Business Law - 1

Contents
Editorial Note ........................................................................................ v

Acknowledgements ................................................................................. ix
PAR PAR PAR PAR PART I - LA T I - LA T I - LA T I - LA T I - LAW OF CONTRA W OF CONTRA W OF CONTRA W OF CONTRA W OF CONTRACTS CTS CTS CTS CTS
1. CHAPTER I
Phenomenon of Agreement ............................................................. 3
2. CHAPTER II
Lawful Consideration and Contractual Capacity .............................. 23
3. CHAPTER III
Free Consent ............................................................................... 39
4. CHAPTER IV
Plegality of Object and Consideration ............................................ 50
5. CHAPTER V
Discharge of Contract and Remedies for Breach of
Contract ...................................................................................... 59
6. CHAPTER VI
Quasi Contracts, Standard Form of Contracts and
Cyber Contracts ............................................................................... 85
P PP PPAR AR AR AR ART II - LA T II - LA T II - LA T II - LA T II - LAW OF TRANSFER OF PROPER W OF TRANSFER OF PROPER W OF TRANSFER OF PROPER W OF TRANSFER OF PROPER W OF TRANSFER OF PROPERTY TY TY TY TY
1. CHAPTER I
Introduction ................................................................................. 96
.
2. CHAPTER II
Transfer of Property by Act of Parties ............................................. 118
3. CHAPTER III
Sale of Immovable Property ......................................................... 142
P PP PPage No. age No. age No. age No. age No.
4. CHAPTER IV
Exchange................................................................................... 152
5. CHAPTER V
Mortgage of Immovable Property ................................................. 153
6. CHAPTER VI
Leases of Immovable Property ......................................................... 184
7. CHAPTER VII
Gift ........................................................................................... 190
8. CHAPTER VIII
Transfer of Actionable Claims ...................................................... 205
P PP PPAR AR AR AR ART III - HINDU LA T III - HINDU LA T III - HINDU LA T III - HINDU LA T III - HINDU LAW WW WW
1. CHAPTER I
Hindu Joint Family ...................................................................... 213
2. CHAPTER II
Coparcenary .............................................................................. 228
3. CHAPTER III
Debt .......................................................................................... 237
4. CHAPTER IV
Hindu Undivided Family - [HUF] .................................................. 250
5. CHAPTER V
Alienation .................................................................................. 262
6. CHAPTER VI
Partition......................................................................................... 276
7. CHAPTER VII
Notional Partition ....................................................................... 306
8. CHAPTER VIII
Succession ................................................................................. 318
9. CHAPTER VIII
Gift ........................................................................................... 354
10. CHAPTER VIII
Will ........................................................................................... 368
P PP PPAR AR AR AR ART IV - COMP T IV - COMP T IV - COMP T IV - COMP T IV - COMPANY LA ANY LA ANY LA ANY LA ANY LAW WW WW
1. CHAPTER I
Nature and Kinds of companies................................................... 383
2. CHAPTER II
Formation of a company ............................................................. 412
3. CHAPTER III
Memorandum of Association....................................................... 427
4. CHAPTER IV
Articles of Association ................................................................. 444
5. CHAPTER V
Prospectus ................................................................................. 456
6. CHAPTER VI
Share Capital ................................................................................ 483
7. CHAPTER VII
Allotment, Calls & Forfeiture of Shares ............................................. 510
8. CHAPTER VIII
Transfer of Shares and the Depository Systems .................................. 530
9. CHAPTER IX
Membership .................................................................................. 556
10. CHAPTER X
Borrowings and Debentures ............................................................ 567
11. CHAPTER XI
Management of a Company ........................................................... 579
12. CHAPTER XII
Meetings and Proceedings .............................................................. 597
13. CHAPTER XIII
Accounts and Audit, Statutory Registers & Dividends .......................... 623
14. CHAPTER XIV
Inspection, Investigation and Winding Up ........................................ 648
P PP PPAR AR AR AR ART V - LA T V - LA T V - LA T V - LA T V - LAW OF PAR W OF PAR W OF PAR W OF PAR W OF PARTNERSHIP TNERSHIP TNERSHIP TNERSHIP TNERSHIP
1. CHAPTER I
Preliminary ................................................................................. 669
2. CHAPTER II
Nature of Partnership .................................................................. 670
3. CHAPTER III
Relation of Partners to One Another ............................................. 678
4. CHAPTER IV
Relation of Partners to Third Parties .............................................. 685
5. CHAPTER V
Incoming and Outgoing Partner .................................................. 696
6. CHAPTER VI
Dissolution of a Firm ...................................................................... 699
7. CHAPTER VII
Registration of Firms ....................................................................... 704
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Dr. K. V. S. Sarma
Professor of Law
NALSAR University of Law, Hyderabad
PART - I
LAW OF CONTRACTS
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INDIAN CONTRACT ACT, 1872
CHAPTER-I
PHENOMENON OF AGREEMENT
Need for Law
No society can exist without law. Law is required for the preservation
of peace and orderliness in the society. Society creates and imposes law
to make organized living possible. Without law, life and business would
soon become a matter of the survival not only of the fittest but also of the
most ruthless. In a free and competitive economy like ours, the rights of
the individual are considered of primary importance; consequently, one
important function of law is to regulate the transaction of business and
the acquisition of property. In fact, law and society are inseparable
companions and have profound effects upon each other.
Law of Contract constitutes the most important branch of Mercantile
Law. Without such a law, it would have been difficult, if not impossible,
to carry on trade or commerce. It is not only the business community
which is concerned with the law of contract, but it affects every person. It
will not be out of place to say that contract is the foundation of the
civilized world. Every one of us enters into a number of contracts from
sunrise to sunset. When a person drinks a cup of tea, or rides a bus, or
goes to the cinema to see a movie or purchases the goods, or gives a
loan to a friend, etc., he enters into a contract though he may be unaware
of it. Such contracts create legal rights and obligations. The law of contract
is mainly concerned with the enforcement of these rights and obligations.
It attempts at the realization of reasonable expectations induced by the
making of promises.
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As a social being, man comes into contact with people in different capacities. He
comes into contact, for example, with a landlord as a tenant, with Government as a tax
payer, with customers as a seller and with suppliers as a buyer.
A person to earn his livelihood he has to do service or he has to do business. To
render service to another he has to enter into the contract. To purchase and sell goods
he has to enter into contract. Once he earns income in any way he is liable to pay
Income Tax. Thats why Law of Contracts is important for Income Tax Officers.
One broad classification of law is that into Public and Private. Public Law deals with
the constitutional and administrative powers of the State, and also certain relations
between the State and the individual. Private Law, on the other hand, deals with the
rights of the subjects inter se. The Law of Contracts forms part of the Private Law. Again,
Private Law may be divided into Substantive Law and Adjective Law. The former deals
with rights which may be acquired by one citizen against another, e.g., Law of Property,
contracts, torts etc., while the latter deals with the Law of Procedure i.e., the process of
litigation, the processual modalities which secure the redressal of grievances, and the
machinery by which rights can be enforced in a court of law, e.g., civil procedure code.
The object of law is the creation and protection of legal rights and has been defined
by Holland as a capacity residing in one person, of controlling with the assent and
assistance of the State, the actions of others. The expression right is correlative to the
expression duty. There can be no rights without duties. Rights may be classified into
rights in rem and rights in personam. A right in rem is a right available against the
whole world. If a man owns a property, the right which he has in the property casts a
duty on the whole world not to disturb his ownership in any way; similarly, a right to
freedom, reputation, etc., A right in personam, on the other hand, is a right for which
the corresponding duty is, not one owed by the whole world, but by an individual or a
definite number or body of individuals. If A has a right to a sum of money, it may be that
one person owes the money or a number of persons jointly owe the money, but the
whole world cannot owe a duty to repay the debt. The Law of Contracts deals with
rights in personam, and forms part of the Law of Obligations. No branch of the Law
has a more pervasive influence upon the affairs of individuals than the Law of Contracts.
