Business Law Assingment - A

Q1. Discuss the essential elements of a valid contract.

Ans: Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law. Section 2(e) defines agreement as "every promise and every set of promises forming consideration for each other." Section 2(b) defines promise in the word: "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted becomes a promise." From the above definition of promise, it is obvious that an agreement is an accepted proposal. The two elements of an agreement are: 1: - Offer of a proposal. 2: - An acceptance of that offer or proposal. What agreement are contracts? All agreements are not studied under the Indian Contract Act, as some of them are not contracts. The Contract Act is the law of those agreements, which create obligations, and in case of a breech of a promise by one party to the agreement, the other has a legal remedy. Thus, a contract consists of two elements, 1. An agreement 2. Legal Obligations i.e. It should be enforceable at law However, there are some agreements, which are not enforceable in a law court. Such agreements do not rise to contractual obligations and are not contracts. Essential Elements of Valid Contracts All agreements are contracts if they are made by free consent of parties, Competent to contract, for a lawful consideration and with a lawful object and are not here by expressly declared to be void. Thus the essential elements of a valid contract can be summed up as follows: 1. Agreement 2. Intensions to create legal relationships 3. Free and genuine consents 4. Parties competent to contract 5. Lawful considerations 6. Lawful Objects 7. Agreements not declared void or illegal 8. Certainty of meaning 9. Possibility of performance

10. Necessary illegal formalities Agreement: As already mentioned, to constitute a contract there must be an agreement. An agreement is composed of two elements, Offer and Acceptance. The party making the offer is known as a offeror, the party to whom the offer is made is know as the offree. Thus, there are essentially to be two parties to an agreement. They both must be thinking of the same thing in the same sense. In other words, there must be consensus-ad-idem. Intensions to Create Legal Relationships: As already mentioned there should be an intension on the part of the parties to the agreement to create a legal relationship. An agreement is purely social or domestic nature is not a contract. Free and Genuine Consent: The consent of the parties to the agreement must be free and genuine. The consent of the parties should not be obtained by misrepresentation, fraud, undue influence, coercion or mistake. If the consent is obtained by any of these flaws, then the contract is not valid. Parties Competent to Contract: These parties to a contract should be competent to enter to a contract. According to section 11, every person is competent to contract if he, (1) Is of the age of majority, (2) Is sound mind, and (3) Is not disqualified from contracting by any law to which he is subject. Thus, there may be a flaw in capacity of parties to the contract. The flaw in capacity may be due to minority, lunacy, idiocy, drunkenness or status. If a party to a contract suffers from any of these flaws, the contract is an unenforceable except in certain exceptional circumstances. Lawful Considerations: The agreement must be supported by consideration on both sides. Each party to the agreement must give or promise something and receive something or promise in return. Consideration is the price for which the promise of the order is sought. However, this price need not be in terms of money. In case promise is not supported by consideration, the promise will be Nudum Pactum (a bare promise) and is not enforceable at law. Moreover the consideration must be real and lawful. Lawful Objects: The object of the agreement must be lawful and not one which the law dis-approves. Agreements not Declared Illegal or Void: There are certain agreements, which have been expressly declared illegal or void by the law. In such cases, even if the agreement possesses all the element of a valid agreement, the agreement will not be enforceable at law. Certainty of Meaning: The meaning of agreement must be certain or capable of being certain otherwise the agreement will not be enforceable at law. For

instance, A agrees to sell 10 meters of cloth. There is nothing whatever to show what type of cloth was intended. The agreement is not enforceable for want of certainty of meaning. If, on other hand, the special description of the cloth is expressly stated, say tarry cot (80:20), the agreement would be enforceable as there is no uncertainty as to its meaning. Possibility of Performance: The terms of the agreements should be capable of performance. An agreement to do an act impossible in itself it cannot be enforced. For instance, A agrees with B to discover the treasure by magic. The agreement cant be enforced. Necessary Legal Formalities: A contract may be oral or in writing if, however, a particular type of contract is required by law to be in writing, it must comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not carried out, then the contract is not enforceable at law. Q2. What do you understand by the 'doctrine of caveat emptor'? Explain Answer: Under the doctrine of caveat emptor, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects. The modern trend in the US, however, is one of the Implied Warranty of Fitness that applies only to the sale of new residential housing by a builder-seller and the rule of Caveat Emptor applies to all other sale situations (i.e. homeowner to buyer). Many other jurisdictions have provisions similar to this. Before statutory law, the buyer had no warranty of the quality of goods. In many jurisdictions, the law now requires that goods must be of "merchantable quality". However, this implied warranty can be difficult to enforce, and may not apply to all products. Hence, buyers are still advised to be cautious. In addition to the quality of the merchandise, this phrase also applies to the return policy. In most jurisdictions, there is no legal requirement for the vendor to provide a refund or exchange. In many cases, the vendor will not provide a refund but will provide a credit. In the case of software, movies and other copyrighted material many vendors will only do a direct exchange for another copy of the exact same title. Most stores require proof of purchase and impose time limits on exchanges or refunds. However, some larger chain stores will do exchanges or refunds at any time with or without proof of purchase- although they usually require a form of picture ID and place quantity or dollar limitations on such returns.

