A MANUALOF

BUSINESS LAWS

DR. S.N. MAHESHWARIPROFESSOR EMERITUS & ACADEMIC ADVISOR

DELHI INSTITUTE OF ADVANCED STUDIES, DELHI-110 085

Formerly : Principal, Hindu College, Delhi UniversityProfessor & Dean, Faculty of Commerce and Business Management, Goa University

DR. SUNEEL K. MAHESHWARIPROFESSOR

EBERLY COLLEGE OF BUSINESS AND INFORMATION TECHNOLOGYINDIANA UNIVERSITY OF PENNSYLVANIA, U.S.A.

Formerly : Professor, Division of Accountancy & Legal EnvironmentMarshall University, U.S.A.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

© S.N. Maheshwari & S.K. MaheshwariNo part of this book shall be stored in a retrieval system, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors.

First Edition : 2003Second Edition : 2006

Third Revised Edition : 2008Reprint : 2009Reprint : 2010

Fourth Revised & Enlarged Edition : 2012Fifth Revised & Enlarged Edition : 2013

Sixth Revised & Enlarged Edition : 2015

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: himpub@vsnl.com; Website: www.himpub.com

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Indore : Kesardeep Avenue Extension, 73, Narayan Bagh, Flat No. 302, IIIrd Floor,Near Humpty Dumpty School, Indore - 452 007 (M.P.). Mobile: 09301386468

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Printed at : Geetanjali Press Pvt. Ltd., Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.On behalf of HPH.

Preface

TO THE SIXTH EDITION

We are pleased to place before the esteemed readers the Sixth Revised and Enlarged Edit ion of our book: ‘AManual of Business Laws’. The heart-warming response given by the readers to each new edit ion of book is a matterof great satisfaction and privilege for us.

The Sixth Edit ion, besides maintaining the PLUS features of the Fifth Edit ion of the book, viz., lucid presentation,tailor-made approach, comprehensive text with plenty of illustrative material including case laws, questions andproblems for recapitulation etc., has several addit ional welcome features. These include the following:-

The book meets all the more comprehensively the course content requirement of the students appearingin the paper Business Laws at B.Com., BBA, M.Com., MBA Examinations of different Universit ies and thoseconducted by various professional Institutions viz. The Institute of Chartered Accountants of India, TheInstitute of Company Secretaries of India and The Institute of Cost Accountants of India.

Since the publication of the Fifth Edit ion, several developments have taken place both in the legislativeand corporate fields. These include :

• Enactment of the Companies Act, 2013, The Securit ies Law (Amendment) Act, 2014, The Preventionof Money Laundering (Amendment) Act, 2012 and The Competit ion (Amendment) Act, 2012.

• Amendment in the Income Tax Act, 1961 by the Finance Act, 2014.

• Stricter enforcement of Corporate Governance provisions as required by amended SEBI Guidelines andthe Companies Act, 2013.

All these developments have been incorporated at appropriate places in the book.

In view of the Companies Act, 1956 not being completely repealed and enforcement of the Companies Act,2013 in stages; an Appendix has been added in Section 5: ‘Elements of Company Law’, giving details ofsections of New Act which have been enforced.

Two new chapters have been incorporated in Section 5, keeping in view the course content requirementsof the students appearing at different examinations. These include: Global Companies and Other Companies.

The text matter in several chapters has been strengthened, wherever necessary.

The latest quest ions and problems from recent University and professional examinations have beenincorporated in the relevant chapters of the book.

The book continues to follow an examination oriented approach.

We are confident that with all these changes, addit ions, adaptations and updating, the readers will find therevised edit ion of the book all the more useful and rewarding for them.

Constructive and helpful suggestions for improvement of the book will be gratefully acknowledged.

A-2/ 156, Paschim Vihar DR. S.N. MAHESHWARINew Delhi-110 063. DR. SUNEEL K. MAHESHWARI

Preface

To the First Edition

We are pleased to place before the esteemed readers a book on Business Laws for undergraduate and postgraduatestudents of different Universit ies and professional institutes.

The book has several distinctive features. These include the following :

Comprehensively covers the course content requirements of the students appearing in the paper BusinessLaws/ Mercantile Laws/ Commercial Laws at B.Com., BBA, C.A., PEE-II of Institute of Chartered Accountantsof India, C.S. (Foundation) and other professional examinations.

Written in simple and straight style.

Gives a lucid explanation of the basic provisions of law with plenty of illustrations supported by case laws.

Incorporates at the end of each chapter :

Objective type questions with short answers to enable the students to test their understanding.

Essay type questions for review, discussion and practice.

Practical problems with short answers for sharpening the knowledge of students.

Broadly classified into six sections, each covering a separate enactment and conveniently divided intoseveral concise but complete chapters covering specific topics.

Provides Learning Objectives at the beginning of each chapter to tell the students what he will learn afterstudying the chapter.

Defines Key Terms introduced, at the end of each chapter, for recapitulation and better grasp over thesubject.

Bound to prove a refreshing guide for business executives.

We are confident that with all these PLUS features the readers will find the book extremely useful and rewardingfor them. Constructive and helpful suggestions for improvement in the book will be gratefully acknowledged.

A-2/ 156, Paschim Vihar DR. S.N. MAHESHWARINew Delhi-110 063. DR. SUNEEL K. MAHESHWARI

Dedicated to

SHRI YADU HARI DALMIAHumanist, Philanthropist and Industrialist.

Contents

Introductory ............................................................................................................................ 1.1–1.2Learning Objectives .......................................................................................................................... 1.1Meaning of Law ............................................................................................................................... 1.1Meaning of Mercantit le Law .............................................................................................................. 1.1Sources of Indian Mercantile Law....................................................................................................... 1.1Key Terms ....................................................................................................................................... 1.2Test Questions.................................................................................................................................. 1.2

Section 1THE INDIAN CONTRACT ACT, 1872

1. General Principles................................................................................................................. 1.5–1.14Learning Objectives .......................................................................................................................... 1.5Scope and Application ...................................................................................................................... 1.5Types of Rights................................................................................................................................ 1.6Meaning of Contract ......................................................................................................................... 1.6Essential Elements of a Valid Contract ................................................................................................ 1.7Classification of Contracts ................................................................................................................. 1.8Key Terms ..................................................................................................................................... 1.12Test Questions................................................................................................................................ 1.12Practical Problems .......................................................................................................................... 1.14

2. Of fer and Acceptance........................................................................................................... 1.15–1.30Learning Objectives ........................................................................................................................ 1.15Proposal or Offer ............................................................................................................................ 1.15Types of Offer ................................................................................................................................ 1.18Acceptance .................................................................................................................................... 1.19Essentials of Valid Acceptance.......................................................................................................... 1.20Communication of Offer and Acceptance .......................................................................................... 1.22Revocation of Offer and Acceptance ................................................................................................. 1.23Contracts by Post ........................................................................................................................... 1.25Contracts over Telephone ................................................................................................................ 1.25Agreement to Make Contract ........................................................................................................... 1.26Key Terms ..................................................................................................................................... 1.26Test Questions................................................................................................................................ 1.26Practical Problems .......................................................................................................................... 1.28

3. Competence of Contracting Parties ....................................................................................... 1.31–1.39Learning Objectives ........................................................................................................................ 1.31Minor ........................................................................................................................................... 1.31

Persons of Unsound Mind................................................................................................................ 1.36Persons Disqualified by Other Laws................................................................................................... 1.36Key Terms ..................................................................................................................................... 1.37Test Questions................................................................................................................................ 1.37Practical Problems .......................................................................................................................... 1.38

4. Consent : Nature and Requisi tes .......................................................................................... 1.40–1.56Learning Objectives ........................................................................................................................ 1.40Consent ......................................................................................................................................... 1.40Free Consent .................................................................................................................................. 1.40Coercion ........................................................................................................................................ 1.41Undue Influence............................................................................................................................ 1.42Fraud ............................................................................................................................................ 1.44Misrepresentation ........................................................................................................................... 1.47Mistake ......................................................................................................................................... 1.49Key Terms ..................................................................................................................................... 1.53Test Questions................................................................................................................................ 1.54Practical Problems .......................................................................................................................... 1.55

5. Consideration ...................................................................................................................... 1.57–1.65Learning Objectives ........................................................................................................................ 1.57Meaning of Consideration................................................................................................................ 1.57Essential Elements of Consideration .................................................................................................. 1.58Adequacy of Consideration .............................................................................................................. 1.60Exceptions : No Consideration, No Contract ....................................................................................... 1.60Key Terms ..................................................................................................................................... 1.62Test Questions................................................................................................................................ 1.62Practical Problems .......................................................................................................................... 1.64

6. Legali ty of the Object and Consideration .............................................................................. 1.66–1.71Learning Objectives ........................................................................................................................ 1.66Consideration and Object ................................................................................................................ 1.66Unlawful Consideration and Object ................................................................................................... 1.66Public Policy .................................................................................................................................. 1.67Key Terms ..................................................................................................................................... 1.70Test Questions................................................................................................................................ 1.70Practical Problems .......................................................................................................................... 1.71

7. Void Agreements ................................................................................................................. 1.72–1.81Learning Objectives ........................................................................................................................ 1.72Agreements in Restraint of Marriage ................................................................................................ 1.72Agreements in Restraint of Trade..................................................................................................... 1.73Agreements by Way of Wager .......................................................................................................... 1.77Agreements to do an Impossible Act ................................................................................................ 1.79Key Terms ..................................................................................................................................... 1.79Test Questions................................................................................................................................ 1.80Practical Problems .......................................................................................................................... 1.80

8. Contingent Contracts............................................................................................................ 1.82–1.85Learning Objectives ........................................................................................................................ 1.82Meaning of Contingent Contract ...................................................................................................... 1.82

Essential Characterist ics .................................................................................................................. 1.83Rules Regarding Performance........................................................................................................... 1.83Contingent Contract and Wagering Agreement ................................................................................... 1.84Key Terms ..................................................................................................................................... 1.85Test Questions................................................................................................................................ 1.85Practical Problems .......................................................................................................................... 1.85

9. Performance of Contracts ..................................................................................................... 1.86–1.95Learning Objectives ........................................................................................................................ 1.86Meaning and Types of Performance .................................................................................................. 1.86Responsibility for Performance......................................................................................................... 1.88Demand for Performance ................................................................................................................. 1.89Reciprocal Promises ........................................................................................................................ 1.90Time and Place for Performance ....................................................................................................... 1.92Appropriation of Payments.............................................................................................................. 1.93Key Terms ..................................................................................................................................... 1.94Test Questions................................................................................................................................ 1.94Practical Problems .......................................................................................................................... 1.95