The Law of contracts in India is governed by Indian Contract Act, 1872. The Act
contains 266 Sections. It is divided into 11 Chapters. They are:
1. Preliminary- Sections 1, 2.
2. Of the Communication, acceptance and revocation of proposals -Sections3 to 9.
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3. Of contracts, voidable contracts and void agreements- Sections 10 to 30.
4. Of contingent contracts- Sections 31 to 36.
5. Of the performance of contracts- Sections 37 to 67.
6. Of certain relations resembling those created by contract- Sections 68 to 72.
7. Of Consequences of breach of contract- Sections 73 to 75.
8. Of Sale of goods- Sections 76 to 173 (repealed).
9. Of Indemnity and guarantee Sections 124 to 147.
10. Of Bailment- Sections 148 to 181.
11. Of Agency- Sections 182 to 238.
12. Of Partnership- Sections 239 to 266 (repealed).
Sections 1 to 75 deal with General Principles of Contract. These General Principles
of Contract are applicable to all types of contracts. Indemnity, Guarantee, Bailment,
Agency, Sale of Goods and Partnership are special contracts. To these special contracts
Sections 1 to 75 are applicable.
These General Principles of Contract are divided into three Parts. They are:
Formation of Contract
Discharge of Contract
Remedies for breach of Contract
Preamble. WHEREAS it is expedient to define and amend certain parts of the law relating
to contracts; it is hereby enacted as follows -
Preliminary
1. Short title.- This Act may be called the Indian Contract Act,1872. Extent,
Commencement.- It extends to the whole of India except the State of Jammu and
Kashmir; and it shall come into force on the first day of September, 1872. Nothing
herein contained shall affect the provisions of any Statute, Act or Regulation not
hereby expressly repealed, nor any usage or custom of trade, nor any incident of
any contract, not inconsistent with the provisions of this Act.
Indian Contract Act, 1872 is not a complete code dealing with the law of contracts.
When the provisions of the Act do not apply, the principles of English Law, in turn
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would apply-Bhagwandass Goverdhan Dass Kedia v. Girdhari Lal Purushottam
Dass & Co., AIR 1966 SC 543.
2. Interpretation-clause. In this Act the following words and expressions are used in
the following senses, unless a contrary intention appears from the context:-
(a) When one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act
or abstinence, he is said to make a proposal;
(b) 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:
(c) The person making the proposal is called the promisor and the person
accepting the proposal is called the promisee:
(d) When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing, or promises
to do or to abstain from doing, something, such act or abstinence or promise
is called a consideration for the promise :
(e) Every promise and every set of promises, forming the consideration for each
other, is an agreement:
(f) Promises, which form the consideration or part, of the. consideration for
each other are called reciprocal promises:
(g) An agreement not enforceable by law is said to be void:
(h) An agreement enforceable by law is a contract:
(i) An agreement which is enforceable by law at the option of one or more of
the parties- thereto, but not at the option of the other or others, is a voidable
contract:
(j) A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable.
The term contract is derived from Latin word Contractum which means drawn
together. It is an agreement to do or not to do something.
According to Section 2(h) of the Act, Contract means an agreement enforceable
by law. Every contract consists of two connected elements namely obligation and
Agreement.
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There are two types of obligations. They are social obligations and legal obligations.
There are two types of agreements. They are social agreements and legal agreements.
Those agreements which give rise to social obligations are called social agreements.
Those agreements which give rise to legal obligations are called legal agreements.
Contract means an agreement enforceable by law. In the eye of law only legal agreements
are enforceable. Social agreements are not enforceable. For determining whether a
particular agreement is a social agreement or legal agreement the courts are applying
objective test but not subjective test. To create a contract there must be a common
intention of the parties to enter into legal obligations. The intention of the parties is
naturally to be known from the terms of the agreement and the surrounding
circumstances. It is for the court in each case to find out whether the parties must have
intended to enter into legal obligations.
In Darlymple vs. Darymple (1811) 161 FR 665, Lord Stowell observed that contract
must not be the sports of an idle hour, mere matters of pleasantry and badinage, never
intended by the parties to have any serious effect whatsoever. It is not every loose
conversation that is to be turned into a contract, although the parties may seem to
agree. The case of Balfour vs. Balfour (1919) 2KB 57 is the authority on this principle.
This defendant and his wife were enjoying leave in England. When the defendant
was due to return to Ceylon, where he has employed, and his wife was advised, by
reason of her health, to remain in England. The defendant agreed to send her an
amount of 30 pounds a month for the probable expenses of maintenance. He did send
the amount for some time, but differences afterwards arose which resulted in their
separation and allowance fell into arrears. The wifes action to recover the arrears was
dismissed.
Lord Aktin explained the principle thus. There are agreements between parties
which do not result in contract within the meaning of that term in our law. The ordinary
example is where two parties agree to take a walk together, or where there is an offer
and acceptance of hospitality. Nobody would suggest in ordinary circumstances that
these agreements result in what we know as contracts, and one of the most usual forms
of agreement which does not constitute a contract appears to be the arrangements do
not result in contract at all, even though there may be what would constitute consideration
for the agreement. They are not contracts because parties did not intend that they shall
be attended by legal consequences.
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So it is for the court to infer and identify in each case whether the parties must have
intended to enter into legal obligations. In all cases we can say the agreements between
the relatives are not enforceable. For example in Merritt v merit (1970) 1 WLR 1211 an
agreement to transfer to the wife the beneficial ownership of the matrimonial home
made at the time of separation was held to be binding. If on the partition of joint family
property among the male members a provision is made for the marriage expenses of a
female member, then such a female member can sue to enforce the agreement. (Sundara
Raja vs. Laxmi Ammal 1914 38 Mad.788)
Section 10 of the Indian Contract Act, 1872 lays down the rules as to what
agreements are contracts. According to it all agreements are contracts if they are
made by the free consent of the parties, competent to contract, for a lawful consideration
and with a lawful object and are not hereby expressly declared to be void. Thus an
agreement becomes a contract and is enforceable by law when it fulfils all these
conditions.
Essentials of Valid Contract
1) Consensus Ad Idem: Consensus Ad Idem: Consensus Ad Idem: Consensus Ad Idem: Consensus Ad Idem: It means identity of minds. Two persons are said to consent
when they agree upon the same thing in the same sense. When they agree upon
the same thing in the same sense they are said to be ad idem. Absence of consensus
makes a contract null and void.
2) L LL LLegal R egal R egal R egal R egal Relations: elations: elations: elations: elations: The agreement must create legal relations. The terms of an offer
must be intended to create or at least capable of creating legal relations. If the
terms of an offer and acceptance do not create legal relationship then that
agreement is not enforceable in the court of law. For example, an agreement to
dine at a friends house is not an agreement intended to create legal relations
and is not a contract. But an agreement to buy and sell goods are agreement to
create some legal relationship and are therefore contracts, provided the other
essential elements are satisfied.
3) L LL LLawful Consideration: awful Consideration: awful Consideration: awful Consideration: awful Consideration: One of the essential elements of a valid contract is lawful
consideration. Consideration means something in return. Every valid agreement
must be supported by lawful consideration. For example if A makes a promise to
give something in consideration of that, B also must make a promise to give
something. Then only that promise is enforceable.
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4) Competent P Competent P Competent P Competent P Competent Parties: arties: arties: arties: arties: At least two parties are essential for a valid contract. Further
the parties must be legally competent to contract. If they are not competent, the
agreement is not enforceable.
5) F FF FFree Consent: ree Consent: ree Consent: ree Consent: ree Consent: In order to enforce an agreement there must be consent and that
consent must be free. If the consent is not free consent, the agreement is not
valid.
6) L LL LLawful Object: awful Object: awful Object: awful Object: awful Object: The object of the agreement must be lawful. If it is not lawful or
immoral or illegal or opposed to public policy then in all these cases agreements
are not valid.