Q3. Explain in detail the 'doctrines of Indoor Management' and 'doctrines of constructive notice"
Answer: The doctrine of Indoor management, popularly known as the Turquands rule initially arose some 150 years ago in the context of the doctrine of constructive notice. The rule of Doctrine of Indoor Management is conflicting to that of the principle of Constructive Notice. The latter seeks to protect the company against outsiders; the former operates to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and, therefore, it follows that there is no notice as to how the companys internal machinery is handled by its officers. If the contract is consistent with the public document, the person contracting will not be prejudiced by irregularities that may beset the indoor work of the company. The Doctrine of Indoor Management lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding. In other words, while persons contracting with a company are pre-sumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles, they are entitled to assume that the officers of the company have observed the provisions of the articles. It is no part of duty of any outsider to see that the company carries out its own internal regulations. It is important to note that the notice of constructive notice can be invoked by the company and it does not operate against the company. It operates against the person who has failed to inquire but does not operate in his favour. But the doctrine of indoor management can be invoked by the person dealing with the company and cannot be invoked by the company. Origination of The Doctrine The rule had its genesis in the case of Royal Bank v Turquand. In this case the Directors of the Company were authorized by the articles to borrow on bonds such sums of money as should from time to time by a special resolution of the Company in a general meeting, be authorized to be borrowed. A bond under the seal of the company, signed by two directors and the secretary was given by the Directors to the plaintiff to secure the drawings on current account without the authority of any such resolution. Then Turquand sought to bind the Company on the basis of that bond. Thus the question arose whether the company was liable on that bond. Doctrone of Constructive Notice

This doctrine provides that persons dealing with a company are deemed to have knowledge of whatever is contained in the company's constitution and other public documents of the company, especially as it relates to the powers, functions and duties of the companys directors. The basis of this imputation is that these are public documents and therefore open to inspection by anybody. The doctrine operates on the assumption that people doing business with a company will be sufficiently motivated to check the company's constitution or other public documents to ensure that the transaction they are entering into is not only allowed but to determine whether there are any internal formalities that must be complied with. The end result of the doctrine of constructive notice is that an individual or juristic entity that deals with a company is presumed to be informed of any required internal formalities or constraints prescribed by the company's public documents, mainly the constitution, relating to the transaction and the authority of the person representing the company in the transaction. The individual or entity is thus prohibited from denying knowledge of the formalities or constraints.

Q4. Describe the kinds of Resolution Directors under the companies Act. 1956.

passed

by

the

Board

Answer: In the absence of any provision in the Act or the Companys articles of association, requiring that the exercise of a particular power of the directors should be only at Board Meeting, there is no reason why they cannot exercise the same by passing resolution by circulation. Further, the section enables any director to propose any resolution (other than those required to be passed only at Board Meeting) and have it passed by circulation, and thus discharge his responsibilities effectively under the Act. The passing of resolution by circulation does not, however, dispense with the need for holding a meeting once at least in three months, as required by section 285. Pasting of resolution passed by circulation in minute book Where a resolution is passed by circulation the proper course will be for the resolution to be pasted in the minute book and minute also placed at the next meeting of the Board recording the fact of the resolution having been passed by circulation. Or, the minute recording it may itself copy or reproduce the whole of the circular resolution or a separate book may be maintained for recording

resolutions passed by circulation. Whatever may be the mode of recording any such resolution, it should find a place in the minutes of the next Board Meeting, in order to ensure its authenticity. Matters, which require sanction at Board Meetings, and not by circulation There are certain matters in reference to which the provisions of the act would require a resolution at an actual Board Meeting and not one by circulation. They are as follows: S. No. 1. 2. Provision/Section Matter Section-262 Section-292 Filling a casual vacancy in the Board The power to: (i) (ii) (iii) (iv) (v) 3. 4. 5. 6. Section-297 Section-299 Section-308 Section-316 386 Section-372A make calls on shareholders; issue debentures; borrow moneys otherwise than on debentures; invest the companys funds; make loans;

Boards sanction for certain contracts in which particular directors are interested; Disclosure to the Board of a directors interest in a transaction of the company; Disclosure to shareholding the Board of a directors

& Approval to the appointment of a person as Managing Director or manager in more than one company; Sanction for inter-corporate loan, investment or giving of guarantees or providing security.

7.

Regulation-81of table A is the Model Regulation pertaining to this section in the Article of Association.

Text of Regulation-81of Table A: Save as otherwise expressly provided in the Act, a resolution in writing, signed by all the members of the Board or a committee thereof, for the time being entitled to receive notice of a meeting of the Board or committee, shall be as valid and effectual as if it had been passed at a meeting of the Board or committee, duly convened and held. Circulation resolution required to be confirmed in the next Board Meeting There is no specific provision in the Act which requires that circulation resolution should be confirmed / recorded by the board at the next Board Meeting. However as a good secretarial practice, the resolutions of directors passed by circulation should be recorded at the next board meeting to ensure their authenticity. Also the Secretarial Standard on Board Meeting (SS-1) issued by ICSI states that circular resolution should be placed before the next Board Meeting for noting and should be reproduced as part of minutes of that meeting. While recording the minutes of the Board Meeting, it must be ensured that the whole of the resolution passed by circulation finds place in the minutes of the Board meeting.