10. Discharge of Contracts ....................................................................................................... 1.96–1.105Learning Objectives ........................................................................................................................ 1.96Meaning and Modes of Discharge ..................................................................................................... 1.96Agreement ..................................................................................................................................... 1.96Performance of Contract .................................................................................................................. 1.98Lapse of Time ................................................................................................................................ 1.98Operation of Law............................................................................................................................ 1.98Material Alteration ......................................................................................................................... 1.99Supervening Impossibility of Performance......................................................................................... 1.99Breach ........................................................................................................................................ 1.102Key Terms ................................................................................................................................... 1.103Test Questions.............................................................................................................................. 1.104Practical Problems ........................................................................................................................ 1.104

11. Quasi-Contracts................................................................................................................ 1.106–1.110Learning Objectives ...................................................................................................................... 1.106Concept of Quasi-Contracts............................................................................................................ 1.106Types of Quasi-Contracts ............................................................................................................... 1.106Key Terms ................................................................................................................................... 1.109Test Questions.............................................................................................................................. 1.109Practical Problems ........................................................................................................................ 1.110

12. Remedies for Breach of Contract ...................................................................................... 1.111–1.124Learning Objectives ...................................................................................................................... 1.111Types of Remedies........................................................................................................................ 1.111Rescission .................................................................................................................................... 1.111Damages...................................................................................................................................... 1.112Liquidated Damages and Penalty .................................................................................................... 1.116Quantum Meruit .......................................................................................................................... 1.118Specific Performance..................................................................................................................... 1.119

Injuct ion .....................................................................................................................................1.119Restitution ...................................................................................................................................1.120Key Terms ....................................................................................................................................1.120Test Questions...............................................................................................................................1.121Practical Problems .........................................................................................................................1.122

13. Contracts of Indemni ty and Guarantee............................................................................. 1.125–1.136Learning Objectives .......................................................................................................................1.125Contract of Indemnity ...................................................................................................................1.125Contract of Guarantee....................................................................................................................1.127Difference between a Contract of Indemnity and a Contract of Guarantee ........................................... 1.128Kinds of Guarantee........................................................................................................................1.128Nature of Surety’s Liability ............................................................................................................1.129Rights of the Surety .....................................................................................................................1.130Discharge of Surety .......................................................................................................................1.131Key Terms ....................................................................................................................................1.134Test Questions...............................................................................................................................1.134Practical Problems .........................................................................................................................1.135

14. Contracts of Bai lment ...................................................................................................... 1.137–1.150Learning Objectives .......................................................................................................................1.137Meaning of Contract of Bailment .................................................................................................... 1.137Essential Characterist ics .................................................................................................................1.137Classification of Bailment ...............................................................................................................1.138Rights of Bailor ............................................................................................................................1.139Duties of Bailor ............................................................................................................................1.139Rights of Bailee ............................................................................................................................1.140Duties of the Bailee.......................................................................................................................1.141Rights of Bailor and Bailee against Third Parties............................................................................... 1.142Rights and Liability of Finder of Goods ........................................................................................... 1.143Lien ............................................................................................................................................. 1.143Pledge.......................................................................................................................................... 1.144Termination of Bailment ................................................................................................................1.147Key Terms ....................................................................................................................................1.148Test Questions...............................................................................................................................1.148Practical Problems .........................................................................................................................1.149

15. Contracts of Agency ......................................................................................................... 1.151–1.170Learning Objectives .......................................................................................................................1.151Meaning and Nature of Agency .......................................................................................................1.151Agent and Servant ........................................................................................................................1.152Agent and Bailee...........................................................................................................................1.152Kinds of Agents ............................................................................................................................1.152Creation of Agency .......................................................................................................................1.153Extent of Agent’s Authority ...........................................................................................................1.156Delegation of Agent’s Authority .....................................................................................................1.157Agency and Contracts with Third Persons ........................................................................................ 1.158Personal Liability of Agent .............................................................................................................1.160

Rights of an Agent ...................................................................................................................... 1.161Duties of an Agent ....................................................................................................................... 1.163Termination of Agency ................................................................................................................. 1.164Key Terms ................................................................................................................................... 1.167Test Questions.............................................................................................................................. 1.167Practical Problems ........................................................................................................................ 1.168

Section 2THE SALE OF GOODS ACT, 1930

1. General Principles................................................................................................................. 2.3–2.12Learning Objectives .......................................................................................................................... 2.3Meaning of Contract of Sale .............................................................................................................. 2.3Essentials of Contract of Sale............................................................................................................. 2.3Distinction between Sale and Agreement to Sell .................................................................................. 2.4Sale Distinguished from Other Contracts............................................................................................. 2.5Formation of Contract of Sale............................................................................................................ 2.7Goods ............................................................................................................................................. 2.7Perishing of Goods ........................................................................................................................... 2.8Price............................................................................................................................................... 2.9Some Important Legal Terms ........................................................................................................... 2.10Key Terms ..................................................................................................................................... 2.10Test Questions................................................................................................................................ 2.11Practical Problems .......................................................................................................................... 2.12

2. Condi t ions and Warranties................................................................................................... 2.13–2.24Learning Objectives ........................................................................................................................ 2.13Meaning of Condit ions and Warranties.............................................................................................. 2.13Difference Between Condit ion and Warranty ...................................................................................... 2.14Express and Implied Condit ions and Warranties.................................................................................. 2.15Doctrine of Caveat Emptor .............................................................................................................. 2.20Key Terms ..................................................................................................................................... 2.21Test Questions................................................................................................................................ 2.21Practical Problems .......................................................................................................................... 2.22

3. Transfer of Ownership ......................................................................................................... 2.25–2.35Learning Objectives ........................................................................................................................ 2.25Importance of Transfer of Ownership ............................................................................................... 2.25Rules Regarding Transfer of Ownership ............................................................................................. 2.25Transfer of Tit le by Non-owners....................................................................................................... 2.28Key Terms ..................................................................................................................................... 2.31Test Questions................................................................................................................................ 2.31Practical Problems .......................................................................................................................... 2.32

4. Performance of a Contract of Sale ........................................................................................ 2.36–2.42Learning Objectives ........................................................................................................................ 2.36Duties of Seller and Buyer .............................................................................................................. 2.36Delivery ........................................................................................................................................ 2.36C.I.F. Contract ................................................................................................................................ 2.40

Key Terms ..................................................................................................................................... 2.41Test Questions................................................................................................................................ 2.41Practical Problems .......................................................................................................................... 2.42

5. Remedial Measures ............................................................................................................. 2.43–2.51Learning Objectives ........................................................................................................................ 2.43Meaning of Unpaid Seller ................................................................................................................ 2.43Rights of Unpaid Seller ................................................................................................................... 2.43Key Terms ..................................................................................................................................... 2.48Test Questions................................................................................................................................ 2.49Practical Problems .......................................................................................................................... 2.50

6. Auction Sale ........................................................................................................................ 2.52–2.54Learning Objectives ........................................................................................................................ 2.52Meaning and Rules......................................................................................................................... 2.52Key Terms ..................................................................................................................................... 2.54Test Questions................................................................................................................................ 2.54Practical Problems .......................................................................................................................... 2.54

Section 3

THE INDIAN PARTNERSHIP ACT, 1932

1. General Principles................................................................................................................. 3.3–3.13Learning Objectives .......................................................................................................................... 3.3Meaning of Partnership ..................................................................................................................... 3.3Essential Characterist ics of Partnership ............................................................................................... 3.3Partnership and Joint Hindu Family Firms........................................................................................... 3.5Partnership and Co-ownership ............................................................................................................ 3.6Partnership and Club ........................................................................................................................ 3.6Tests of Partnership .......................................................................................................................... 3.7Registration of Partnership Firms ....................................................................................................... 3.8Key Terms ..................................................................................................................................... 3.11Test Questions................................................................................................................................ 3.11Practical Problems .......................................................................................................................... 3.13

2. Formation of Partnership .................................................................................................... 3.14–3.25Learning Objectives ........................................................................................................................ 3.14Partnership Deed ............................................................................................................................ 3.14Posit ion of Minor ........................................................................................................................... 3.15Duration of Partnership .................................................................................................................. 3.16Classes of Partners .......................................................................................................................... 3.16Reconstitution of a Firm................................................................................................................. 3.18Rights of Outgoing Partner ............................................................................................................. 3.20Partnership Property ....................................................................................................................... 3.21Key Terms ..................................................................................................................................... 3.22Test Questions................................................................................................................................ 3.22Practical Problems .......................................................................................................................... 3.24

3. Rights and Liabi li t ies of Partners........................................................................................ 3.26–3.34Learning Objectives ........................................................................................................................ 3.26Relations of Partners with One Another ............................................................................................ 3.26Rights of Partners .......................................................................................................................... 3.26Duties of Partners........................................................................................................................... 3.28Relations of Partners with Third Parties ............................................................................................ 3.29Key Terms ..................................................................................................................................... 3.32Test Questions................................................................................................................................ 3.32Practical Problems .......................................................................................................................... 3.33

4. Dissolution of Partnership Fi rms ......................................................................................... 3.35–3.42Learning Objectives ........................................................................................................................ 3.35Dissolution of Partnership and Dissolution of Firm ............................................................................ 3.35Modes of Dissolution of Firm........................................................................................................... 3.35Consequences of Dissolution ............................................................................................................ 3.37Rules for the Sett lement of Accounts after Dissolution ...................................................................... 3.38Public Notice ................................................................................................................................. 3.39Key Terms ..................................................................................................................................... 3.40Test Questions................................................................................................................................ 3.40Practical Problems .......................................................................................................................... 3.41

Section 4THE NEGOTIABLE INSTRUMENTS ACT, 1881

1. Introductory .......................................................................................................................... 4.3–4.20Learning Objectives .......................................................................................................................... 4.3Meaning of Negotiable Instrument ..................................................................................................... 4.3Types of Negotiable Instruments........................................................................................................ 4.5Bank Draft or Demand Draft ............................................................................................................ 4.13Ambiguous Instruments.................................................................................................................. 4.13Where Amount is Stated Differently in Figures and Words.................................................................. 4.13Instruments Payable on Demand ...................................................................................................... 4.13Inchoate Instrument ...................................................................................................................... 4.14At Sight, On Presentment, After Sight ............................................................................................. 4.14Escrow .......................................................................................................................................... 4.15Payment in Due Course ................................................................................................................... 4.15Maturity of Negotiable Instrument ................................................................................................... 4.16Key Terms ..................................................................................................................................... 4.17Test Questions................................................................................................................................ 4.17Practical Problems .......................................................................................................................... 4.19