7) The Agreements must not have been expressly declared V The Agreements must not have been expressly declared V The Agreements must not have been expressly declared V The Agreements must not have been expressly declared V The Agreements must not have been expressly declared Void by any Court or by oid by any Court or by oid by any Court or by oid by any Court or by oid by any Court or by
any L any L any L any L any Law in F aw in F aw in F aw in F aw in Force in the Country orce in the Country orce in the Country orce in the Country orce in the Country.
According to Salmond According to Salmond According to Salmond According to Salmond According to Salmond All contracts are agreements but all agreements are not All contracts are agreements but all agreements are not All contracts are agreements but all agreements are not All contracts are agreements but all agreements are not All contracts are agreements but all agreements are not
contracts. contracts. contracts. contracts. contracts.
Classification of Contracts
Section 2
1) V VV VValid Contracts alid Contracts alid Contracts alid Contracts alid Contracts: According to Section 2(h) contract means an agreement
enforceable by law. An agreement becomes valid contract when all the essential
elements of a contract as laid down in section 10 are fulfilled.
2) V VV VVoid Agreement oid Agreement oid Agreement oid Agreement oid Agreement: A void agreement is one which is not enforceable by law.
3) V VV VVoid Contract oid Contract oid Contract oid Contract oid Contract: :: :: A contract which ceases to be enforceable by law. An agreement
may be valid at the time of entering into agreement but due to some intervening
event the contract ceases to be enforceable. Ex. A Promises to sell his house to B
for Rs.1 Lakh. Subsequently the house is destroyed by fire. The agreement ceases
to be enforceable.
4) V VV VVoidable Contract oidable Contract oidable Contract oidable Contract oidable Contract: :: :: A voidable contract is one which is valid until avoided and
void when avoided. It is enforceable at the option of one party but not at the
option of the other party. Such a contract is valid until avoided. Once it is avoided,
it is void. But if the aggrieved party chooses to enforce it, the contract is valid. Ex.
A threatens to shoot B if he does not sell his house for a nominal amount. The
contract has been brought about force and is avoidable at the option of B. But if
B desires, he can enforce it against A.
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5) Unlawful Agreement Unlawful Agreement Unlawful Agreement Unlawful Agreement Unlawful Agreement: :: :: An agreement which is prohibited by law.
Ex. An agreement with a minor; agreement without consideration
6) Illegal Agreement Illegal Agreement Illegal Agreement Illegal Agreement Illegal Agreement: :: :: An agreement which is not only prohibited by law but also
punished by law.
7) Unenforceable Agreement Unenforceable Agreement Unenforceable Agreement Unenforceable Agreement Unenforceable Agreement: :: :: An agreement which is void from the beginning.
8) Unenforceable Contract Unenforceable Contract Unenforceable Contract Unenforceable Contract Unenforceable Contract: : : : : A contract which is not enforceable by a court of law
because of some technical defect.
Ex. Time-barred debt, non-observance of certain formalities such as
writing, attestation and registration.
9) Express Contract Express Contract Express Contract Express Contract Express Contract: Contracts entered into between the parties by Words,
spoken or written are termed as express contracts.
10) Implied Contract Implied Contract Implied Contract Implied Contract Implied Contract: :: :: Contracts constituted by Law or obligations imposed by law
are known as quasi contracts or implied contracts.
11) Unilateral or Executed Contract Unilateral or Executed Contract Unilateral or Executed Contract Unilateral or Executed Contract Unilateral or Executed Contract: It is a contract in which one party to the contract
performed his obligations under the contract and the other party to the contract is
yet to perform his obligations under the contract. Ex. A gave Rs.1000 to B upon
which B agreed to supply one bag of rice to A after 10 days.
12) Bilateral Contract or Executory Contract Bilateral Contract or Executory Contract Bilateral Contract or Executory Contract Bilateral Contract or Executory Contract Bilateral Contract or Executory Contract: :: :: It is a contract in which both the parties
are yet to perform their obligations under the contract.
Ex. A made a promise to B to sell one bag of rice after one month and
B made a promise to purchase one bag of rice after month.
13) Simple Contract or P Simple Contract or P Simple Contract or P Simple Contract or P Simple Contract or Parole Contracts arole Contracts arole Contracts arole Contracts arole Contracts: : : : : They are made by words spoken or written.
14) F FF FFormal Contracts ormal Contracts ormal Contracts ormal Contracts ormal Contracts: : : : : Their validity depends upon their for alone. They are required
to satisfy certain legal formalities in order to be valid and binding.
The L The L The L The L The Law of contracts is not the whole law of agreements nor is it whole law of aw of contracts is not the whole law of agreements nor is it whole law of aw of contracts is not the whole law of agreements nor is it whole law of aw of contracts is not the whole law of agreements nor is it whole law of aw of contracts is not the whole law of agreements nor is it whole law of
obligations; it is the law of those agreements which create obligations and of those obligations; it is the law of those agreements which create obligations and of those obligations; it is the law of those agreements which create obligations and of those obligations; it is the law of those agreements which create obligations and of those obligations; it is the law of those agreements which create obligations and of those
obligations which have their source in agreements. obligations which have their source in agreements. obligations which have their source in agreements. obligations which have their source in agreements. obligations which have their source in agreements.
Obligations may have their source in agreements or not. Obligations may arise
even without agreements. Obligations which do not have their source in agreements
are not contracts. Examples are obligations arising from tort, quasi contract or judgment
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of courts. Obligations imposed by law are also excluded. Obligations created by an
agreement are only contractual in nature.
Agreements may be of four types they are:
1) Agreements which destroy rights and obligations like release or surrender.
2) Agreements which transfer rights from one party to another, for example completed
sale.
3) Agreements which relate to social, moral or religious matters.
4) Agreements which create legal rights and obligations.
The law of contracts deals with only agreements which create legal rights and
obligations. Hence Salmond rightly observed that the law of contracts is not the whole
law of Agreements, nor is it the whole law of obligations. It is the law of those Agreements
which create obligations and those obligations which have their source in Agreements.
Right is an interest recognized and protected by rule of right or by courts. Rights are
of two kinds viz. a) Right in rem and b) Right in Personam. A Right in rem is a right
available against the whole world and a right in personam is a right available against
a particular individual. Rights to property are rights in rem, while rights arising under a
contract are rights in personam. The law of contract deals with rights in personam only.
Offer
A Contract is an agreement and comes into existence when one party makes an
offer which the other accepts. An offer is a proposal by one party another to enter into
a legally binding agreement with him. A person is said to make a proposal When one
person signifies to another his willingness to do or abstain from doing anything with a
view to obtaining the assent of that other to such act or abstinence he is said to make
a proposal. The person making the proposal is called the proposer or offeror and the
person to whom the proposal is made is called the proposee or offeree. [Sec.2(a)]
An offer may be either express or implied. It may be either an act or abstinence i.e.
an agreement neither to do nor not to do.
3. Communication, acceptance and revocation of proposals.-The communication
of proposals the acceptance of proposals, and the revocation of proposals and
acceptances, respectively, are deemed to be made by any act or omission of the party
proposing, accepting or revoking by which he intends to communicate such proposal,
acceptance or revocation, or which., has the effect of communicating it.
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Essentials of a Valid Offer :
1. The terms of an offer must be intended to create or at least capable of creating
legal relations:- A valid offer must be intended to create or at least capable of
creating legal relations. If the offer is not intended to create legal relationships, it
is not an offer in the eyes of law. To offer a friend or relative for a dinner, does not
give rise to a legal action.
For ex. In Balfour vs. Balfour (1919) 2 K.B. 571 D was a civil servant stationed in
Ceylon. D had promised his wife P, who was living in England for reasons of
health, to pay her a monthly allowance 30 pounds, so long as she could not
come over to Ceylon and join him. P sued for the breach of the agreement. It
was held that P could not sue D for the allowance as no intention to create a legal
obligation was contemplated. The promise was only of a domestic nature.