Q5. Define "goods". Explain the conditions and warranties implied by law in a contract for sale of goods.
Answer: 'Goods' means every kind of moveable property other than action able claims and money; and include stocks and shares, growing crops, grass, and thing attach to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Thus, 'Goods' means every kind of moveable property other than actionable claim or money. Things like goodwill, copyright, trademark, patient, water, gas, electricity are all goods and may be the subject matter of a contract of sale. Although, in general its only movables i.e. things which can carry from one place to another that form goods. All such things, which are part of the land itself but are agreed to be severed from the land under the contract, are considered as goods. Thus, where trees were sold, to be cut and then taken away by the buyer; it was held that there was contract for sale of movable property. Implied Conditions and warranties

Implied conditions and warranties are deemed to be incorporated in every contract of sale of goods unless the terms of contract show contrary intentions. The following are the: Implied conditions 1. Conditions as to title provides that in a contract of sale unless the circumstances of the contract or such as to show a different intention there is an implied condition on the part of the seller that in the case of a sale, he has the right to sell the goods at the time when the property is to pass. As the consequence of this if the title turns out to be defective, the buyer is entitled to reject the goods and claim refund of the price if paid plus damages. This will be allowed even where the buyer has used the goods. 2. Sale by description Section 15. Where there is a contract for the sale of goods by description there is an implied condition that the good correspond with the description. If the sale is by sample as well as description, the goods must not only correspond with the sample but also with the description. 3. Condition as to quality or fitness. As a general rule a buyer is supposed to satisfy himself about the quality of goods he purchases and also he is charged with the responsibility of seeing for himself that the goods suit the purpose for which he buys them. Thus, later on, if the goods purchase turn out to be unsuitable for the purpose for which he bought them, seller can't be asked to compensate. There are, however, certain exceptions are to this general rule. It's only in these exceptional circumstances that there is an implied condition as to quality or fitness. These circumstances are: A: Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show, That the buyer relies on the seller's skill or judgment and the goods or of a description which it is in the course of sellers business to supply (He is manufacturer or producer or not). There is an implied condition that the goods shall be responsible fit for such purpose. For the exception to operate all the three conditions must be fulfilled: The purpose must have been disclosed. The buyer must have relied on the seller's skill or judgment. The seller business must be sell such goods. B: Where goods are bought by description from a seller who deals in goods of that description (whether he is manufacturer or producer or not) There is an implied condition that the goods shall be of merchantable quality, i.e. The goods shall be free from latent defects (Which are not a apparent or possible of detection by mere inspection.) Thus, this exception shall be available where:

(I) Goods are bought by description (II) From seller who deals in such goods Where, However, the buyer has examine the goods, there shall be no implied condition as regards defects which such examinations ought to have revealed. C: A condition as to fitness for a particular purpose or as to quality may also arise on account of a custom of trade. 4. Merchantable quality. "What is merchantable quality?" The term has never been defined. The best definition which is probably the nearest the description of the term was given in Gardner V. Grey. It said that the article "Must be saleable in the market under the denomination mentioned". In other words, the quality of the article should be such that reasonable men would accept the article as performance of a promise. Implied Warranties There are two implied warranties. These are: A: Warranty of quite possession (Section 14B). In a contract of sale, unless Intention appears, there is an implied warranty that the buyer shall has and shall enjoyed quite possession of the goods. Thus, if the right of enjoyment or possession of the buyer is distributed by the seller or any other person, the buyer is entitled to sue the seller for damages. B: Warranty of freedom from encumbrances (Section 14C). The Buyer is entitled to another warranty that the goods are free from any charge or encumbrance in favor of the third person, not declared to or known to buyer. Thus, this clause will not be applicable where the buyer has been informed of the encumbrances or had notice of the same. Further, it was held in Collinge V. Heywod (1839). 9A. and E.633, That the claim under this warranty shall be available only when the buyer discharges the amount of encumbrance.

Assingment - B
Q1. Enumerate the duties of an Arbitrator: Differentiate domestic and foreign awards. Answer
The duties of an arbitrator are as follows: 1: - He shall, with all reasonable dispatch enter into the reference and make an award with in a prescribe time. 2: - He shall act judicially an impartially. He shall not secretly communicate with any party or the party who has appointed him. He shall give a fair hearing to the parties (section 18) and a responsible time and opportunity to them to substantiate their respective claims. 3: - He shall stand indifferent between the parties and shall have no interest direct or remote in the subject meter of the dispute or in the party. He shall, from the time of his appointment and through out the arbitration proceedings. Disclose in writing any circumstances likely to give six to justifiable doubts as to his independence or impartiality (section 12). 4: - He shall, from the time of his appointment and through out the arbitration proceedings. Disclose in writing any circumstances likely to give six to justifiable doubts as to his independence or impartiality (section 12). 5: - He shall not misconduct himself or the proceedings in any way, e.g by accepting improper gratification or bribe from a party or by showing bies or partiality towards to party. 6: - He shall encourage settlement of the dispute by mediation or conciliation or other proceedings (section 30). 7: - he shall not exceed his authority and shell act with in the scope of arbitration agreement thus, where an arbitrator has to decide whether a buyer has the right to reject the goods as inferior in quality, and the arbitrator awards that the buyer should take them with an allowance, or when an arbitrator has to

decide as to the boundaries of certain lands, any decide as to title, the arbitrator acts in access of his authority. 8: - He shall observe the rules of nature justice. The chief rules of natural justice are: A: - To act fairly, in good faith with out bias and in a judicial temper. B: - To give each party the opportunity of adequately stating his case. And correcting or contradicting any relevant statement prejudicial to his case. C: - Not to here 1 party behind the back of the other party. 9: - He Shall give a final award (Section 31) on all the maters referred to him, unless he is empowered to makes several awards he shall also sign and file the award with in due time.