2. Parties to Negotiable Instrument ......................................................................................... 4.21–4.28Learning Objectives ........................................................................................................................ 4.21Parties to Bill of Exchange .............................................................................................................. 4.21Parties to Promissory Note............................................................................................................... 4.22Parties to Cheque ........................................................................................................................... 4.22Holder........................................................................................................................................... 4.22Holder in Due Course...................................................................................................................... 4.22Competence of Parties to Negotiable Instrument ................................................................................ 4.24Liabilit ies of Parties to Negotiable Instrument ................................................................................... 4.26Key Terms ..................................................................................................................................... 4.27Test Questions................................................................................................................................ 4.27Practical Problems .......................................................................................................................... 4.28

3. Presentment of Negotiable Instrument ................................................................................ 4.29–4.34Learning Objectives ........................................................................................................................ 4.29Presentment for Acceptance ............................................................................................................ 4.29Presentment for Sight .................................................................................................................... 4.31Presentment for Payment ................................................................................................................ 4.31Key Terms ..................................................................................................................................... 4.33Test Questions................................................................................................................................ 4.33Practical Problems .......................................................................................................................... 4.34

4. Negotiation ......................................................................................................................... 4.35–4.48Learning Objectives ........................................................................................................................ 4.35Meaning of Negotiation .................................................................................................................. 4.35Meaning of Assignment .................................................................................................................. 4.35Modes of Negotiation ...................................................................................................................... 4.36Indorsement .................................................................................................................................. 4.37Negotiation of Lost Instruments and Instruments Obtained by Unlawful Means .................................... 4.40Negotiation of Dishonoured and Overdue Instruments........................................................................ 4.43Negotiable Instruments Without Consideration .................................................................................. 4.43Duration of Negotiability ................................................................................................................ 4.44Once a Bearer Instrument, Always a Bearer Instrument ...................................................................... 4.44Key Terms ..................................................................................................................................... 4.45Test Questions................................................................................................................................ 4.45Practical Problems .......................................................................................................................... 4.46

5. Discharge of Parties ............................................................................................................ 4.49–4.60Learning Objectives ........................................................................................................................ 4.49Meaning of Discharge ..................................................................................................................... 4.49Modes of Discharge......................................................................................................................... 4.52Dishonour ..................................................................................................................................... 4.53Noting and Protesting..................................................................................................................... 4.53Dishonour of Cheques for Insufficiency of Funds .............................................................................. 4.54Acceptance for Honour ................................................................................................................... 4.55Payment for Honour ....................................................................................................................... 4.56Compesation for Dishonour ............................................................................................................. 4.56Foreign Instruments ....................................................................................................................... 4.57Key Terms ..................................................................................................................................... 4.57Test Questions................................................................................................................................ 4.58Practical Problems .......................................................................................................................... 4.59

6. Liabi li t ies of a Banker ........................................................................................................ 4.61–4.70Learning Objectives ........................................................................................................................ 4.61Meaning of Banker ......................................................................................................................... 4.61As Paying Banker ........................................................................................................................... 4.61As Collecting Banker ...................................................................................................................... 4.63Crossing of Cheques ....................................................................................................................... 4.64Marking of Cheques........................................................................................................................ 4.67Key Terms ..................................................................................................................................... 4.68Test Questions................................................................................................................................ 4.68Practical Problems .......................................................................................................................... 4.69

7. Hundis ................................................................................................................................ 4.71–4.73Learning Objectives ........................................................................................................................ 4.71Meaning of Hundi .......................................................................................................................... 4.71Types of Hundis............................................................................................................................. 4.71Key Terms ..................................................................................................................................... 4.72Test Questions................................................................................................................................ 4.72

Section 5ELEMENTS OF COMPANY LAW

1. Company and Its Forms ......................................................................................................... 5.3–5.28Learning Objectives .......................................................................................................................... 5.3Int roduct ion .................................................................................................................................... 5.3Scope And Aplication ............................................................................................................................ 5.4Administration of Companies Act ...........................................................................................................5.4Definition .............................................................................................................................................5.5Essential Characterist ics of Company ................................................................................................... 5.6Illegal Association ............................................................................................................................ 5.8Lift ing Up of the Corporate Veil ...................................................................................................... 5.10Kinds of Companies ........................................................................................................................ 5.13Difference Between Company and Partnership .................................................................................... 5.17Distinction Between Private Company and Public Company ................................................................. 5.19Privileges of Private Company .......................................................................................................... 5.20Advantages of Company .................................................................................................................. 5.22Disadvantges of Company ................................................................................................................ 5.22Conversion of a Private Company into a Public Company .................................................................... 5.23Conversion of a Public Company into a Private Company .................................................................... 5.23Conversion of One Person Company (OPC) into Public or Private Company............................................ 5.24The Securit ies and Exchange Board of India(SEBI) ............................................................................. 5.24Service of Documents ..................................................................................................................... 5.25Key Terms ..................................................................................................................................... 5.26Test Questions................................................................................................................................ 5.26Practical Problem ........................................................................................................................... 5.28

2. Formation of a Company ...................................................................................................... 5.29–5.38Learning Objectives ........................................................................................................................ 5.29Promotion ..................................................................................................................................... 5.29Incorporation ................................................................................................................................ 5.33Commencement of Business ............................................................................................................ 5.35Key Terms ..................................................................................................................................... 5.35Test Questions................................................................................................................................ 5.36Practical Problems .......................................................................................................................... 5.37

3. Memorandum of Association ................................................................................................ 5.39–5.50Learning Objectives ........................................................................................................................ 5.39Meaning of Memorandum................................................................................................................ 5.39Clauses of Memorandum.................................................................................................................. 5.39

Form of Memorandum ..........................................................................................................................5.41Alteration of Memorandum of Association ........................................................................................ 5.41Doctrine of Ultra-Vires.................................................................................................................... 5.46Key Terms ..................................................................................................................................... 5.48Test Questions................................................................................................................................ 5.48Practical Problems .......................................................................................................................... 5.49

4. Articles of Association ......................................................................................................... 5.51–5.59Learning Objectives ........................................................................................................................ 5.51Meaning of Articles ........................................................................................................................ 5.51Form of Model Articles .........................................................................................................................5.51Contents of the Articles................................................................................................................. .5.52Binding Effects of Memorandum and Articles.................................................................................... 5.52Alteration of Articles...................................................................................................................... 5.55Distinction Between Memorandum of Association and Articles of Association ....................................... 5.55Constructive Notice of the Memorandum and Articles ........................................................................ 5.56Doctrine of Indoor Management ...................................................................................................... 5.56Key Terms ..................................................................................................................................... 5.57Test Questions................................................................................................................................ 5.57Practical Problems .......................................................................................................................... 5.59

5. Prospectus .......................................................................................................................... 5.60–5.73Learning Objectives ........................................................................................................................ 5.60Need and Meaning .......................................................................................................................... 5.60Requirements as to Prospectus......................................................................................................... 5.60Contents of Prospectus ................................................................................................................... 5.62Effect of Omissions and Mis-statements in a Prospectus...................................................................... 5.63Deposits from Members or Public ..................................................................................................... 5.64Public Offer of Scurit ies of be in Dementerialized Form...................................................................... 5.65Advertisement of the Prospectus...................................................................................................... 5.66Shelf Prospectus............................................................................................................................. 5.66Red Herring Prospectus................................................................................................................... 5.66Listing of Securit ies ....................................................................................................................... 5.66Book Building ............................................................................................................................... 5.68Credit Rating .......................................................................................................................................5.69Insider Trading ....................................................................................................................................5.71Key Terms .................................................................................................................................. ...5.71Test Questions................................................................................................................................ 5.72Practical Problems .......................................................................................................................... 5.73

6. Allotment of Shares............................................................................................................. 5.74–5.78Learning Objectives ........................................................................................................................ 5.74General Principles of Allotment ....................................................................................................... 5.74Statutory Restrict ions on Allotment of Securit ies .............................................................................. 5.85Return of Allotment ...................................................................................................................... 5.76Key Terms ..................................................................................................................................... 5.76Test Questions................................................................................................................................ 5.77Practical Problems .......................................................................................................................... 5.77

7. Shares and Share Capi tal ................................................................................................... 5.79–5.100Learning Objectives ........................................................................................................................ 5.79Meaning of Share........................................................................................................................... 5.79Nature of Share ............................................................................................................................. 5.79Kinds of Shares.............................................................................................................................. 5.80

Share Capital ................................................................................................................................. 5.81Shareholders’ Voting Rights............................................................................................................. 5.81Commission on Issue of Shares and Debentures ................................................................................. 5.81Purchase by Company of its Own Shares ........................................................................................... 5.82Loans by Company for Purchase of Own Shares ................................................................................. 5.82Power of Company to Purchase (Buy-Back) Own Securit ies.................................................................. 5.83Transfer to Capital Redemption Reserve ............................................................................................ 5.83Issue of Sweat Equity Shares ........................................................................................................... 5.84Issue of Shares at Premium ............................................................................................................. 5.84Prohibit ion on Issue of Shares at Discount ....................................................................................... 5.85Issue and Redemption of Preference Shares....................................................................................... 5.85Further Issue of Capital .................................................................................................................. 5.86Conversion of Loans into Capital ..................................................................................................... 5.87Share Certificate............................................................................................................................. 5.87Stocks........................................................................................................................................... 5.88Transfer of Shares .......................................................................................................................... 5.88Transfer of Security in case of Listed Company.................................................................................. 5.93Transfer when Company is under Winding Up ................................................................................... 5.93Transmision of Shares..................................................................................................................... 5.94Nomination of Shares ..................................................................................................................... 5.94Lien on Shares............................................................................................................................... 5.95Dematerialization ........................................................................................................................... 5.95Key Terms ..................................................................................................................................... 5.96Test Questions................................................................................................................................ 5.97Practical Problems .......................................................................................................................... 5.99

8. Membership of Company ................................................................................................. 5.101–5.113Learning Objectives ...................................................................................................................... 5.101Members without being Shareholders ............................................................................................. 5.101Shareholders without being Members ............................................................................................. 5.102Modes of Acquiring Membership .................................................................................................... 5.102Termination of Membership ........................................................................................................... 5.103Persons who can be Members ......................................................................................................... 5.104Joint Shareholders ....................................................................................................................... 5.106Rights of Members ....................................................................................................................... 5.106Liability of Members..................................................................................................................... 5.104Calls on Shares ............................................................................................................................ 5.107Advance Payment of Calls ............................................................................................................. 5.108Forfeiture of Shares ...................................................................................................................... 5.108Surrender of Shares...................................................................................................................... 5.110Test Questions.............................................................................................................................. 5.111Practical Problems ........................................................................................................................ 5.112