2. The terms of an offer must be certain or at least capable of being made certain.
Offer must be certain, definite and not vague.
No contract can come into existence if the terms of the offer are vague and
indefinite. To constitute a valid agreement, it is essential that the proposal must
be so certain, that the rights and obligations of the parties arising out of the
contract can be exactly fixed. A vague offer does not convey what it exactly means.
Thus, an offer by A to B to pay the latter a certain sum of money on the latter
marrying As daughter is no offer, because the amount to be paid is not certain.
Similarly the words P to receive a reasonable share of the profits do not constitute
a valid offer.
For example A promised to B to take on rent his house for three years at 85
pounds per annum if the house was put into through repairs and the drawing
rooms handsomely decorated according to present style. It was held that the
terms were too uncertain and the promise could not be enforced. Taylor v.
Portington (1855) 44 E.R. 128.
3. Offer must be communicated to the offeree: - there can be no offer by a person
to himself. It must always be communicated to another person.An offer becomes
effective only when it has been communicated to the offeree. If there is no
communication of an offer, there is no acceptance resulting in the contract.
According to section 4 of the Indian Contract Act, 1872 lays down that the
communication of proposal is complete only when it is communicated to the
offerree.
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The leading case on this issue is Lalman Shukla v. Gauri Dutt 11 All.L.J 489. The
facts of the case are one D sent his servant P to trace his missing nephew. D in the
meantime announced a reward for information relating to the boy. P in ignorance
of the announcement traced the boy and informed D. P later on came to know of
the reward and he claimed it. His claim was dismissed on the ground that he
could not accept the offer unless he had knowledge of the same.
4. Offer must be made with a view to obtaining the assent of the other party:- An
offer must be distinguished from mere expression of intention. An offer or proposal
to do or to abstain from doing anything must be made with a view to obtaining
the assent of the other party to whom the offer is made. Mere enquiry is not an
offer.
a) It is open to a person to whom a conditional offer is addressed to accept or
not to accept condition. A conditional offer lapses when the condition is not
accepted. An offer may be either express or implied.
b) An offer may be conditional:- An offer may be made subject to a condition.
In that case it can be accepted only subject to that condition.
Kinds of Offer
General Offer
An offer may be general or specific. When an offer is made to a specific individual
it must be accepted by that particular individual only. When an offer is made to a
special class of persons it can be accepted by any one from that class. When an offer
is made to the general public it can be accepted by any one from that class. The
leading case on the subject of general offer is Carlil v. Carbolic Smoke Ball Co., (1893)
1 Q.B. 256. In this case, the company offered by advertisement a reward of 100
pounds to any one who contacts influenza after using their smoke balls for a fortnight
according to printed directions. Mrs. Carllil, on the faith of the advertisement, bought a
smoke ball and used it as directed but was attacked by influenza. She sued for the
advertised reward. The court decreed the suit on the ground that the advertisement was
not a mere statement of an intention to give reward but a definite promise, and although
the offer was not made to any particular person but to the whole world. It was capable
of being accepted by one or more persons who accepted by conduct or performance
of conditions. In such a case acceptance and performance go together and no
communication is necessary.
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An Invitation to Offer is not an Offer: An Invitation to Offer is not an Offer: An Invitation to Offer is not an Offer: An Invitation to Offer is not an Offer: An Invitation to Offer is not an Offer: An offer is different from invitation to offer. It
only invites the general public to make an offer. Invitation to offer is also called Offer
to negotiate or offer to receive offer. An offer in the legal sense is one which if
accepted becomes a promise. The person, who responds to an invitation to offer,
makes the actual offer.
When a man advertises that he has got a stock of books to sell, or houses to let,
there is no offer to be bound by any contract. Such advertisements are offers to negotiate-
offers to receive offers offers to chaffer. An offer is the final expression of willingness
by the offeror to be bound by his offer should be other party chooses to accept it. This
should seem to become more or less obvious from the definition of proposal in
section 2(a), which emphasis that there should be the expression of willingness to do or
abstain with a view to obtaining the assent of the other. The offeror must have expressed
his willingness to contract in terms of his offer with such finality that the only thing to be
waited for is the assent of the other party. Where a party, without expressing his final
willingness, proposes certain terms on which he is willing to negotiate, he does not
make an offer, but only invite the other party to make an offer on those terms. This is
perhaps the basic distinction between an offer and an invitation to receive offers.
An offer is altogether different from quotation or catalogue. Quotations or
catalogues quoting or indicating the price of the goods do not amount to offers by
themselves. Quotations and catalogues are treated as only an invitation to offers.
Similarly a prospectus issued by a company inviting public at large to take shares in the
company is not an offer but it is only an invitation to offer. When public in response to
that prospectus make an application, they are said to make an offer offering to take
shares in the company.
A declaration by a person that he intends to do something gives no right of action
to another. Such a declaration only means that an offer will be made or invited in future
and not that an offer is made now. An advertisement for a concert or an auction sale
does not amount to an offer to hold such concert or auction sale.
Display of goods by a shop keeper in his window, with prices marked on them, is
not an offer but merely an invitation to the public to make an offer to buy the goods at
the marked prices. Likewise, quotations, catalogues, advertisements in a newspaper for
sale of an article, or circulars sent to potential customers do not constitute an offer.
They are instead invitation to the public to make an offer. A person, in case the prices
of the goods are marked, can not force the seller to sell the goods at those prices. He
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can at the most, asks the seller to sell the goods to him, in which case he would be
making an offer to the seller and it is up to the seller to accept it.
A AA AAuction Cases uction Cases uction Cases uction Cases uction Cases:- A mere announcement or an advertisement in the news papers to
hold an auction is not an offer and therefore the auctioneer is entitled to withdraw the
article from the sale after making an announcement to hold the auction. In Harris v.
Nickerson, (1873) LR QB 286, the defendant advertised to auction certain furniture at
a certain place at a certain date. The plaintiff relying on the advertisement and intending
to buy the furniture traveled all the way to the place of auction spending money on
transport. When the plaintiff reached the place of auction he found the furniture withdrawn
from the auction. The plaintiff filed a suit for breach of contract. The court held that the
announcement or advertisement to hold an auction is not an offer but only an invitation
to an offer and therefore the breach of contract does not arise.
At an auction, the bidder who makes a bid can always retract or withdraw his bid
before the fall of hammer. In Payne v .Cave (1789) (100) ER 502, the defendant at an
auction made a bid of 40 pounds for a warm tub but withdrew his bid before the fall of
hammer. The auctioneer resold the tub at the second auction and the defendant
himself purchased it for a sum of 30 pounds. The plaintiff filed a suit for recovery of 10
pounds being the difference between the defendants first bid and second bid. It was
argued on behalf of the plaintiff that every bid, being a conditional purchase- conditional
on there being no higher bid and that the hammer is not suspended for the benefit of
the bidder enabling him to retract his bid and therefore the defendant cannot withdraw
his bid. The court held that every bid at an auction is an offer and until the acceptance
of such bid is signified either by fall of hammer or by some other customary method, the
contract will not be completed, or before such acceptance the bidder is entitled to
retract his bid.
In Warlow v. Harrison the defendant advertised to sell a mare by auction without
reserve. The plaintiff made a bid of 60 guineas for the mare and subsequently another
person made a bid of 61 guineas. The plaintiff although intended to bid still higher but
refrained to do so on knowing that the highest bidder was the owner himself. In a suit
filed by the plaintiff it was held that the auction being without reserve the defendant
has to knock down the mare in favour of the plaintiff.
The following are only invitations to offer but not actual offers:
a) Invitation made by the trader for the sale of goods.
b) A price list of the goods for sale.
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c) Quotations of lowest prices.
d) An advertisement to sell goods by auction.
e) An advertisement inviting tenders.
f) Display of goods with price tags attached.
g) Railway time-table.
h) Prospectus issued by the company.
i) Display of goods in a shop for sale.