Q1. Nagendra issued a cheque in favour of Happy-home, a charitable institution, as his share of charitable subscription. The banker returned the cheque for the reason of insufficiency of funds in the drawer's account. The demand for payment by way of written notice to Nagendra by Happy-home should be made within how many days from the date of receipt of information of the dishounour to initiate an action under section 138 of the Negotiable Instruments Act, 1881?
Answer: As per the amendment of 2002 to section 138 of Negotiable Instrument Act a legal notice shall be issued to the drawer by payee within 30 days of the receipt of the information of the dishonour of the cheque by banker to initiate the legal action. Prior to this amendment the time frame was 15 days to initiate such legal action. However in the given situation here it doesnt attract the provision of sec 138 of Negotiable Instrument Act since Nagendra is neither a debtor nor he is liable for any amount to the payee. The said section applies only for the legally enforceable debt or liability. Whereas in the given case it is clear that Mr.Nagendra issued the cheque as his share of charitable subscription which is given out of free will and not by any liability. However the burden of proving that he has no liability would upon drawer where payee initiates legal action. Because section 138of said Act articulates as follows:-

138. Dishonour of cheque for insufficiency, etc., of funds in the accounts Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for 2["a term which may extend to two year"], or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. The payee or the holder induce course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, 3["within thirty days"] of the receipt of information by him from the bank regarding the return of the cheques as unpaid, and The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice Explanation: For the purpose of this section, "debt or other liability" means a legally enforceable debt or other liability]. Hence it is not appropriate for the charitable institution to initiate a legal action u/s 138 of Negotiable instrument Act against Nagendra.

Q2. Baiju, a singer, enters into a contract with Alok, the manager of a theatre, to sing at his theatre three nights in every week during the next three months, and Alok promises to pay him Rs.5,000 for each night's performance. On the seventh night, Baiju willfully absents himself from the theatre. Can Alok put an end to the contract?
Answer: In the given situation it is clear that Biju has agreed to sing at Mr. Aloks theatre three nights in every week. But it is not clear which are the days that Biju is

supposed to perform his show at Aloks theatre. There could be three scenarios over here. One is flexibility for the singer to choose three days as he wishes. Another one is option of theatre owner. The last probability is oral or mutual agreement or consensus between the parties on subsequent days. However in this case in the strict spirit of contract law we find the very contract is legally enforceable one. Hence one should go by the terms and condition of the said agreement to arrive at a correct conclusion as to the remedies available in case of the breach by either party. Thus it can be concluded that as per the contract law the other party will be at the flexibility to rescind the contract where the opposite party breach the contract. In the said case the theatre manager can put an end to the contract with the singer giving a due notice to the singer if the singer has breached the terms and condition of the contract.

Assingment - C
1. Which of the following contracts, in order to be valid under the Indian Contract Act, 1872, must be in writing, stamped and registered? (a) Creation of a trust under the Indian Trust Act (b) A promise to pay a time barred debt (c) Cheque (d) Contracts for sale of immoveable property (e) Bill of exchange Answer: (d) Reason: It must be noted that a contract need not be in writing, unless there is specific provision in law that it should be in writing. Certain contracts must be in writing, otherwise they are not enforceable in law. Following are the examples of such contracts. Contract for sale of immoveable property must be in writing, stamped and registered. Certain other contracts do not require registration, yet must be in writing like the following: Bills of exchange Promissory notes Cheques A trust created under the Indian Trust Act A promise to pay a time-barred debt Contracts made without consideration with natural love and affection. Hence, (d) is correct answer. 2. Under the Indian Contract Act, 1872, every promise or set of promises forming the consideration for each other is known as (a) Offer (b) Contract (c) Agreement (d) Consideration (e) Acceptance. Answer: (c) Reason: According to section 2(e) of the Indian Contract Act, 1872, Every promise and every set of promises, forming the consideration for each other, is known as an agreement. 3. Under the Indian Contract Act, 1872, if all the parties to a contract substitute a new contract for an existing contract, it is known as (a) Rescission (b) Restitution (c) Novation (d) Remission (e) Waiver. Answer: (c) Reason: If a new contract is substituted for an existing contract, it is called novation. When a contract becomes void, any benefit derived out of the contract by one party is required to be restored to the other. This is called restitution.