9. Meetings and Proceedings ............................................................................................... 5.114–5.135Learning Objectives ...................................................................................................................... 5.114Kinds of Meetings ........................................................................................................................ 5.114Statutory Meeting ........................................................................................................................ 5.114Annual General Meeting................................................................................................................ 5.115Extraordinary General Meeting ....................................................................................................... 5.116Meetings Convened by National Company Law Tribunal .................................................................... 5.117Class Meetings.............................................................................................................................. 5.118Other Meetings ............................................................................................................................ 5.118Procedures and Requisites of Valid General Meeting.......................................................................... 5.119

Resolutions ..................................................................................................................................5.125Passing of Resolutions by Postal Ballot ............................................................................................ 5.127Minutes of the Proceedings ............................................................................................................5.128Key Terms ....................................................................................................................................5.129Test Questions...............................................................................................................................5.129Practical Problems .........................................................................................................................5.131

10. Borrowing Powers............................................................................................................ 5.136–5.146Learning Objectives .......................................................................................................................5.136Extent of Borrowing Powers ...........................................................................................................5.136Powers to Give Security .................................................................................................................5.136Charge on Uncalled Capital .............................................................................................................5.136Consequences of Ultra Vires Borrowings........................................................................................... 5.137Remedies available to the Lender of Money ...................................................................................... 5.137Debentures ...................................................................................................................................5.138Difference between Debentures and Shares ....................................................................................... 5.141SEBI Guidelines for Issue of Debt Instruments ................................................................................. 5.142Charge ......................................................................................................................................... 5.143Key Terms ....................................................................................................................................5.145Test Questions...............................................................................................................................5.146

11. Managerial Personnel and Thei r Remuneration ................................................................ 5.147–5.154Learning Objectives .......................................................................................................................5.147Meaning of Managerial Personnel .................................................................................................... 5.147Key Managerial Personnel ...............................................................................................................5.147Choice of the Managerial Personnel ................................................................................................. 5.148Overall Limit Managerial Remuneration ........................................................................................... 5.149Schedule (V) Part (II) Remuneration ............................................................................................... 5.150Key Terms ....................................................................................................................................5.153Test Questions...............................................................................................................................5.154

12. Di rectors ......................................................................................................................... 5.155–5.172Learning Objectives .......................................................................................................................5.155Meaning of Directors .....................................................................................................................5.155Number and Composit ion of Directors ............................................................................................. 5.155Classification of Directors...............................................................................................................5.160Committees of Board of Directors.................................................................................................... 5.159Number of Directorships ................................................................................................................5.160Disqualification of Directors ...........................................................................................................5.160Vacation of Office by A Director .....................................................................................................5.161Removal of Directors .....................................................................................................................5.161Resignation by Director .................................................................................................................5.162Loans to Directors .........................................................................................................................5.163Related Party Transactions..............................................................................................................5.163Powers of Directors ........................................................................................................................5.164Further Restrict ions on the Powers of the Board ............................................................................... 5.166Duties of Directors ........................................................................................................................5.167Legal Posit ion of Directors..............................................................................................................5.169

Key Terms ................................................................................................................................... 5.170Test Questions.............................................................................................................................. 5.170Practical Problems ........................................................................................................................ 5.172

13. Other Managerial Personnel ............................................................................................. 5.173–5.178Learning Objectives ...................................................................................................................... 5.173Managing Director ........................................................................................................................ 5.173Whole-t ime Directors .................................................................................................................... 5.174Difference Between A Managing Director and Whole-t ime Director ..................................................... 5.175Managerial Remuneration of Directors ............................................................................................ 5.175Manager ...................................................................................................................................... 5.176Key Terms ................................................................................................................................... 5.177Test Questions.............................................................................................................................. 5.177Practical Problems ........................................................................................................................ 5.178

14. Secretary ......................................................................................................................... 5.179–5.185Learning Objectives ...................................................................................................................... 5.179Meaning of Secretary .................................................................................................................... 5.179Appointment of Secretary ............................................................................................................. 5.180Dismissal of Secretary ................................................................................................................... 5.181Status of Secretary ....................................................................................................................... 5.181Duties of Secretary ....................................................................................................................... 5.182Liabilit ies of a Company Secretary .................................................................................................. 5.183Key Terms ................................................................................................................................... 5.184Test Questions.............................................................................................................................. 5.184Practical Problems ........................................................................................................................ 5.185

15. Accounts, Audi t and Investigation ................................................................................... 5.186–5.208Learning Objectives ...................................................................................................................... 5.186Books of Account ........................................................................................................................ 5.186Statutory Books of Account and Statutory Registers........................................................................ 5.187Financial Statements..................................................................................................................... 5.192National Financial Reporting Authority .......................................................................................... 5.195Corporate Social Responsibility ...................................................................................................... 5.196Internal Audit ............................................................................................................................. 5.197Audit and Auditors ...................................................................................................................... 5.197Investigation ............................................................................................................................... 5.202Key Terms ................................................................................................................................... 5.205Test Questions.............................................................................................................................. 5.206Practical Problems ........................................................................................................................ 5.207

16. Corporate Governance...................................................................................................... 5.209–5.224Learning Objectives ...................................................................................................................... 5.208Concept of Corporate Governance................................................................................................... 5.208Emergence of Corporate Governance ............................................................................................... 5.209Global Institutions for Corporate Governance .................................................................................. 5.210Authorit ies Involved in Corporate Governance in India .................................................................... 5.211Evaluation of Corporate Governance Measures ................................................................................. 5.220Conclusion .................................................................................................................................. 5.222Key Terms ................................................................................................................................... 5.222

Test Questions.............................................................................................................................. 5.222

17. Dividends, Bonus and Interest ......................................................................................... 5.225–5.233Learning Objectives .......................................................................................................................5.223Dividends .....................................................................................................................................5.223Bonus Shares................................................................................................................................5.229Key Terms ....................................................................................................................................5.233Test Questions...............................................................................................................................5.231Practical Problems .........................................................................................................................5.232

18. Compromises, Arrangements and Amalgamation .............................................................. 5.234–5.241Learning Objectives .......................................................................................................................5.233Compromises and Arrangements......................................................................................................5.233Reconstruction & Amalgamation .....................................................................................................5.236Amalgamation of Companies in Public Interest ................................................................................ 5.238Preservation of Books and Papers of the Amalgamated Company ......................................................... 5.239Key Terms ....................................................................................................................................5.239Test Questions...............................................................................................................................5.239Practical Problems .........................................................................................................................5.239

19. Supremacy of Majori ty and Protection of Minori ty ........................................................... 5.242–5.245Learning Objectives .......................................................................................................................5.244Rule of Supremacy of Majority .......................................................................................................5.244Exceptions to the Rule Supremacy of Majority ................................................................................. 5.242Key Terms ....................................................................................................................................5.244Test Questions...............................................................................................................................5.244Practical Problems .........................................................................................................................5.244

20. Prevention of Oppression and Mismanagement ................................................................ 5.246–5.251Learning Objectives .......................................................................................................................5.245Oppression ....................................................................................................................................5.245Mismanagement ............................................................................................................................5.246Key Terms ....................................................................................................................................5.249Test Questions...............................................................................................................................5.249Practical Problems .........................................................................................................................5.250

21. Winding Up .................................................................................................................... 5.252–5.275Learning Objectives .......................................................................................................................5.251Meaning of Winding Up.................................................................................................................5.251Modes of Winding Up ....................................................................................................................5.251Winding Up by the Tribunal ..........................................................................................................5.252Voluntary Winding Up ...................................................................................................................5.261Conduct of Winding Up .................................................................................................................5.267Key Terms ..................................................................................................................................... 5.73Test Questions................................................................................................................................ 5.73Practical Problems .......................................................................................................................... 5.74

22. Company Law in a Computerized Envi ronment : E-Fi ling ................................................. 5.276–5.282Learning Objectives .......................................................................................................................5.275Background – MCA 21 ...................................................................................................................5.275Key Benefits of MCA 21 Project ......................................................................................................5.276Scope of MCA 21...........................................................................................................................5.276Services Available on MCA 21 .........................................................................................................5.276Organization of Work Under MCA 21 ............................................................................................... 5.277

E-Filing ....................................................................................................................................... 5.277Online Registration of Company ..................................................................................................... 5.278Digital Signature Certificate .......................................................................................................... 5.278Director Identification Number ...................................................................................................... 5.278Corporate Identity Number ............................................................................................................ 5.279The Companies Act and E-Filing .................................................................................................... 5.280Conclusion .................................................................................................................................. 5.280Key Terms ................................................................................................................................... 5.280Test Questions.............................................................................................................................. 5.280Practical Problems ........................................................................................................................ 5.281

23. Global Companies ............................................................................................................ 5.283–5.286Learning Objectives ...................................................................................................................... 5.282Concept of Global Company ........................................................................................................... 5.282Difference between Global Company & Other Companies ................................................................... 5.282Formation of Global Company ........................................................................................................ 5.283Characterist ics of Global Company .................................................................................................. 5.283Administration of Global Company ................................................................................................. 5.283Indian Companies in Forbes Global 2000 List-2014 ........................................................................... 5.284Key Terms ................................................................................................................................... 5.285Test Questions.............................................................................................................................. 5.285

24. Other Companies ............................................................................................................. 5.287–5.299Learning Objectives ...................................................................................................................... 5.286One PersonCompany (OPC) ............................................................................................................. 5.286Small Company ............................................................................................................................ 5.288Dormant Company ........................................................................................................................ 5.288Defunct Company ......................................................................................................................... 5.289Producer Company ........................................................................................................................ 5.290Sick Industrial Company ............................................................................................................... 5.292Key Terms ................................................................................................................................... 5.296Test Questions.............................................................................................................................. 5.297Appendix ........................................................................................................................ 5.300–5.309

Section 6MISCELLANEOUS

1. The Essential Commodi ties Act, 1955 ...................................................................................... 6.3–6.7Learning Objectives .......................................................................................................................... 6.3Important Terms .............................................................................................................................. 6.3Powers of Central Government ........................................................................................................... 6.4Test Questions.................................................................................................................................. 6.7