An offer is something different from Tender
A AA AA T TT TTender is not an Offer ender is not an Offer ender is not an Offer ender is not an Offer ender is not an Offer. .. .. After its acceptance, it sometimes becomes what is
known as a standing offer or continuing offer. A contract takes place only after the
order is placed. Reference may be made here of an illustration i.e. Bengal Co., Ltd.
Home Wadia & Co. ILR (1899) 22. In this case the defendants entered into an agreement
to supply a kind of coal from time to time required by the plaintiff for a period of twelve
months. The plaintiff, in pursuance of the said agreement, placed certain orders and
the defendants supplied the coal. But before the lapse of 12 months they withdrew their
offer and refused to supply the coal any more. The plaintiffs thereupon filed the suit
against them for the breach of contract. The court dismissed the suit on the ground that
there was no contract. The court pointed out that it was simply a continuing offer and
the contract took place only when a certain quantity was ordered. The defendants were
therefore within their right to revoke it. They could not, however, revoke their offer in
respect of the orders actually placed.
Tender is also called Standing Offer or Open Offer or Continuing Offer:-
Where large quantities of goods are required by Railways or other bodies from
time to time, it is usual to call tenders for the supply of such goods. An advertisement
inviting tenders is not an offer but a mere invitation to offer. It is the person who sends
a tender for the supply of such goods is deemed to have made an offer. An offer for the
continuous supply of a certain articles at a certain rate over a definite period is called
a standing offer. Such offers though accepted do not give rise to contract unless an
actual order is placed with him. A by means of an offer agrees to supply coal to B at a
particular rate for a period of two years. B accepts the tender. In this case B is not
bound to place an order for all the coal which he requires nor is A bound to keep that
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offer alive during the course of two years unless there is an extra consideration. As offer
is merely a standing offer which he can revoke at any time before its acceptance by an
order from B.
Cross Offer
Identical offers made by persons in ignorance of each other are known as cross
offers. They do not make a contract.
Firm Offer and Option:-
When an offeror made a firm offer to the offeree to sell a particular property and in
turn the offeree asks for some time to give his acceptance or not to give his acceptance
and he requested the offeror to give for some time. In the above situation the offeror is
bound to wait in case the offeree gives some consideration to the offeror. By giving
consideration the offeree purchased the option for the firm offer made by the offeror.
S.5. Mode of Revocation of Proposal:
Revocation how made.- A proposal is revoked-
(1) by the communication of notice of revocation by the proposer to the other party
(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no
time is so prescribed, by the lapse of a reasonable time, without communication
of the acceptance;
(3) by the failure of the acceptor to fulfill a condition precedent to acceptance ; or
(4) by the death or insanity of the proposer, if the fact of his death or insanity comes
to the knowledge of the acceptor before acceptance.
Law Relating to Contract made through Post
It is contained in Sections 4 and 5 of the Act.
Communication when complete.- The, communication of a proposal is complete
when it comes to the knowledge of the person to whom it is made.
The communication of an acceptance is complete,
as against the proposer, when it is put in a course of transmission to him, so as to
be out of the power of the acceptor; as against the acceptor, when it comes to the,
knowledge of the proposer
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The communication of a revocation is complete,
as against the person who makes it, when it is put into a course of transmission to
the person to whom it is made, so as to be out of the power of the person who makes it;
as against the person. to whom it is made, when it comes to his knowledge.
Illustrations
(a) A proposes, by letter, to sell a house to B at a certain price.
The communication of the proposal is complete when B receives the letter.
(b) B accepts as proposal by a letter sent by post.
The communication of the acceptance is complete,
as against A when the letter is posted
as against B, when the letter is received by A.
(c) A revokes his proposal by telegram.
The revocation is complete as against A when the telegram is dispatched. It
is complete as against B when B receives it.
B revokes his acceptance by telegram. Bs revocation is complete as against
B when the telegram is dispatched, and as against A when it reaches him.
(5) Revocation of proposals and acceptances.-A proposal may be revoked at any
time before the communication of its acceptance is complete as against the
proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.
Illustrations
A proposes, by a letter sent by post, to sell his house to B. B
accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment when B posts his
letter of acceptance, but not afterwards.
B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A, but not afterwards.
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The communication of proposal is complete when it comes to the knowledge of the
person to whom it is made. The communication of acceptance is complete as against
the proposer once the letter of acceptance properly addressed and stamped is posted
the acceptance is made and binds the offeror, as he is deemed to have received the
acceptance at the moment when it is dispatched so as to be out of the power of the
acceptor and it becomes on which the acceptor can sue even if the letter never reaches
the offeror. But an acceptance binds the acceptor only when it reaches the offeror.
The offeror can revoke his offer before letter of acceptance is posted by the offeree.
The offeree or proposee can revoke his acceptance before the letter of acceptance is
received by the offeror. But in English Law the offeree cannot revoke the letter of
acceptance once it is posted.
When the communication of an acceptance is made by post, it is complete as
against the proposer when the letter of acceptance is posted. Where a letter of
acceptance was duly posted but was delayed in post, and offeror sought to repudiate
the contract it was held that the posting of the letter was an acceptance of the offer.
D in an answer to an enquiry as to the price of pig iron wrote to H, we shall be
glad to supply you with 2000 tons of pig iron at 65s per ton, and after further
correspondence wrote on the 28
th
January, that the price was 65s net.He received this
on the 30
th
January, and on the same day wrote We will take the 2000 tons pig iron
you offer us. The post was then delayed and the acceptance was received six hours
later than the scheduled hour. D refused to sell the iron. It was held that the posting of
the letter was an acceptance of the offer and that D could not refuse to supply the iron.
Dunlop v. Higgins (1948) I H.L.C. 381;
Contract over Telephone and Telex
The law with regard to contracts over telephone and telex is the same in England
and India. In telex or telephonic communication the parties are to all intents and purposes
in each others presence and where a contract is negotiated by such instantaneous
communications, there is no binding contract until the notice of the offer is received by
the offeree and notice of acceptance is received by the offeror.
The rule that the moment the letter of acceptance is posted completes the contract
cannot be applied in case of instantaneous contract like contracts made through telex
and telephone. In these instantaneous contract it is necessary that an acceptance to be
complete as against the offeror, the acceptance must actually be received by the offeror
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and consequently to give rise to the contract. The question of acceptance through telex
service came for the consideration of the court in Entores v. Miles Far East Corporation,
(1955) (2) Q.B. 327 in this a contract was made by telex between a Dutch Company
Amsterdam (Holland) and an English Company in England by Telex. Each company
has a teleprinter machine in its office. Each has a Telex number like a telephone
number. When one company wishes to send a message to the other, it gets the telephone
exchange to connect up the machines. Then a clerk at one end types the message on
his machine just as if it were a typewriter. Instantaneously the machine at the other end
takes up the message and automatically types it on a paper at that end. In this case the
acceptance was complete in Holland from which the message was sent out or in London
where message was received. Denning L.J. held: The contract is only complete when
the acceptance is received by the offeror and the contract is made at the place where
the acceptance is received. The contract in this case was thus held to have been made
in England and not in Holland.
On the same Analogy the Supreme Court of India in the case of Bhagwandas
Kedia v. Girdharilal, AIR 1966 (1) SCR 666, has held in case of offers and acceptances
communicated by telephone, the contract is complete only at the end of the offeror
where he has received the acceptance to his offer.
In case of communication of offer and acceptance through post and telegraph, a
third agency intervenes and without it the messages cannot be transmitted but in case
of telephone once a connection is established between the offeror and acceptor, generally
the question of third party intervention does not arise.
S.2 (b). Acceptance
Section 2(b) of the Act defines Acceptance as when the person to whom the proposal
is made signifies his assent there to the proposal is said to be accepted. The Person
who is giving the acceptance is called proposee or offeree or acceptor. Acceptance
may be either expres or implied.