 Rescission means cancellation. In a contract, the injured party can cancel the contract and refuse the performance of contract. Remission means giving relief. Waiver means the act of giving up a claim or right. Hence, correct answer is (c). 4. Which of the following agreements is voidable under the Indian Contract Act, 1872? (a) Agreements by incompetent parties (b) Agreements where consent is obtained by way of coercion (c) Agreements under mutual mistake of fact material to the agreement (d) Agreements in restraint of marriage (e) Agreements with unlawful consideration. Answer: (b) Reason: A contract is voidable when the consent of a party to a contract is obtained by fraud, misrepresentation, coercion or undue influence. In all the other options the contract is void. Hence, (b) is correct answer. 5. Under the Indian Contract Act, 1872, which of the following agreements is not considered to be opposed to public policy? (a) Agreements restricting the enforcement of rights (b) Agreements curtailing the period of limitation (c) Agreement to refer to arbitration any disputes which have arisen or which may arise in future (d) Agreements in restraint of marriage (e) Agreements in restraint of trade. Answer: (c) Reason: An agreement to refer to arbitration any disputes which have arisen or which may arise in future is valid. Agreements in restraint of legal proceedings renders void two kinds of agreements namely: Agreements restricting the enforcement of rights; Agreements curtailing period of limitation. Agreements in restraint of marriage and agreements in restraint of trade are also considered as agreements opposing the public policy. Hence, (c) is correct answer. 6. Under the Indian Contract Act, 1872, the damages which are usually assessed on the basis of the actual loss suffered by the plaintiff are known as (a) General damages (b) Special damages (c) Vindictive damages (d) Nominal damages (e) Exemplary damages. Answer: (a) Reason: General or ordinary damages are damages which naturally arise in the usual course of things from breach of contract. General Damages are usually assessed based on the actual loss suffered. Hence, (a) is correct answer.

7. Under the Indian Contract Act, 1872, in which of the following circumstances a continuing guarantee may not be revoked? (a) By novation (b) By death of surety in respect of transactions prior to the date of death (c) Release or discharge of principal debtor (d) Compounding by the creditor with the principal debtor (e) Loss of security by the creditor. Answer: (b) Reason: In the absence of any contract to the contrary, death of surety operates as a revocation of continuing guarantee so far as regards to future transactions. (Section 131). The liability of the surety for previous transactions however remains. Hence, (b) is correct answer. 8. Abhimanyu purchased a Ford Ikon car and obtained a comprehensive insurance policy from Continental Insurance Company. This type of contract is known as (a) A wagering contract (b) A contract of guarantee (c) A voidable contract (d) A contract of indemnity (e) A contingent contract. Answer: (d) Reason: It is a contract of indemnity wherein one party promises to save the other from loss caused to him by the conduct of indemnified himself or any other person. Hence, (d) is correct answer. 9. Under the Indian Contract Act, 1872, the bailment of goods as security for payment of a debt is known as (a) Lien (b) Mortgage (c) Charge (d) Pledge (e) Assignment. Answer: (d) Reason: The bailment of goods as security for a debt or performance of a promise is called pledge. Lien is a right exercised by one person to retain that, which is in his possession, belonging to another, until some debt or claim is paid. Bankers, factors have general lien. A mortgage is the transfer of an interest in specific immovable property for the purpose of securing a loan Hypothecation means creation of claim in movable goods for a loan without transferring the possession of goods to the lender. Assignment of security to a third party is done to borrow, which is secured by that debt. The correct answer is (d). 10. Under normal circumstances which of the following statements is false regarding contract of agency? (a) An agent should not set up an adverse title to the goods which he receives from the principal as an agent (b) An agent is duty bound to pay sums received to the principal on his account

(c) An agent is bound to render proper accounts to his principal on demand (d) An agent should protect and preserve the interests of the principal in case of his death or insolvency (e) An agent can delegate his authority to a sub-agent. Answer: (e) Reason: An agent can not delegate his authority to a sub-agent. Duties of an agent include the following: An agent should not set up an adverse title to the goods which he receives from the principal as an agent, An agent is duty bound to pay sums received to the principal on his account, An agent is bound to render proper accounts to his principal on demand and An agent should protect and preserve the interests of the principal in case of his death or insolvency. Hence, the answer is (e). 11. Which of the following agents is considered as a non-mercantile agent under the Indian Contract Act, 1872? (a) Auctioneer (b) Broker (c) Banker (d) Factor (e) Insurance agent. Answer: (e) Reason: The definition of mercantile agents covers factors, brokers, auctioneers, commission agents, Del credere agents and bankers. Insurance agents, advocates, etc., are considered as non-mercantile agents. Hence, (e) is correct answer. 12. Which of the following is not considered as a payment in due course under the Negotiable Instruments Act, 1881? (a) Payment made in accordance with the apparent tenor of the instrument (b) Payment made on an instrument before the date of maturity (c) Payment made to a person who is in possession of the instrument as a holder (d) Payment made in good faith and without negligence (e) Payment made to a person in possession of an instrument payable to bearer. Answer: (b) Reason: An instrument should be payable either at maturity or after the date of maturity. An instrument paid before the date of maturity is not a payment in due course. It was held in Burbridge vs. Manners that a bill paid before maturity and subsequently endorsed is valid in the hands of a bona fide endorsee. Hence, (b) is correct answer. 13. Which of the following statements is false in respect of presumptions of a negotiable instrument under the Negotiable Instruments Act, 1881? (a) Every negotiable instrument is drawn for consideration irrespective of the consideration mentioned in the document (b) Every bill is accepted within reasonable time before maturity (c) Every accepted bill is transferred before its maturity