2. The Consumer Protection Act, 1986 ....................................................................................... 6.8–6.18Learning Objectives .......................................................................................................................... 6.8Important Terms .............................................................................................................................. 6.8Consumer Protection Councils ........................................................................................................... 6.9Consumer Dispute Redressal Agencies ............................................................................................... 6.11Test Questions................................................................................................................................ 6.17

3. The Co-operative Societies Act, 1912 ................................................................................... 6.19–6.27Learning Objectives ........................................................................................................................ 6.19Objective and Scope of the Act ........................................................................................................ 6.19Definit ions .................................................................................................................................... 6.19Registration ................................................................................................................................... 6.20Rights and Liabilit ies of Members .................................................................................................... 6.21Duties of Registered Societies .......................................................................................................... 6.22Privileges of Registered Societies...................................................................................................... 6.22Property and Funds of Registered Societies ....................................................................................... 6.24Inspection of Affairs ...................................................................................................................... 6.25Dissolution of Society ..................................................................................................................... 6.25Test Questions................................................................................................................................ 6.26Practical Problems .......................................................................................................................... 6.27

4. The Mult i -State Co-operative Societies Act, 2002 ................................................................. 6.28–6.44Learning Objectives ........................................................................................................................ 6.28Application of the Act .................................................................................................................... 6.28Important Terms ............................................................................................................................ 6.28Registration of Societies ................................................................................................................. 6.30Transfer and Amalgamation of Societies ........................................................................................... 6.31Members of Mult i-State Co-operative Societies ................................................................................... 6.32Management of Mult i-State Co-operative Societies ............................................................................. 6.34Privileges of Mult i-State Co-operative Society .................................................................................... 6.37Properties and Funds of Mult i-State Co-operative Societies.................................................................. 6.37Audit, Inquiry and Inspection of Mult i-State Co-operative Societies .................................................... 6.38Winding Up of Mult i-State Cooperative Societies ............................................................................... 6.40Offences and Penalt ies .................................................................................................................... 6.42Test Questions................................................................................................................................ 6.42

Practical Problems .......................................................................................................................... 6.43

5. The Foreign Exchange Management Act, 1999...................................................................... 6.45–6.57Learning Objectives ........................................................................................................................ 6.45Objectives and Application .............................................................................................................. 6.45FEMA Vesus FERA ........................................................................................................................... 6.45Definit ions .................................................................................................................................... 6.46Regulation and Management of Foreign Exchange.............................................................................. 6.48Authorised Person .......................................................................................................................... 6.50Contravention and Penalt ies ............................................................................................................ 6.52Adjudication and Appeal ................................................................................................................. 6.54Directorate of Enforcement ............................................................................................................. 6.56Test Questions................................................................................................................................ 6.57

6. The Employees Provident Funds &Miscellaneous Provisions Act, 1952 ..................................................................................... 6.58–6.79Learning Objectives ........................................................................................................................ 6.58Scope and Application .................................................................................................................... 6.58Definit ions .................................................................................................................................... 6.59Employees Provident Funds Scheme ................................................................................................. 6.61Employees’ Pension Scheme............................................................................................................. 6.61Employees’ Deposit-Linked Insurance Scheme.................................................................................... 6.62

Administration of Schemes ............................................................................................................. 6.63Membership of the Fund ................................................................................................................. 6.66Contributions to the Fund .............................................................................................................. 6.67Duties of Employer ......................................................................................................................... 6.68Nominations, Payments and Withdrawals from the Fund ..................................................................... 6.70Payment of Provident Fund ............................................................................................................. 6.71Schedule I ..................................................................................................................................... 6.72Schedule II .................................................................................................................................... 6.75Schedule III ................................................................................................................................ ..6.76Schedule IV................................................................................................................................... 6.76Test Questions................................................................................................................................ 6.77Practical Problem ........................................................................................................................... 6.78

7. The Payment of Gratui ty Act, 1972 ...................................................................................... 6.80–6.86Learning Objectives ........................................................................................................................ 6.80Scope and Application .................................................................................................................... 6.80Important Terms ............................................................................................................................ 6.80Administration of the Act ............................................................................................................... 6.81Test Questions................................................................................................................................ 6.85

Practical Problems .......................................................................................................................... 6.858. The Payment of Wages Act, 1936 ......................................................................................... 6.87–6.95

Learning Objectives ........................................................................................................................ 6.86Scope and Application .................................................................................................................... 6.86Definit ions .................................................................................................................................... 6.86Wages : Payment and Deductions ..................................................................................................... 6.87Records and Inspection ................................................................................................................... 6.92Contracting Out ............................................................................................................................. 6.94Test Questions................................................................................................................................ 6.94Practical Problems .......................................................................................................................... 6.95

9. The Payment of Bonus Act, 1965 ....................................................................................... 6.96–6.113Learning Objectives ........................................................................................................................ 6.96Objective and Application of the Act ............................................................................................... 6.96Definit ions .................................................................................................................................... 6.98Liability to Pay Bonus .................................................................................................................. 6.100Eligibility for Bonus..................................................................................................................... 6.100Amount of Bonus ........................................................................................................................ 6.100Applicability of Act to Establishments Newly Setup ......................................................................... 6.101Payment of Bonus........................................................................................................................ 6.102Miscellaneous Provisions ............................................................................................................... 6.102The First Schedule........................................................................................................................ 6.103The Second Schedule.................................................................................................................... 6.105The Third Schedule ...................................................................................................................... 6.107The Fourth Schedule..................................................................................................................... 6.110Test Questions.............................................................................................................................. 6.110Practical Problem ......................................................................................................................... 6.111

10. The Information Technology Act, 2000 ............................................................................. 6.114–6.133Learning Objectives .......................................................................................................................6.114Objectives of the Act .....................................................................................................................6.114Scope and Application ...................................................................................................................6.115Definit ions ...................................................................................................................................6.115Digital Signature & Electronic Signature.......................................................................................... 6.117Electronic Governance ...................................................................................................................6.117Attribution, Acknowledgement and Despatch of Electronic Records .................................................... 6.119Secure Electronic Records and Secure Digital Signatures.................................................................... 6.120Regulation of Certifying Authorit ies ............................................................................................... 6.120Granting of Licence.......................................................................................................................6.121Electronic Signature Certificates .....................................................................................................6.123Duties of Subscribers .....................................................................................................................6.124Penalt ies Compensation and Adjudication ........................................................................................ 6.124The Cyber Appellate Tribunal .........................................................................................................6.126Offences....................................................................................................................................... 6.128Key Terms ....................................................................................................................................6.130Test Questions...............................................................................................................................6.131

Practical Problem ..........................................................................................................................6.133

11. The Deposi tories Act, 1996 ............................................................................................. 6.134–6.144Learning Objectives .......................................................................................................................6.134Need for Depositories .....................................................................................................................6.134Meaning and Benefits of a Depository ............................................................................................. 6.134Scope and Applications of the Act .................................................................................................. 6.135Definit ions ...................................................................................................................................6.135Certificate of Commencement of Business........................................................................................ 6.136Rights and obligations of Depositories, Participants........................................................................... 6.136Enquiry and Inspections ................................................................................................................6.138Penalty ........................................................................................................................................ 6.141Miscellanenous..............................................................................................................................6.141Key Terms ....................................................................................................................................6.144Test Questions...............................................................................................................................6.144

12. The Income Tax Act, 1961 ............................................................................................... 6.145–6.151Learning Objectives .......................................................................................................................6.145Scope and Application ...................................................................................................................6.145Finance Act ..................................................................................................................................6.145Scheme of Taxation .......................................................................................................................6.146Important Concepts .......................................................................................................................6.146Deduction of Tax at Source ............................................................................................................6.147Advance Payment of Tax ................................................................................................................6.148Assessment Procedure ....................................................................................................................6.148Types of Assessment ......................................................................................................................6.149Key Terms ....................................................................................................................................6.150Test Questions...............................................................................................................................6.150

13. The Central Excise Act, 1944 & VAT................................................................................. 6.152–6.160Learning Objectives ...................................................................................................................... 6.152Scope and Applications................................................................................................................. 6.152Levy of Excise Duty...................................................................................................................... 6.152Chargeability of Excise Duty .......................................................................................................... 6.153Excisable Goods............................................................................................................................ 6.153Classification of Goods.................................................................................................................. 6.154Valuation of Goods....................................................................................................................... 6.155Registration of Certain Persons ...................................................................................................... 6.156Clearance of Goods ....................................................................................................................... 6.157MODVAT Scheme .......................................................................................................................... 6.157CENVAT Scheme ........................................................................................................................... 6.158Value Added Tax (VAT) .................................................................................................................. 6.158Key Terms ................................................................................................................................... 6.159Test Questions.............................................................................................................................. 6.159

14. The Competi t ion Act, 2002 .............................................................................................. 6.161–6.175Learning Objectives ...................................................................................................................... 6.161Scope and Applications................................................................................................................. 6.161Definit ions .................................................................................................................................. 6.162Prohibit ion of Agreements ............................................................................................................ 6.163Prohibit ion of Abuse of Dominant Posit ion ..................................................................................... 6.164Regulations of Combinations ......................................................................................................... 6.165Competit ions Commission of India ................................................................................................. 6.167Director General ........................................................................................................................... 6.168Registrar and Officers and Other Employees of Commission ............................................................... 6.169Duties, Powers and Functions of Competit ion Commission of India.................................................... 6.169Penalties...................................................................................................................................... 6.172Miscellaneous............................................................................................................................... 6.173Key Terms ................................................................................................................................... 6.174Test Questions.............................................................................................................................. 6.174

15. The Limi ted Liabi li ty Partnership Act ............................................................................. 6.176–6.189Learning Objectives ...................................................................................................................... 6.176Int roduct ion ................................................................................................................................ 6.176Meaning and Nature of Limited Partnership..................................................................................... 6.176Formation of Limited Liability Partnership ...................................................................................... 6.177Designated Partners ...................................................................................................................... 6.177Limited Liability Partnership V/ s. Partnership Firm .......................................................................... 6.178Limited Liability Partnership V/ s. Limited Liability Company ............................................................ 6.179Partners and their Relations .......................................................................................................... 6.179Cessation of Partnership ................................................................................................................ 6.180Extent and limitation of Liability of Limited Liability Partnership and Partners .................................. 6.181Financial Disclosures..................................................................................................................... 6.182Assignment and Transfer of Partnership Rights................................................................................ 6.183Investigation ............................................................................................................................... 6.183