S SS SS.7. .7. .7. .7. .7. Acceptance must be absolute.-In order to convert a proposal into a promise, the
acceptance must-
(1) be absolute and unqualified;
(2) be expressed in some usual and reasonable manner, unless the proposal
prescribes the manner in which it is to be accepted. If the proposal prescribes
a manner in which it is to be accepted, and the acceptance is not made in
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such manner, the proposer may, within a reasonable time after the acceptance
is communicated to him, insist that his proposal shall be accepted in the
prescribed manner, and not otherwise; but if he fails to do so, he accepts the
acceptance.
S SS SS.8. .8. .8. .8. .8. Acceptance by performing conditions, or receiving consideration.-Performance
of the conditions of a proposal, or the acceptance of any consideration for a
reciprocal promise which may be offered with a proposal, is an acceptance of the
proposal.
S SS SS.9. .9. .9. .9. .9. Promises express and implied.-In so far as the proposal or acceptance of any
promise is made in words, the promise is said to be express. In so far as such
proposal or acceptance is made otherwise than in words, the promise is said to
be implied.
An acceptance should always be accepted in the manner required by the offeror.
Section 7(2) of the Act imposes the duty on the offeror or intimate to the offeree that the
acceptance is not according to the prescribed manner, and if he keeps quiet, he is
deemed to have accepted the acceptance as made.
1) Acceptance must be By the Offeree and None else
When an offer is made to a particular individual it must be accepted by that particular
individual only. If it is accepted by another individual it is not a valid acceptance. In
Boutlon vs. Jones (1877) 157 E.R. 232. A sold his business to B. The sale is not known
to As customers. So Jones, who is a usual customer of A, places an order for goods
with A by name B. The new owner receives the order and supplies the goods without
disclosing the fact of sale of business to him. It was held that there was no contract
since the order was to A and the acceptance by B. So it is not a valid acceptance.
2) Acceptance must be Absolute and Unconditional
The offeree must give the acceptance absolutely and unconditionally. If the
acceptance is conditional acceptance it is not valid acceptance. It amounts to counter
offer. Again the counter offer must be accepted by the offeror. In Neale vs. Merrett
(1930) WN 189, an offer of land by M for 280 pounds was accepted by N, who
enclosed 80 pounds with his letter of acceptance and promised to pay the balance of
monthly instalments of 50 Pounds. M is not bound by the acceptance of N because it is
not unqualified acceptance.
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3) Acceptance must be Communicated to the Offeror
An offer must be accepted and it must be communicated to the offeror. Offer must
be communicated to the offeree and the acceptance must be communicated to the
offerror. Then only the contract is concluded. If the acceptance is not communicated to
the offeror or he comes to know the acceptance through unauthorized means then the
offeror cannot enforce the promise. The leading case on this point is Power v Lee
(1908) 99 LT 284. The Board of Managers of a school resolved to appoint P as Head
Master. But the resolution or decision was not communicated to P. One of the Managers,
in his personal capacity informed P of the same. But there was no official communication
of the resolution by the Board. The Board later cancelled the resolution. It was held that
in the absence of any authorized communication, there was no completed contract.
4) Acceptance must be in the Mode Prescribed:
If the offeror prescribed the mode of acceptance, the acceptance must be made in
accordance with the mode prescribed.
5) Acceptance must be given within a Reasonable Time:
If the offeror has prescribed a time within which offer must be accepted, it must be
accepted within the prescribed time. If no time is prescribed for acceptance, the offer
must be accepted within reasonable time.
6) Provisional Acceptance:
Where acceptance is given subject to approval it is not binding unless and until it
is approved by the final authority.
7) In the Following Cases Acceptance need not be Communicated to the
Offeror:
a) Unilateral contract or executed contract.
b) General offer.
c) Acceptance by conduct.
d) In case, the offeror waives this condition.
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CHAPTER-II
LAWFUL CONSIDERATION AND
CONTRACTUAL CAPACITY
In the words of Lord Denning Consideration is a cardinal necessity
of the formation of contract. Under Indian Law also consideration is
necessary for the formation of contract. Section 25 affirms this proposition
by laying down a general rule that An agreement without consideration
is void. It is legal evidence of the intention of the parties to effect their
legal relations. When a party to an agreement promises to do something
he must get something in return for it. If he does not get something in
return the contract is not valid. It is the price for which the promise of the
other is bought.
Section 2(d) of the Act defines consideration as When at the desire
of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing or promises to do or abstain
from doing something, to such act or abstinence or promise is called
consideration for the promise. In simple terms, consideration means
the element of exchange in a bargain, and in order to satisfy the
requirements of law consideration must be an act or abstinence of some
value in the eye of law.
Legal Rules Relating to Consideration
Consideration must move at the Desire of the Promisor
The act performed at the desire of the third party cannot be considered
as consideration for the promise. But the promisor need not necessarily
derive any benefit from the contract. The benefit may be intended for a
third party. In Durga Prasad vs. Baldeo ILR (1880) 3 ALL. 221, the plaintiff
built a market at the desire of the Collector of the district. The defendant
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who subsequently occupied one of the shops in the market agreed to pay a certain
commission on all goods sold through him in the market. An action brought by the
plaintiff on the breach of the said promise was dismissed on the ground that the plaintiff
built the market at the desire of the Collector and not that of the defendant and hence
the promise was without consideration and could not be enforced.
Consideration may move from the Promisee or any other Person
Consideration may move from the promisee or any other person. In Chainnaya
Rau vs. Ramayya (1881) 4 Mad. 137 A, an old lady by deed of gift, made over certain
property to her daughter with a direction that the daughter should pay an annuity to As
brother as had been done by A. The daughter also entered into an agreement with her
uncle to pay an annuity. The daughter however did not pay the annuity as promised. As
brother sued As daughter. It was held that the consideration moved from A, the donor
of the estate, though not from her brother. That was sufficient consideration for the
daughters promise to As brother, because the consideration in India need not move
from the promise, but can move from any other person.
Under English law, however, a stranger to the consideration cannot sue to enforce
the contract. The person to whom the promise is made (Promisee) must furnish the
consideration.
Consideration may be Past, Present or Future
Where the promisor had received the consideration before the date of the promise,
the consideration is termed as Past consideration.
Example: A renders some service to B in the month of August. In the month of
October B promises to pay A Rs.1,000/-. The consideration of A is past consideration.
Where the promisee receives consideration along with his promise, the consideration is
termed as present consideration.
Example: A agrees to sell his car for Rs. one lakh. B pays money to A at the time of
taking the car.
Where one party to the contract receives consideration in future the consideration
is called future consideration.
Consideration need not be adequate to the Promise
LAWFUL CONSIDERATION AND CONTRACTUAL CAPACITY
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It is up to the parties to fix their own prices. For example, where A voluntarily agreed
to sell his car which costs Rupees one lakh for Rupees one thousand, it became a valid
contract despite the inadequacy of the consideration. The parties are presumed to be
capable of appreciating their own interest and reaching of their own equilibrium, and
the law, as a general rule, leaves people to make their own bargains, and does not
concern itself with the adequacy of consideration.
Consideration must be Real
Consideration must be real. It must not be illegal, impossible or illusory.
Example: A promise to sell nine planets to B for nine lakhs. Here As consideration
is impossible and so not valid.
Consideration must be Lawful
Consideration for an agreement must be lawful. It must not be illegal immoral or
opposed to public policy. If the consideration is not legal, the agreement cannot be
enforced.
Example: A agrees with C to destroy Bs house, for which C agrees to pay
Rs. 50,000/- to A. Here the consideration is not legal and so not valid.
Stranger to Contract
As a general rule parties to the contract are only entitled to enforce the contract.
Third party to the contract cannot enforce the contract. A stranger to contract cannot
sue in England as well as in India though it may be made for his benefit. The leading
case on this point is Dunlop Pneumatic Tyre Co. Vs. Selfridge & Co (1915) A.C. 847.