(d) The instruments were not endorsed in the order in which they appear on the instrument (e) The holder of the instrument is holder in due course. Answer: (d) Reason: According to Sections 118 and 119 of the Negotiable Instruments Act, 1881, negotiable instruments are subject to the following presumptions: Every negotiable Instrument is drawn for consideration irrespective of consideration mentioned in the document. Every bill is accepted within reasonable time before maturity and is transferred before maturity The instruments were endorsed in the order in which they appear on the instrument The holder of the instrument is holder in due course. Hence, (d) is correct answer. 14. The pecuniary jurisdiction of State forum and National forum are: (a) Rs 5 Lakh to10 lakh and 10-20 lakh (b) Rs 20Lakhs -1 crore and 1 crore and above (c) Below Rs 20Lakhs and 20 lakh to 1 crore (d) Rs 20 Lakh -50 Lakh and 75 Lakh &above (e) None of these Answer: (b) Reason: In cases where the value of goods and services involved is less than Rs. 20 Lakhs in value, you will have to file the complaint in the District Forum constituted in the specified districts of a State. In cases where the value of goods and services involved is more than Rs. 20 Lakhs in value but does not exceed Rs 1 crore you will have to file the complaint with the State Commission constituted in the capital cities of the different states In cases where the value of goods and services involved is more than 1 crore in value then you can file a complaint with the National Commission which has been constituted only in New Delhi. 15. Veedol Ltd. was incorporated on May 3, 2007. However, the company could obtain its certificate to commence business only on September 25, 2007. The company, in the meanwhile had entered into contracts with suppliers for import of machinery. Such contracts entered into after incorporation but before obtaining certificate of commencement of business are considered as (a) Voidable contracts (b) Provisional contracts (c) Pre-incorporation contracts (d) Illegal contracts (e) Void contracts. Answer: (b) Reason: A contract entered after incorporation but before obtaining certificate for commencement of business is a provisional contract. It automatically gets confirmed as soon as certificate for commencement of business is obtained. No further ratification is necessary In case of a private company, it does not require any certificate of commencement of business, as section 149 is not applicable to private company. Hence question of provisional contract does not arise in case of a private company.

16. Which of the following instances isnottreated as 'crossing' under the Negotiable Instruments Act, 1881? (a) A cheque bearing across its face the words 'account payee' without two transverse parallel lines (b) A cheque bearing across its face the words 'not negotiable' with two transverse parallel lines (c) A cheque bearing across its face the words 'not exceeding rupees two hundred within two transverse parallel lines (d) A cheque bearing across its face the words 'State Bank of India, Karol Bagh Branch, New Delhi' within two transverse parallel lines (e) A cheque bearing across its face the words 'Andhra Bank, Daryaganj Branch, New Delhi'Wthout two transverse parallel lines. Answer: (a) Reason: In case of a special crossing (i.e. from one bank to another) the crossing is permitted even without two traverse lines. But in case of general crossing or any other crossing there should two transverse lines. The instances cited in (b), (c), (d) and (e) are crossing under the Negotiable Instruments Act, 1881. Hence (a) is correct answer. 17. The term goods under the Sale of Goods Act, 1930, does not include (a) Stocks and shares (b) Actionable claims (c) Growing crops (d) Grass (e) Every kind of movable property. Answer: (b) Reason: The term goods under Sale of Goods Act, 1930 does not include Actionable claims and money. 18. Under the Sale of Goods Act, 1930, in case of breach of a warranty in a contract of sale, the buyer can (a) Repudiate the contract (b) Claim damages only (c) Reject the goods (d) Refuse to pay the price (e) Not only reject the goods but also claim damages. Answer: (b) Reason: A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. [Section 12(3)] 19. The right of lien available to an unpaid seller by implication of law under the Sale of Goods Act, 1930 is to (a) Retain the possession of goods for the price (b) Recover the possession of goods (c) Recover the price (d) Recover the damages

(e) Make use of the goods. Answer: (a) Reason: The right of lien exercised by an unpaid seller is to retain the possession of goods, if he has not parted the goods . Hence, (a) is correct answer. 20. With reference to the Sale of Goods Act, 1930 which of the following statements is false? (a) A breach of warranty can give rise only to a claim for damages (b) Warranties are obligations which need to be performed (c) A breach of a condition can be treated as a breach of warranty (d) A breach of warranty can be treated as a breach of condition (e) A particular stipulation is a condition or a warranty will depend upon the facts and circumstances of each case. Answer: (d) Reason: The breach of warranty cannot be treated as a breach of condition. All other options are true under the Sale of Goods Act, 1930. 21. In which of the following cases corporate veil need not be lifted by a Court of law under the Companies Act, 1956? (a) Where a company has been formed for defrauding the creditors (b) Where a company is used to evade taxes and other legal obligations (c) Where a company is used for the furtherance of welfare legislation (d) Where there is a complaint of oppression by the shareholders (e) Where there is a need to determine the enemy character of the company. Answer: (c) Reason: Principally, company has identity separate and independent from its members. Though this principle behind the judgment of Solomon vs. Solomon & Co. Ltd. is still valid, now such purist approach is not taken. Often, people behind the company who really control the affairs of the company are looked into. This is termed as lifting of the corporate veil. Many Statutes also now provide for such lifting of corporate veil. Courts also often look behind the corporate veil and see the persons who are controlling the company. Statutory provisions for lifting of the veil: Holding and Subsidiary company Foreign Investment control under FEMA SEBIs take over regulations When the number of members fall bellow statutory minimum Tax liability of directors of a private company Punishment provisions. Judicial Decisions regarding lifting of corporate veil:-Courts also lift the corporate veil to see the real state of affairs. It may be noted that the corporate veil can be lifted for benefit of the company as well as for purposes of penalizing the company. Some cases where courts did lift the veil are as follows: 1. Prevention of Fraud 2. Decide foreign character. 3. Decide whether company is a joint venture 4. Decide company is partnership in subsistence 5. To deicide complaint of oppression

6. 7. 8. 9. 10. 11. 12. 13.