Conversion from Firm into Limited Liability Partnership ................................................................... 6.184Conversion from Private Company into Limited Liability Partnership .................................................. 6.185Conversion from Unlisted Public Company into Limited Liability Partnership ....................................... 6.186Contributions ...............................................................................................................................6.187Winding Up and Dissolution ...........................................................................................................6.187Key Terms ....................................................................................................................................6.188Test Questions...............................................................................................................................6.188

16. The Prevention of Money Laundering Act, 2002 .............................................................. 6.190–6.197Learning Objectives .......................................................................................................................6.190Int roduct ion .................................................................................................................................6.190Offence of Money Laundering.........................................................................................................6.190Attachment, Adjudication and Confiscation ..................................................................................... 6.191Obligations of Banking Companies, Financial Institutions and Intermediaries ...................................... 6.193Summons, Searches and Seizures, etc. ............................................................................................. 6.193Appellate Tribunal .........................................................................................................................6.195Special Courts ...............................................................................................................................6.195Miscellaneous................................................................................................................................6.195Key Terms ....................................................................................................................................6.196Test Questions...............................................................................................................................6.196

17. Indian Copyright Act, 1957 ............................................................................................. 6.198–6.208Learning Objectives .......................................................................................................................6.198Int roduct ion .................................................................................................................................6.198Definit ions ...................................................................................................................................6.198Publication ...................................................................................................................................6.200Copyright Office and Copyright Board ............................................................................................. 6.200Copyright .....................................................................................................................................6.201Ownership of Copyright and Rights of the Owner ............................................................................. 6.202Terms of Copyright ........................................................................................................................6.203International Copyright .................................................................................................................6.204Registration of Copyright ...............................................................................................................6.204Infringement of Copyright .............................................................................................................6.205Civil Remedies ..............................................................................................................................6.207Offences....................................................................................................................................... 6.207Key Terms ....................................................................................................................................6.208Test Questions...............................................................................................................................6.208

1.3

SECTION 1

THE INDIAN CONTRACT ACT, 1872

1.5

Chapter 1

GENERAL PRINCIPLES

LEARNING OBJECTIVES

A careful study of this chapter wi ll enable you to : understand the meaning of the term contract; identify the essentials of a valid contract; classify the contracts into different categories; and explain the meaning of certain key terms.

SCOPE AND APPLICATION

The Indian Contract Act is the most important constituents of Indian Mercantile Law. It affects every person since everyone of us enters into a contract virtually every day. When a person takes a seat in a bus or lends a book to his friendor deposits money in a bank account or purchases goods on credit, he enters into a contract though he may not beconscious of this fact. The law of contracts is of immense importance to a businessman since all his transactions are basedon contracts.

The Indian Contract Act came into force from 1st September, 1872. It has been amended several t imes. The notableamendments have been in 1886, 1891, 1899, 1930, 1932 and 1997. The Act has been mainly enacted to ensure that theobligations prescribed by agreements and the reasonable expectations created by them are fulfilled by the concernedparties to the agreements. The Act applies to the whole of India except the state of Jammu and Kashmir.

The Act largely deals with :

(i) the general principles applicable to contracts;

(ii) the condit ions necessary for making a valid contract;

(iii) the principles applicable to quasi contracts; and

(iv) the principles applicable to some special contracts like those of Indemnity, Guarantee, Bailment and Agency.

It may be noted that the Contract Act is not applicable to all types of contracts. There are certain contracts whichare governed by special laws. For example, the Transfer of Property Act is applicable to all contracts, relating to immovableproperty. Similarly, the Negotiable Instruments Act regulates all contracts regarding cheques, bills of exchange andpromissory notes. The Sale of Goods Act deals with contracts of sale of goods, etc. The provisions of the Contracts Actare mostly general in nature and they are applicable to special contracts mentioned above only to the extent that theyare not contrary to the provisions of the special Acts governing them. Similarly, the Contract Act does not affect particularcustom and usage of trade unless otherwise specifically agreed by the parties.

1.6 The Indian Contract Act, 1872

1. Balfour v. Balfour (1919) 2 K.B. 571.2. Rose & Frank Co. v. Crompton & Bros. (1925) A.C. 445.

TYPES OF RIGHTS

Rights available to a person may be divided as rights in rem and rights in personam. Right in rem implies a right availableagainst the whole world. Right in personam is available only against a particular individual. The Contract Act deals withrights in personam and not with rights in rem.

Examples : (i) A is the owner of a house. As owner of the house he has the right of its quiet possession and enjoyment againstthe whole world. This is, therefore, his right in rem.

(ii) A is indebted of B to the extent of Rs. 1000. B’s right to recover money from A will be termed as right in personam as itis available only against A and none else.

Thus, rights to property are right in rem and rights arising out of contracts are rights in personam.

MEANING OF CONTRACT

It will be appropriate to go through definit ions given by some eminent jurists to understand the meaning of the termcontract.

“An agreement creat ing and defining obligat ions between the part ies”. — Salmond

“A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or moreto acts or forbearances on the part of the other or others”. — Sir William Anson

“Every agreement and promise enforceable at law is a contract”. — Sir Federick Pollock

Sec. 2 (h) of The Indian Contract Act defines a contract as, ‘an agreement enforceable at law’. Every contract, thus,combines two essential elements (i) agreement and (ii) obligation. It creates rights and obligations between the partiesto the contract, which are correlative. In case a party refuses to honour a contracted obligation it will give right of actionto the other party.

The essential requirements of a contract, based on the above definit ions can be put as follows :

(1) Two Parties : Two parties are necessary to make a contract. The person who makes the promise is known asthe ‘promisor’ and the person to whom the promise is made is known as the ‘promisee’. As a matter of fact, ina contract, each party is a promisor as well as a promisee. For example, when A promises to sell his car for asum of Rs. 10,000 to B, A is a promisor because he has promised to sell his car while he is also a promiseebecause there is a promise from B to pay a sum of Rs. 10,000 to him. The same is also applicable to B.

(2) An Agreement : There has to be an agreement between two parties. An offer when accepted becomes anagreement. Thus, an agreement implies an ‘offer’ and acceptance. The term offer implies the willingness of aperson to do or not to do something and its communication to the other, while acceptance means assent bythe party to whom the offer has been made. For example, if A says to B that he is willing to sell him his carfor a sum of Rs. 10,000, it is an offer from A. If B gives his assent to this offer, it will be said that he hasaccepted the offer and an agreement will come into existence.

(3) Legal Obligation : The agreement should give rise to a legal obligation, i.e., obligation which is enforceableat law. Agreements which give rise only to social or domestic obligations cannot be termed as contracts. Anagreement to go to a picture or attend a marriage ceremony is not a contract as it does not give rise to anylegal obligation. They are often not intended to be binding in law. The most usual form of agreements, whichdo not constitute a contract, are the agreements made between husband and wife. They are not contractsbecause the parties do not intend that they should be attended by legal consequences.1 But where A agreesB to supply him 1,000 bales of cotton at Rs. 100 per bale, there is a contact, because if any party is notprepared to fulfil his part, the other party can have recourse to legal remedies.

From the above following conclusions can be drawn :

(a) All agreements are not contracts : Agreement is a much wider term than a contract. As stated above, an agreementmay or may not give rise to legal obligations. An agreement which does not create legal obligation, is not a contract.

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Agreements which the parties declare not to be binding also do not constitute contract. They may be just ‘honourablepledges’ and expressly stated to be ‘outside the jurisdiction of any court.’2

Examples : (i) If A agrees to come to the house of B for a dinner at B’s request, there is an agreement, but it cannot be termedas a contract because it does not carry any legal obligat ion.

(ii) A of Ceylon came to England with his wife for a holiday. While returning to Ceylon on the expiry of his leave, he promisedhis wife, who on medical grounds had to remain in England, a household allowance of £ 30 a month until she joined him in Ceylon.After some t ime when the two part ies separated from each other, the wife claimed the allowance. The Court did not allow the claimon the ground that domest ic arrangements are outside the realm of contract altogether.3

(b) All obligations also do not constitute contracts : Any obligation which arises independently of an agreement,cannot be the basis of a valid contract. According to Anson, only that obligation is a contract, which directly contemplatesand creates an obligation and is intended to have any legal consequences. Obligation to maintain wife and children doesnot arise out of contract. Obligation to observe the provisions of the various Acts also does not arise out of a contract.

Therefore, to sum up, a contract results from a combination of agreement and obligation. But, it is not necessarythat all agreements should create an obligation between the parties to the agreement. An agreement may exist withoutany legal obligation, but a contract cannot. In order that an agreement should be a contract, it must create legal obligationon both the parties. It must impose compulsion upon a person or persons to do or not to do a certain act. Obligationsmay also relate to either social or legal matters. But the Law of Contracts is confined only to such legal obligations asare traceable only to agreements. Agreements giving rise to social obligations will also not constitute binding contracts.Obligations arising from a trust, a decree or from statutes do not fall within the scope of the Contract Act. Hence ‘thelaw of contracts is not the whole law of agreements nor is it the whole law of obligations. It is the law of those agreementswhich create obligations, and those obligations which have their sources in agreements.’— Sir John William Salmond*

ESSENTIAL ELEMENTS OF A VALID CONTRACT

The following are the essential elements of a valid contract :

(1) Agreement : Agreement means communication by the parties to one another their intention to create relationship.This requires a proposal from the side of one party and its acceptance by the other party. Thus, a contractrequires two parties— one making the proposal and the other accepting it.

(2) Competent Parties : Both the parties entering into an agreement should be competent to make contract. Everyperson who has attained the age of majority, possesses sound mind and is not subject to any other legaldisqualifications, is considered competent to enter into a contract.

(3) Free Consent : The term consent means understanding the same thing in the same sense by the partiesentering into an agreement. Consent is said to be free if it has been given by the parties independently withoutany fear or favour. In order to make a contract valid, it is necessary that parties to the contract not only givetheir consent, but should also be free.

(4) Consideration : A contract enforceable by law must also be supported by consideration. Consideration means‘something’ in return. This implies that the parties entering into an agreement should get something in returnfor the promises they are making to make such promises a valid contract.

(5) Legal Object : The object of the agreement should be legal. In other words the agreement should not violatethe provisions of some law or it should not relate to matters which are forbidden by law.

(6) Not Expressly Declared Void : The agreement must have not been expressly declared void by any law in forcein the country.

(7) Compliance wi th the Legal Formali t ies : The prescribed legal formalit ies of writ ing, registration etc., ifnecessary, for the agreement to make it enforceable by law, must have been observed. Certain other Acts alsoprescribe some legal formalit ies, which if not observed, will make the agreements void.