The facts of the case are A sold a large quantity of tyres to B at a certain price on
entering into a covenant not to sell the tyres below the price mentioned in price list
supplied by A. B sold some tyres to C, a retail dealer, under a contract stipulating the
same covenant as between A and B. C sold the tyres at less than the list price. A sued
C for the breach. It was held that A could not sue C as A was not a party to the contract
between B and C.
In Jamuna Dass vs. Rama Autar (1911) 30 I a 7, A borrowed Rs. 40,000/- by
executing a mortgage of her Zamindari in favour of B. Subsequently she sold the property
to C for Rs. 44,000/- and allowed C, the purchaser, to retain Rs. 40,000/- of the price
in order to redeem the mortgage, if he though fit. B sued C for the recovery of the
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mortgaged money, but could not succeed because he was not a party to the agreement
between A and C.
Exceptions to the Rule that a Stranger to Contract Cannot Sue
1. Beneficiary of a T Beneficiary of a T Beneficiary of a T Beneficiary of a T Beneficiary of a Trust rust rust rust rust: The person who created the trust is called the Settlor. The
person who is appointed by the Settlor to manage the trust is called Trustee. The
person for whose benefit the trust is created is called Beneficiary. In case of
mismanagement of trust property by Trustee, the Beneficiary can enforce the
provisions of the trust even though he is stranger to the contract creating the trust.
2. Charge Created on a Specific Immovable P Charge Created on a Specific Immovable P Charge Created on a Specific Immovable P Charge Created on a Specific Immovable P Charge Created on a Specific Immovable Property: roperty: roperty: roperty: roperty: The leading case on this
point is Khwaja Mohammad vs. Hussaini Begum (1910) 37 IA 52. In this case, the
suit was brought by a Mohammedan lady against her father-in-law to recover
arrears of certain allowance called Karcha-I-Pandan under the terms of an
agreement executed by the father-in-law in consideration of her marriage with his
son at the time when she and her husband were minors. The amount was to be
paid out of the rent of his specific immovable property. The defendant disclaimed
the liability on the ground that the plaintiff was not a party to the agreement. It
was held that in India and among communities circumstanced as the
Mohammedans, among whom marriages are contracted for minors by parents
and guardians, it might occasion serious injustice if the common law doctrine
was applied to agreements or arrangements entered into in connection with such
contracts.
3. Marriage Settlements or F Marriage Settlements or F Marriage Settlements or F Marriage Settlements or F Marriage Settlements or Family Arrangements amily Arrangements amily Arrangements amily Arrangements amily Arrangements: In case a provision is made for
the marriage or maintenance of a female member of the family on the partition of
a Hindu undivided family, the female member can enforce the promise though
she may be a stranger to the contract. In Shuppu Ammal v. Subramanyam (1910)
ILR 33 Mad. 238, two brothers in a partition deed agreed to pay Rs. 300/- in
equal shares to their mother of her maintenance. The brothers subsequently failed
to pay the amount. The court held that the mother could enforce the promise
even though she was a stranger to the contract.
In Sundara Raju vs. Lakshmi Ammal (1914) 38 Mad. 788 the partition deed between
brothers in a joint family contained a provision for payment of marriage expenses
to their sister. It was held that their sister could enforce that provision though she
was not a party to the partition agreement.
4. Agency Agency Agency Agency Agency : :: :: Contract entered into by an agent can be enforced by the principal.
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5. Acceptance by Conduct Acceptance by Conduct Acceptance by Conduct Acceptance by Conduct Acceptance by Conduct : Where the promisor has by his conduct created privity
of contract with the stranger. Thus, if A admits to C, that he has received money
from B for payment to C, he constitutes himself as the agent C, who can successfully
recover the amount from A.
6. Assignment : Assignment : Assignment : Assignment : Assignment : The assignee of a debt or an actionable claim may, if the assignment
is legal assignment, sue the original debtor.
English Law: Past Consideration is No Consideration
According to English Common Law past consideration is not valid. Consideration
must always be present or future. In Roscorla vs.Thomas (1842) 114 ER 496, a horse
was sold by the defendant to the plaintiff. After the sale had been made the defendant
expressly warranted that the horse was sound and fee from vice. The horse happened
to be a vicious one. The question was whether the defendant could be liable for the
breach of this warranty by him? It was held that the plaintiff has no cause of action on
the ground that:
1) There is no implied warranty in the original agreement that the horse is sound
and free from vice, and
2) The express warranty is not binding because the same was given after the sale
was made and is not supported by any fresh consideration.
Exceptions to the above Rule
1) Past Consideration at the Promisors Request
Past consideration though given prior to the promise, but at the request of the
promisor, is deemed to be a good consideration for the promise. The authority for this
point is the case of Lampleigh vs. Braithwait (1615) Hob. 105 Thomas Braithwait, the
defendant, who was held guilty of having committed a murder, requested Lampleigh,
the plaintiff, to make efforts to obtain pardon for him from the King. The plaintiff made
efforts to secure the pardon, going from one place to another with his own expense. In
consideration of these efforts the defendant promised to pay 100 pounds to the plaintiff.
The question was, whether the plaintiff had legal right to recover this amount. It was
held that the plaintiff has a right to enforce the promise and recover the said amount
because for this promise the consideration, in the form of efforts by the plaintiff to
obtain the pardon had been there at the earlier request of the defendant.
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2) Written promise to pay a time-barred debt
3) Negotiable Instrument:
Where a negotiable instrument is given in consideration of some past act, the past
act will form as a good consideration for the issue of the negotiable instrument and the
party who gets the instrument can validly enforce it.
Section 25: An Agreement without Consideration is Void
25. 25. 25. 25. 25. Agreement without consideration, void, uncles it is in writing and registered, or
is a promise to compensate for something done, or is a promise to pay a debt barred
by limitation law.- An agreement made without consideration is void, unless-
(1) it is expressed in writing and registered under the law for the time being in force
for the registration of documents, and is made on account of natural love and
affection between parties standing in a, near relation to each other ; or unless
(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily
done something for the promisor, or something which the promisor was legally
compellable to do ; or unless
(3) it is a promise, made in writing and signed by the person to be charged therewith,
or by his agent generally or specially authorized in that behalf, to pay wholly or in
part a debt of which the creditor might have enforced payment but for the law for
the limitation of suits.
In any of these cases, such an agreement is a contract.
Explanation 1.- Nothing in this section shall affect the validity, as between the
donor and donee, of any gift actually made.
Explanation 2.- An agreement to which the consent of the promisor is freely given
is not void merely because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account by the Court in determining the question
whether the consent of the promisor was freely given.
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Exceptions:-
1) Natural Love and Affection:
An agreement though made without consideration will be valid if it is in writing
and registered and is made on account of natural love and affection between
parties standing in a near relation to each other.
In Venkatwswamy v. Rangaswamy (1903) 13 MLJ 428, A by registered agreement
on account of love and affection for his brother B undertook to discharge a debt
due by B to C. The promise was put in writing and registered. This is a valid
contract without consideration.
2) Promise to Compensate for Past Voluntary Services
To apply this rule, the following essentials must exist:
a) The act must have been done voluntarily.
b) For the promisor or it must be something which was the legal obligation of
the promisor
c) The promisor must be in existence at the time when the act was done.
d) The promisor must agree now to compensate the promisee.
Example: A finds Bs purse and give it to him. B promises to give A
Rs. 50/-. This is a contract.
3) Written promise to pay a time-barred debt.
4) Completed Gift:
It does not affect the validity of any gift actually made between donor and donee.
5) Agency:
Section 185 of the Act says that no consideration is needed to create an agency.