Tax avoidance device Production of subsidiary can be own production To ascertain true nature of transaction if alleged as sham. Device to avoid welfare legislation If opposed to justice or public interest Experience of directors is experience of the company. Punishing for contempt of court Abuse of process of law.

22. As per section 591 of the Companies Act, 1956, a foreign company means (a) A company incorporated outside India and having place of business in India (b) A company incorporated in India and having place of business outside India (c) A company incorporated outside India and having place of business outside India (d) A company incorporated in India and having place of business in India (e) A company incorporated in India but not commenced its business. Answer: (a) Reason: As per section 591 of the Companies Act, 1956, a foreign company means a company incorporated out side India and having place of business in India. 23. Under the Companies Act, 1956, a public company which never commenced business is known as a/an (a) Private company (b) Closely held public company (c) Unlimited company (d) Widely held company (e) Defunct company. Answer: (e) Reason: Under section 560 of the Companies Act, 1956, a public company which never commenced business is known as a defunct company. 24. The Doctrine of Constructive Notice is used to protect (a) Company against outsiders (b) Outsiders against company (c) Directors against outsiders (d) Directors against company (e) Outsiders against directors. Answer: (a) Reason: The doctrine of constructive notice is to protect company against outsiders, while doctrines of indoor management and ostensible authority to protect outsiders against the company. 25. The directors of a newly floated company want to name it as Zeneca Finance Corporation. Under the Companies Act, 1956, in order to use the keyword Corporation in its name the company must have a minimum authorized capital of (a) Rs. 1 crore (b) Rs. 2 crore (c) Rs. 5 crore

(d) Rs.10 crore (e) Rs.25 crore. Answer: (c) Reason: The Department of Company Affairs in its circular dated 7-3-1989, has clarified that if a company uses any of the following keywords in its name under Sections 20 and 21, it must have a minimum authorized capital mentioned against the keywords: 1. Keywords Required Authorized Capital (Rs.) Corporation 5 crore 2. International, Globe, Universal, Continental, Inter 1 crore Continental, Asiatic, Asia, being the first word of the name 3. If any of the words at (2) above is used within the name 50 lakh (with or without brackets) 4. Hindustan, India, Bharat, being the first word of the 50 lakh name 5. If any of the words at (4) above is used within the name 5 lakh (with or without brackets) 6. Indus tries/Udyog 1 crore 7. Enterprises, Products, Business, Manufacturing 10 lakh Hence (c) is correct answer. 26. The lock in period of minimum promoters contribution in case of a public issue is (a) 1 year (b) 2 years (c) 3 years (d) 4 years (e) 5 years. Answer: (c) Reason: In a public issue the minimum promoters contribution shall be locked in for a period of 3 years. 27. Under the Companies Act, 1956, if a public company does not register its own set of articles, then (a) The regulations contained in Table A of Schedule I to the Act automatically apply (b) The regulations contained in Table C of Schedule I to the Act automatically apply (c) The regulations contained in Table D of Schedule I to the Act automatically apply (d) The regulations contained in Table E of Schedule I to the Act automatically apply (e) The company cannot be incorporated under the Companies Act, 1956. Answer: (a) Reason: Under the Companies Act, 1956, if a public company does not register its own set of articles, then the regulations contained in Table A of Schedule I to the Act automatically apply. 28. The maximum number of public companies to which an individual can be appointed as a director at a time under section 276 of the Companies Act, 1956, is (a) 10 companies

(b) 15 companies (c) 20 companies (d) 25 companies (e) 50 companies. Answer: (b) Reason: As per section 276 of the Companies Act, 1956, an individual cannot be director of more than fifteen public companies at a time. 29. Which of the following statements is false under the Companies Act, 1956? (a) A director must be a member of the company (b) Minimum seven persons are required for incorporation of a public company (c) Proxy has no right to speak in the general meeting (d) Company having profits need not declare dividends (e) A private company cannot issue prospectus. Answer: (a)
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Reason: Director need not be member of the company, if the companys articles so provide to take qualification shares then the directors are required to take shares in the company otherwise for the directors to become members of the company is absolutely optional. 30. Section 292A of Companies Act, 1956 lays down compulsory constitution of Audit Committee by certain public companies. Which of the following companies are required to constitute such committees? (a) A public company having a paid-up capital of not less than Rs.1 crore (b) A public company having a authorised capital of not less than Rs.1 crore (c) A private company having a paid-up capital of not less than Rs.1 crore (d) A foreign company having a paid-up capital of not less than Rs.3 crore (e) A public company having a paid-up capital of not less than Rs.5 crore. Answer: (e)
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Reason: Section 292A of Companies Act, 1956, lays down compulsorily constitution of Audit Committee by certain public companies. A public limited company having a paid-up capital of not less than Rs.5 crore is required to constitute such committees. 31. Under the Companies Act, 1956, a public financial institution whose main object is financing shall file which of the following with the Registrar of Companies for issue of its securities? (a) Statement in lieu of prospectus (b) Information memorandum (c) Red-herring prospectus (d) Abridged prospectus (e) Shelf prospectus. Answer: (e)
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Reason: Under the Companies Act, 1956, a public financial institution whose main object is financing shall file a shelf prospectus with the Registrar of Companies for issue of its securities.