* (3rd Dec. 1862 - 19th Sept. 1924) Legal Scholar, Judge, New Zealand.3. Balfour v. Balfour op. cit.

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1.8 The Indian Contract Act, 1872

A list of such agreements is given below :Contracts which must be in writing : Following are some of the contracts or documents which must be in writ ing,

otherwise they will not be valid :(1) A promise to pay a t ime-barred debt.(2) An arbitration agreement.(3) Lease agreements for a period of more than three years.(4) Contracts of insurance.

(5) Negotiable Instruments e.g., bills of exchange, cheques or promissory notes.(6) Memorandum and Articles of Association of a company.(7) Contracts relating to transfer of immovable properties.

Contracts which must be registered : Following are some of the contracts (or documents containing contracts) whichmust be registered:

(1) A promise made without consideration on account of natural love and affection between parties standing innear relation.

CLASSIFICATION OF CONTRACTS

Enforceability Mode of Creation

Express Contracts

Valid Void Illegal Unenfor-ceable

Execu-ted

Execu-tory

Implied Contracts

Extent of Execution

(2) Documents of which registration is compulsory under Sec. 17 of The Registration Act, 1908.(3) Contracts relating to the transfer of immovable properties under The Transfer of Property Act, 1882.(4) Memorandum and Articles of Association, debentures, mortgages and charges under The Companies Act, 1956.

CLASSIFICATION OF CONTRACTS

Contracts may be classified into different categories depending upon their (i) enforceability, (ii) mode of creation and(iii) extent of execution. This has been given in the chart as follows:

1. Classification of Contracts on the Basis of Enforceability

(a) Valid Contracts : Contracts which satisfy all the essential elements of a valid contract as laid down by Section10, are enforceable in a court of law. Such contracts are termed as valid contracts.

(b) Void Contracts : An agreement may be enforceable at the t ime when it was made but later on, due to certainreasons, it may become void and unenforceable. Such agreements are known as void contracts.

Following are some of such contracts :

(i) A contract becomes void by supervening impossibility or illegality (Sec. 56).

(ii) A voidable contract becomes void, when the party, who had the option to avoid it , decides to repudiate thecontract.

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(iii) A contingent contract to do or not to do something on the happening of an event becomes void when the eventbecomes impossible (Sec. 32).

Examples : (i) On 15th January. A agrees with B to sell him horse for a sum of Rs. 500 on 20th February. The horse dies on21st January. The performance of the agreement was possible at the t ime when it was made, but now its performance becomesimpossible on account of supervening impossibility. It is, therefore, a void contract.

(ii) A, by exercising coercion over B, makes him agree to sell his horse worth Rs. 500 for a sum of Rs. 100 only. The agreementis voidable at the opt ion of B. He may at his opt ion adopt or rescind the contract. In case B decides to rescind the contract, thecontract between A and B would be void.

(iii) A agrees to sell 1,000 tonnes of wheat to B @ Rs. 500 per tonne in case his ship reaches the port safely by 15th February.The ship fails to reach by the st ipulated date. The contract between A and B is void.

Such contracts can appropriately be termed as ‘contracts which have become void’ in place of ‘void contracts’.

Void Agreement : According to Sec. 2(g) ‘an agreement not enforceable by law is said to be void.’ Thus, a voidagreement is one which is deficient in essentials so as to be destitute of legal effects. Such an agreement is taken to benon-existent and is a nullity in its effects. It does not create any legal rights between the parties. All illegal or immoralagreements are void. Bilateral mistake of a material fact also makes an agreement void.

Example : A agrees with B, in considerat ion of Rs. 100, to draw two parallel lines in such a way as to cross each other. Theagreement is impossible to perform and, therefore void.

Void Agreement and Void Contract

Thus, a void agreement is void from the very beginning, i.e., void ab initio, while a void contract was valid at thetime when it was made but becomes void later. An agreement, which is found to be void ab initio or which becomes voidsubsequently, as stated earlier, will have the following effects :

(a) The agreement shall be unenforceable.

(b) Money paid or property transferred by one party to another is recoverable. This principle will not apply whereboth the parties knew or were expected to know about the illegal or void nature of the agreement at the t imewhen it was made. This has been discussed in detail at the end of Chapter 12 in this Section.

(c) Collateral transactions shall not become void unless the agreement has also been illegal.Example : A test match is going on between India and Pakistan. A agrees to pay a sum of Rs. 100 to B if India wins the match.

India wins and in order to pay off B, A borrows a sum of Rs. 100 from C. C knows the purpose. The agreement between A and C isa collateral t ransact ion. Since a wagering agreement is void and not illegal (except in the old State of Bombay), notwithstanding theoriginal agreement between A and B being void, the collateral agreement between A and C is perfect ly valid.

(d) All lawful promises which are severable shall remain valid and can be enforced.

(c) Voidable Contracts : ‘An agreement which is enforceable by law at the option of one or more of the partiesthereto, but not at the option of other or others, is voidable contract.’ [Sec. 2( i) ] . Thus, a voidable contract is a contractwith a flaw of which the aggrieved party may, at his option, take benefit. He has the option either to affirm it and electto carry out the contract in spite of the defect or to reject it . The other party will have no right to avoid it . The contractshall remain valid so long as it is not repudiated or avoided by the party entit led to do so. Agreements induced bycoercion, undue influence, fraud or misrepresentation are voidable at the option of the party whose consent has beenso obtained.

Example : A by giving false descript ion persuades B to purchase certain goods. B on discovering the misrepresentat ion canrepudiate the contract or elect to carry out the contract in spite of the defect.

The party rescinding the contract is entit led to get damages for any loss that he might have suffered from the otherparty on account of making that contract. But in case he (the aggrieved party) has received some benefit under thecontract, he must restore such benefit to the person from whom it was received.

Difference between Void Agreements and Voidable Contracts1. Enforceability : Void agreements are unenforceable from the very beginning. They are void ab initio. A voidable

General Principles

1.10 The Indian Contract Act, 1872

contract becomes unenforceable only when the party at whose option contract is voidable chooses to rescind it. Itcontinues to be valid t ill it is repudiated by the person entit led to do so. A void agreement cannot be enforced at all.A voidable contract can be enforced if the option is exercise to enforce it.

No one can acquire any t it le on goods contained under a void agreement. But a bona fide holder for value willacquire better t it le on goods obtained from a person who had t it le to the same under a voidable contract.

2. Restitution and Compensation : (a) In the case of void agreements, restitution is always allowed except whereillegality or void nature of the agreement was known or expected to be known to both the parties from very beginning,e.g., where a minor who had not misrepresented his age was a party to the contract.

But in voidable contract, when they are rescinded, benefit will be restored as far as may be possible.(b) As a void agreement cannot be enforced at law, there arises no question of the compensation on account of the

non-performance of the agreement. But, in case of voidable contract, if a person rightfully rescinds a contract, he isentit led to compensation for loss or damages suffered by him on account of the rescission of the contract.

3. Effect on Collateral Agreements : A voidable contract also does not affect the collateral contract just as a voidagreement. But where the agreement is void on account of the illegality of the object and consideration, the collateralagreements will also become void.

Following examples will explain the difference between void agreements and voidable contracts:Examples : (i) A, a doctor by exercising undue influence over his pat ient B, makes him agree to sell his car worth Rs. 10,000

for a sum of Rs. 5,000. The contract is voidable at the opt ion of B; but if he does not exercise his opt ion the contract will remainvalid.

(ii) B has two cars, one blue and other red. He wishes to sell his blue car. He makes an offer to sell his car to A for a sum ofRs. 5,000. A accepts the offer thinking that it is about the red car. There is no consensus ad idem (ident ity of mind) and, therefore,the agreement is void.

(d) I l legal Contracts : It will be appropriate to use the term illegal agreement in place of illegal contract. The term‘illegal agreement’ has a wider conception than void agreement. All illegal agreement are void but all void agreements arenot necessarily illegal, e.g., a wagering agreement is void but not illegal or an agreement with a minor is void but notillegal. An illegal agreement is destitute of legal effect ab initio (i.e., from the very beginning) but a contract may becomevoid subsequently on the happening of an event which makes it illegal. Money paid or property transferred by one partyto the other, in the case of an illegal agreement, shall in general be not recoverable. But incase of agreements which werevalid in the beginning but had become illegal on account of the happening of some event or where the parties did notknow of illegality, the money paid or property transferred might be recovered. A void agreement does not affect theperformance of collateral transactions, but illegality of the original contract will make even the collateral transactionstainted with illegality. Illegal agreements need not necessarily be criminal in nature. When the contract is illegal, thecourt will, of its own motion, refuse to enforce it even though the illegality has not been pleaded by the defendant.

Examples : (i) A promises to pay a sum of Rs. 100 to B if he B gives a good beat ing to C. B gives a good beat ing to C and A,in order to pay B, borrows from D a sum of Rs. 100, D knows the purpose for which money has been borrowed from him. The agreementbetween A and B being illegal, the collateral t ransact ion between A and D will also be illegal.

(ii) A agrees to pay B a sum of Rs. 100 if it rains tomorrow. It rains tomorrow and in order to pay B, A borrows a sum of Rs.100 from D. D knows the purpose for which money has been borrowed from him. The agreement between A and B, being of wageringnature, shall be void (except in Maharashtra and Gujarat where wagering agreements are illegal on account of Bombay Act) but thecollateral t ransact ion between A and D will be perfect ly valid.

Difference between Void and Illegal Agreements1. All illegal agreements are void, but all void agreements are not illegal.2. Unlike illegal agreements, there is no punishment to the parties to a void agreement.3. Agreements collateral to void agreements are valid but agreements collateral to illegal agreements are void ab-

initio.4. Illegal agreements are void from the very beginning, but sometimes valid contracts may subsequently become

void.

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(e) Unenforceable Contracts : Certain contracts become void because the law courts will not enforce them. Thesecontracts have all the essential characterist ics of a contract and are perfectly valid in their substances yet they cannotbe enforced because of certain technical defects. They include contracts which are incapable of being enforced on accountof non-observance of certain formalit ies required by special provisions of law such as those of writ ing, attestation,registration, etc. Some of them can be enforced if the technical defect is removed. For example, if a document embodyinga contract is understamped, the contract is unenforceable, but if the requisite stamp is affixed (if allowed), the contractbecomes enforceable.

2. Classification of Contracts on the Basis of Mode of Creation

(a) Express Contracts : Contracts entered into between the parties by words spoken or written, are termed asexpress contracts. In such contracts, parties make oral or written declaration of their intentions and of the terms of thetransaction.

