy was

collected by the employer from the salary of the

employees nor did it issue any premium notice.

When the widow of the deceased employee made a

claim to LIC on the death of her husband, the LIC

repudiated the claim on the ground that four

installments of premium had not been paid. The

widow was approached the consumer forum for

redressal. Is the LIC liable for deficiency in

service? Explain?

iii) Raman booked a ticket from Delhi to New York by

Lufthansa Airlines. The airport authorities in

New Delhi did not find any fault in his visa and

other documents. However, at Frankfurt airport

authorities instituted proceedings of verification

because of which Raman missed his flight to New

York. After necessary verification, Raman was

able to reach New York by the next flight. The

airline authorities’ tendered apology to Raman for

the inconvenience caused to him and also paid as

goodwill gesture a sum of Rs. 5,000. Raman

intends to institute proceedings under the

Consumer Protection Act, 1986 against Lufthansa

Airlines for deficiency in service. Will he

succeed?

(10 Marks )

Q.23. With reference to the provisions of the

Consumer Protection Act, 1986, decide the

following giving reasons in support of your

answer.

i) Sohn sent all relevant documents in an envelope

regarding consignment of goods to a buyer in the

USA through Fast Service Couriers. The documents

did not reach the buyer as a consequence of which

the buyer could not take delivery of the goods.

By the time the duplicate copies of the document

had been received by the buyer, the season of the

goods was over. He claimed that he had suffered a

loss of US $ 5,000 as a result of the negligence

of the courier. The State Commission ordered the

payment to be made by the Fast Service Couriers,

but the National Commission in appeal reversed the

order and ordered payment of US $ 100 only as per

the receipt issued by the Fast Service Courier to

the consignor at the time of the dispatch of the

latter. Advise Sohan.

ii) Mahesh purchased a machine from Astute Ltd. to

operate it himself for earning his liverhood. He

took the assistance of a person to assist him in

operating the machine. The machine developed

fault during the warranty period. He filed a claim

in the consumer forum against the company for

deficiency in service. Astute Ltd. alleged that

Mahesh did not operate the machine himself but had

appointed a person exclusively to operate the

machine. Will Mahesh succeed?

iii) Pillai purchased a car by taking a loan from

Kerala cooperative Bank Ltd. and gave post-dated

cheques to the bank not only in respect of

repayment of loan instalments but also of premium

of insurance policy for two succeeding years. On

the expiry of the policy. Pillai’s car met with

an accident. Will Pillai succeed in getting a

claim against the

Bank ? (10

Marks)