32. Which of the following statements is false in respect of a proxy under the Companies Act, 1956? (a) Proxy need not be a member of a company (b) A member of a private company cannot appoint more than one proxy to attend the same meeting (c) A proxy can vote only on poll (d) Where the NCLT directs under Section 167 or 186 of the Companies Act, 1956 one member present in person or by proxy can constitute a quorum in a meeting (e) The period fixed for depositing proxies cannot be extended beyond 72 hours before the meeting. Answer: (e)
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Reason: According to the provisions of Companies Act, 1956 relating to proxies, the period fixed for depositing proxies cannot be extended beyond 48 hrs before the meeting. 33. The maximum maturity period for deposits accepted by a public company under the Companies (Acceptance of Deposits) Rules, 1975, cannot exceed (a) 12 months (b) 24 months (c) 36 months (d) 48 months (e) 60 months. Answer: (e)
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Reason: The minimum tenure for which public deposits can be accepted or renewed is 12 months (earlier 6 months). It is also stipulated that the maximum maturity period for the deposits cannot exceed 60 months (earlier 36 months). 34. Where more than one companies are merged together, it is known as (a) Arrangement (b) Compromise (c) Reorganization (d) Reconstruction (e) Amalgamation. Answer: (e) Reason: Where one or more companies are merged together it is known as Amalgamation. The term compromise indicates the existence of a dispute between two parties, which needs to be settled amicably. The dispute usually relates to the rights of the parties. Section 390(B) of the Companies Act, 1956 defines the term arrangement to include reorganization of the share capital of a company by consolidation of shares of different classes or by the division of shares into shares of different classes or by both of these methods. The reconstruction is said to have taken place when an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company. Hence, (e) is correct answer.

35. The debentures, which are similar to share warrants are known as (a) Registered debentures (b) Secured debentures (c) Bearer debentures (d) Naked debentures (e) Irredeemable debentures. Answer: (c) Reason: Bearer debentures are similar to share warrants in that they too are negotiable and transferable by mere delivery. 36. Which of the following is not a ground for winding up of a company by National Company Law Tribunal under section 433 of the Companies Act, 1956? (a) Default in holding statutory meeting by a public company limited by shares (b) Default in holding annual general meeting (c) Failure to commence business within a year of its incorporation (d) Inability to pay its debts (e) Reduction of number of members below statutory minimum. Answer: (b) Reason: Default in holding Annual General Meeting is not a ground for issue of winding up order by National Company Law Tribunal. All other grounds in options (a), (c), (d) and (e) are the grounds for issue of winding up order. 37. As per the provisions the Companies Act, 1956, an alternate director can be appointed, in place of the original director during his absence for a period not less than 3 months, by (a) Securities Exchange Board of India (b) Board of directors (c) Financial Institutions (d) The Central Government (e) Share holders of the company. Answer: (b) Reason: Section 313 of the Companies Act, 1956, lays down that the Board of Directors of a company can appoint an alternate director in place of the original director during his absence for a period not less than three months from the date in which the board meetings are held. This power can be exercised, only if authorized by the articles or by a resolution passed by the company in a general meeting. 38. Under the Companies Act, 1956, the amount held under unpaid dividend account of a company which remains unpaid or unclaimed for a period of 7 years from the date of such transfer must be transferred by the company to (a) Securities premium account (b) General reserve (c) Revaluation reserve (d) Investor education and protection fund (e) Debenture redemption reserve. Answer: (d) Reason:

 Share premium account represents the amount of premium collected by the company from the shareholders for every share issued at premium. General reserve represents the amount of profits ploughed back as reserve. Revaluation reserve represents the surplus generated by revaluing the fixed assets of the company. Amount held under unpaid dividend account of a company which remains unpaid or unclaimed for a period of 7 years from the date of such transfer is to be transferred to Investor education and protection fund Debenture redemption reserve fund represents the reserve fund created out of profits every year, to redeem the debentures on the due date. 39. Which of the following statements is true with respect to the requirement of quorum for a general meeting of a company under the Companies Act, 1956? (a) Quorum is required at the end of the meeting of the company (b) Quorum is required only at the beginning of the meeting of the company (c) Quorum is required throughout the meeting of the company (d) Quorum is not required for the meeting of the company (e) Quorum is required only for the listed companies. Answer: (b) Reason: The Articles of Association of a company require the presence of the quorum at the time when the meeting proceeds to business then such requirement will be deemed to be complied with if the quorum is present at the beginning of the meeting. This means quorum need not present throughout the meeting or when the meeting proceeds to vote. Hence option (b) is correct. 40. Which of the following category of directors cannot be removed by the members of the company in general meeting under section 284 of the Companies Act, 1956? (a) The director appointed in casual vacancy (b) The director appointed as additional director (c) The director appointed as alternate director (d) The director appointed by the Central Government (e) Director appointed as regular director in a general meeting. Answer: (d) Reason: The director appointed by the Central government cannot be removed by the members under section 284 of the Act and all others can be removed by the members in general meeting.