Example : A writes to B, ‘I am prepared to sell my horse for a sum of rupees five hundred. B accepts A’s offer by a telegram.The contract will be termed as express contract.

(b) Implied Contracts : Contracts which come into being on account of the act or conduct of the parties and notby their express words, written or spoken, are known as implied contracts. Blackstone defines implied contracts as those‘which reason and justice dictate and which the law, therefore, presumes that every man undertakes to perform.’

Example : A takes a seat in a bus. There is an implied contract that he will pay the prescribed fare for taking him to hisdest inat ion.

In some cases, in spite of no agreement between the parties, the law takes it for granted on account of the circumstancesthat the contractual relationship exists between two parties. Actually such obligations do not arise out of agreements,and therefore, properly speaking they cannot be termed as contracts. The Contracts Act calls such obligations as ‘relationsresembling to those of controls’. These relations have been discussed in detail in Chapter 11 of this section.

Example : A sends a parcel of fruits to his friend B. The parcel is misdelivered to C, who takes it as a birthday present fromhis friend. C must pay for the price of the fruits.

3. Classification of Contracts on the Basis of the Extent of Execution

(a) Executed Contracts : Where both the parties to the contract have fulfilled their respective obligations, contractis said to be executed. In other words, an executed contract is one where nothing remains to be done by either party.

Example : A sells a radio set to B for Rs. 300. B pays the price. Both the part ies have performed their respect ive obligat ions,and therefore, it is an executed contract.

(b) Executory Contract : Where one or both the parties to the contract have still to perform certain things in futureor under the terms of the contract something remains to be done, the contract is termed as an executory one, e.g.,delivery of goods has been given but price has not been paid or both the delivery of goods and payment of price haveto be made at a future date.

Example : A agrees to paint a picture for B and B in considerat ion promises to pay A a sum of rupees one hundred. The contractis executory.

In a contract where one party has performed his promise but the other has still to perform his part, the contractwill be taken as partly executed and partly executory.

Example : A agrees to paint a picture for B and B in consideration pays a sum of Rs. 100 to A. The contract is executed as regardsB, but executory as regards A.

On the basis of execution, the contracts may also be divided as :(1) Unilateral contracts.(2) Bilateral contracts.(1) Unilateral Contracts : A contract is said to be unilateral where one party has performed his obligation either

before or at the t ime when the contract comes into existence. It is only the obligation of the other party whichremains outstanding at the t ime of formation of the contract. Such contracts are also termed as contracts withexecuted consideration.

General Principles

1.12 The Indian Contract Act, 1872

Example : A, a coolie, puts B’s luggage in the carriage. The contract comes into existence as soon as the luggage is put. It isnow for B to perform his obligat ion by paying the charges to the coolie.

(2) Bilateral Contracts : A contract is bilateral if the obligations of both the parties are outstanding at the t imeof the formation of the contract. They are, therefore, executory contracts with executory consideration.

Example : A promises to sell his car to B after 15 days. B promises to pay the price on the delivery of the car. The contractis bilateral as obligat ions of both the part ies are outstanding at the t ime of the formation of the contract.

It is to be noted that the contract comes into existence on the date on which it is entered into between the parties.The date of its execution is immaterial for determining the validity of the contract. The mere fact that the performanceof the contract has been postponed does not mean that the contract was never entered into.

Example : A agrees to supply 500 bags of rice to B three months after 15th January the date on which he will enter into acontract with B. Though performance of the contract has been deferred for three months but the contract will be taken to have comeinto existence right on 15th January.

From the above, it follows that a contract is a contract from the t ime it is made and not from the time its performanceis due.

––––––––––––––––––––––––––––––––––––– KEY TERMS –––––––––––––––––––––––––––––––––––––

Agreement : An offer when accepted becomes an agreement. Contract : An agreement enforceable by law. I l legal Agreement : An agreement against the provisions of law. Void Agreement : An agreement enforceable at the t ime when it was made; but later on becomes unenforceable. Voidable Contract : An agreement enforceable at the option of one or more parties thereto; but not at the

option of the other or others.

–––––––––––––––––––––––––––––––––– TEST QUESTIONS ––––––––––––––––––––––––––––––––––

Object ive Type : Test Your Knowledge

1. Fill in the blanks(i) A contract is an agreement .............(ii) A void agreement is void from the ................(iii) A voidable contract is void at the opt ion of one of the contract ing part ies but not at the opt ion of the .......................(iv) All illegal agreements are ........................ but not all void agreements are ...............................(v) Collateral agreements are also void in case of ........................... agreements.(vi) A contract to contract is ........................ a contract.(vii) An agreement not enforceable by law is.......................... (CCS Foundation Dec. 2012)

[Ans. (i) enforceable by law; (ii) very beginning; (iii) other or others; (iv) void, illegal; (v) illegal;(vi) not; (vii) void-ab-init io.]

2. Select the most appropriate answer(i) A contract is made where :

(a) X agrees with Y to discover a treasure by magic.(b) X bids at a public auct ion.(c) A takes a sit in a public omni bus.(d) X promises in writ ing to give Rs. 500 to Y.

(ii) Right in rem implies :(a) a right available against the whole world.(b) a right available against a part icular individual.(c) a right available against the Government.

(iii) A void contract(a) is void from the very beginning.

1.13

(b) becomes void later on due to certain cont ingencies.(c) is enforceable at the opt ion of one of the contract ing part ies only.

(iv) A void agreement is one which is(a) Valid but not enforceable.(b) Enforceable at the opt ion of both the part ies.(c) Enforceable at the opt ion of one party.(d) Not enforceable in a court of law. (CS Foundation, June 2007)

(v) In case of void agreements, collateral t ransact ions are(a) Also void(b) Unenforceable(c) Not affected(d) Illegal (PCE, ICAI, Nov. 2007)

[Ans. (i) (c); (ii) (a); (iii) (b); (iv) (d); (v) (c)]

Essay Type : For Review, Discussion and Pract ice

1. Explain the essent ials which must be fulfilled before an agreement becomes enforceable at law.2. “The law of contracts is not the whole law of agreements nor is it the whole law of obligat ions.” — (Salmond). Comment.3. How do you dist inguish between Void, Voidable, Unenforceable and Illegal Contracts?4. Different iate between (i) Executed and Executory Contracts, (ii) Formal and Simple Contract.5. Different iate between :

(a) Unilateral and Bilateral Contracts (CA Inter, Nov. 1987, 1990)(b) Void and Illegal Agreements (CA Foundation, Nov. 2000; CA Inter, Nov. 1991,

CS Foundation, Dec. 2003, B.Com. (Hons.), Delhi 1987, B.Com. (Pass) 2000)6. ‘A contract is a contract from the t ime it is made and not from the t ime performance is due.’ Comment.7. Explain the following :

(i) A voidable contract is valid t ill the aggrieved party opts to avoid it . (ICWA Foundation, June 1998)(ii) Is there any difference between agreement and contract? (ICWA Foundation, June 2000)(iii) Illegal agreements and void agreements are the same. (ICWA Foundation, Dec. 1999; Dec. 2000)(iv) An agreement to agree is a valid contract. (ICWA Foundation, June 2000)(v) Dist inguish between void agreement and voidable contract. (ICWA Foundation, Dec. 2000)(vi) “All illegal agreements are void”— Comment. (ICWA Foundation, Dec. 2000)(vii) What are essent ials for validity of a contract? (ICWA Foundation, June 2001)

8. Dist inguish between ‘Void’ and ‘Voidable’ contracts with relevant examples.(GGSIPU, BBA (H), May 2002, B.Com. (Pass), Delhi 2005)

9. Define ‘Contract’. Explain essent ial elements of a valid contract. (GGSIPU, BBA (H), May 2002, 2004)10. “All contracts are agreements, but all agreements are not contracts.” Discuss this statement in the light of sect ion 10 of the

act. (B.Com. (Hons.) Delhi 1999 & 2003; GGSIPU, BBA (H), May 2003)11. “In commercial and business agreements, the presumption is that the part ies intend to create legal obligat ions.” Comment.

(B.Com. (Hons.), Delhi, 1988)12. “The law of contract is not the whole law of obligat ions.” Comment. (B.Com. (Hons.), Delhi, 1991)13. “An agreement enforceable at law is a contract.” Explain. (B.Com. (Pass), Delhi 2005)14. Dist inguish between ‘void contract’ and ‘voidable contract’. (CS Foundation, June 2008)15. State the essent ial elements of a valid contract. (CS Foundation, Dec., 2011)16. Comment on the following statements:

(i) All contracts are agreements but all agreements are not contracts (B.Com (Hons.) Delhi 2010)(ii) In social agreements, the usual presumptions is that the part ies intend to create legal obligat ions.

(B.Com (Hons.) Delhi 2011)(iii) A void contract is one which is void ab-init io (B.Com (Hons.) Delhi 2012)(iv) All void agreements are not illegal but all illegal agreements are void. (B.Com (Hons.) Delhi 2010)(v) Collateral t ransact ions to an illegal agreement do not become void. (B.Com (Hons.) Delhi 2011)

General Principles

1.14 The Indian Contract Act, 1872

––––––––––––––––––––––––––––––– PRACTICAL PROBLEMS ––––––––––––––––––––––––––––––1. Do the following const itute valid contracts :

(a) when you board a bus;(b) when you enrol for a correspondence course;(c) when you call a taxi;(d) when you buy an evening paper;(e) when you put a penny in the slot of a weighing machine;(f) when you eat a meal at a restaurant.

[Ans. Yes, in all cases.]2. Father promised to pay his son a sum of Rs. 1 lakh if the son passed CA examinat ion in the first at tempt. The son passed the

examinat ion in the first at tempt, but father failed to pay the amount as promised. Son files a suit for recovery of the amount.State along with reasons whether son can recover the amount under the Indian Contract Act, 1872. (PEE II, May 2005)

[Ans. The son cannot recover the amount of Rs. 1 lakh from fathersince there was no intent ion to create legal relat ionship.]

3. W, the wife of H, who is lunat ic, purchased a diamond set of Rs. 10 lakhs from Beauty Jeweller on credit . Referring to theprovisions of the Indian Contract Act, 1872, decide whether the Beauty Jeweller is ent it led to claim the above amount fromthe property of H. (PEE-II, ICAI, June 2009)

[Ans. Beauty Jeweller is not ent it led to claim the price of diamond set from the property ofH because diamond set of worth Rs. 10 lakhs is not a necessity for W.]