Time-barred claims
A dispute does not cease to exist merely because the claim is barred by the limitation
prescribed as per the Limitation Act, 1963 or otherwise though action based on a claim
may be required to be dismissed. A distinction is to be made between arbitration
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agreement entered into about a time-barred claim and a reference to arbitration made
on the basis of an arbitration clause after the expiry of the period of limitation in respect
of such a claim. In the latter case, no reference can be made as the right to claim
ceases to subsist and the relief with respect to the dispute has become time-barred. In
Ruby General Insurance Co. Ltd. v. Peare Lal Kumar, all differences arising out of the
insurance policy were to be referred to arbitration within twelve months of the disclaimer
of the claim by the company. The company had rejected the claim under the policy. The
policy holder referred the dispute to arbitration but beyond the period of twelve months
after the disclaimer by the company it was held that the question of disclaimer and the
rights of the parties were themselves questions arising out of the policy and as such
covered by the terms of the arbitration clause. Whether the claim to be made in the
reference to the arbitration is barred or not is a question to be decided by the arbitrators.
However period of limitation for commencement of an arbitration runs from the date
on which cause of action accrues.
Compentency of Consideration
Whether the following considerations are valid consideration or not:
1) Charitable Subscriptions
A promise to subscribe to a public or a charitable object is unenforceable because
there is no benefit to the promisor. But where the other party has undertaken a
liability on the faith of the promise made by the promisor, it is enforceable. A
promise to pay a charitable subscription is enforceable as soon as any definite
steps have been taken in furtherance of the object and on faith of the promised
subscription. In Abdul Aiz v. Masum Ali AIR 1914 A11.22 the defendant promised
to pay a sum of Rs.500 as donation for the repairs and reconstruction of a mosque.
The defendant refused to pay the amount. It was held that since nothing was
done on the faith of the promise, there was no consideration in this case and, the
defendant was not liable to pay the subscription promised by him.
Although a promise to contribute for charitable purpose is not as such enforceable,
but if something is done on the faith of the promise or some obligation is incurred,
that constitutes consideration for the promise and then it can be enforced. In
Kedarnath v. Gorie Mohamed there was a proposal to construct a town hall at
Howrah provided sufficient funds would be available by way of subscription. The
defendant was one of the subscribers, having promised to pay Rs. 100/- by signing
his name in the subscription book for the purpose. On the faith of the promised
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subscription the plaintiffs engaged a contractor for the purpose of the construction
and started construction work of the proposed town hall. The defendant refused
to pay his subscription on the ground that he was not legally bound by his promise
because there was no consideration for the promise. It was held that engaging a
contractor and starting the construction on the faith of the promise was sufficient
consideration to enforce the promise and, therefore, the defendant was bound to
pay the amount promised by him.
2) Forbearance To Sue
Forbearance to sue means not filing a case against the other party. It means a
person has a right of taking action against another person but refrains from
bringing the action. Forbearance to sue amounts to good consideration. Ex. A
has a right to recover Rs. 1,000/- from B. But he did not take legal action against
B at his request and in consideration of that B agreed to pay Rs. 100/- This is
valid consideration.
3) Compromise of a Disputed Claim
Compromise is a kind forbearance. The compromise of a disputed claim is a
good consideration for the fresh agreement of compromise.
4) Composition with Creditors
A person who is not in a position to pay his debts fully may enter into a compromise
to pay lesser money, if the creditors agree to it. The agreement is binding.
5) Pre-existing Contract With The Promisor Himself
A promise to do a particular thing which the promisee is already bound to do
under pre-existing contract with the promisor will not constitute a good
consideration. In Ram Chandra v. Kalu Raju ILR (1877) 2 Bom. 362, the defendant
engages the plaintiff as lawyer in a suit and signed the vakaltnama which was
accepted by the plaintiff. Later on the defendant promised to pay a certain sum as
reward to the plaintiff if he won the suit. The plaintiff was able to win the suit for
the defendant, yet the defendant did not pay the promised reward.
It was held that the promise for the reward was without consideration for the
plaintiff as a lawyer of the defendant was already bound to do his best to win the
suit. There being no fresh consideration for the sum promised the agreement was
void.
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6) Pre-existing Legal Obligation
Performance of a legal duty is no consideration for a promise. In Collins vs.
Godefroy (1831) 109 ER 140 A was summoned to appear as a witness at a trial
in a civil suit on behalf of B. B Promised to pay A certain amount if A appears as
a witness. A appeared as a witness before the court. But B failed to pay the
promised amount. So A filed a suit against B. It was held that the promise was
without consideration for A was under a duty imposed by law to appear and give
evidence.
Capacity of Parties
Section 11: Section 11: Section 11: Section 11: Section 11: Who are competent to contract.
According to section 10 of the Act an agreement becomes a contract if it is entered
into between the parties who are competent to contract. According to section 11 of the
Act Every person is competent to contract who is of the age of majority according to
the law to which he is subject and who is of sound mind and is not disqualified from
contracting by any law to which he is subject.
Incapacity to contract may arise out of status:
1) Political or civic
a) Foreign Sovereign and Ambassadors
b) Alien
c) Felon or Convict
d) Bankrupt or insolvent
e) Professional
f) Artificial
g) Married Woman
1) Political or Civic
A) F FF FForeign Sovereign and Ambassadors : oreign Sovereign and Ambassadors : oreign Sovereign and Ambassadors : oreign Sovereign and Ambassadors : oreign Sovereign and Ambassadors : Under English Law a person can enter
into a contract with a foreign sovereign but in case of breach of contract foreign
sovereign cannot be sued unless he is subject himself to the jurisdiction of English
Courts.
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Under Indian Law also a person can enter into an agreement with a foreign
sovereign but in case of breach if the aggrieved party wants to enforce the
agreement against the foreign sovereign he has to take prior permission from the
Central government.
B) Alien : Alien : Alien : Alien : Alien : An Indian can enter into an agreement with an alien and it is enforceable
in the courts of law. In case if the war declared against any country, during the
pendency of law was an Indian Citizen cannot enter into an agreement with the
person in case if he belongs to the enemy country.
C) F FF FFelon or Convict : elon or Convict : elon or Convict : elon or Convict : elon or Convict : To enter into an agreement a convict must take prior permission
form the state government.
D) Bankrupt or Insolvent : Bankrupt or Insolvent : Bankrupt or Insolvent : Bankrupt or Insolvent : Bankrupt or Insolvent : An undischarged insolvent is not competent to contract.
But a discharged insolvent is competent to enter into a contract.
2. Professional:
In England Doctors and Barristers cannot file a suit against the patients and
clients to recover the fees. But in India they can sue.
3. Artificial:
A company is a person, artificial, invisible intangible and existing only in
contemplation of law. It can enter into those contracts which are permitted by the
object clause of the Memorandum of Association.
4. Married Woman:
Married woman is competent to enter into contract like any other person provided
she fulfils the condition specified in section 11 of the Act.
II) Incapacity to contract may rise out of Mental deficiency.
1) Minority:
Section 3 of the Indian Majority Act, 1875 provides about the age of majority. It
states that a person is deemed to have attained the age of majority when he completes
the age of 18 years, except in case of a person of whose person or property a guardian
has been appointed by the court in which case the age of majority is 21 years. Now it
is reduced to 18 years whether guardian is appointed or not.
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Nature of Minors Contracts
Infancy is said to be disability, but in practice it is really a protection granted by law
courts. It has been rightly observed. The law protects their (infants) persons; preserves
their estates, excuses their laches, and assists them in their pleadings; the judges are
their counsellors; the jury are their servants; and Law is their guardian.
a) An Agreement with or By a Minor is V An Agreement with or By a Minor is V An Agreement with or By a Minor is V An Agreement with or By a Minor is V An Agreement with or By a Minor is Void oid oid oid oid : :: :: Section 10 of the Act required that the
parties to a contract must be competent and section 11 says that a minor is not
competent. But neither section makes it clear whether the contract entered into by
a minor is void or voidable. Till 1903, courts in India were not unanimous on this
point. The Privy Council made it perfectly clear that a minor is not competent to
contract and that a contract by a minor is void ab initio i.e. void from the beginning.
The leading case on this point is Mohori Bibi vs. Dharmo Das Ghose (1903) 30
Cal. 539. The minor had executed a mortgage for the sum of Rs. 20,000/- out of
which the lender had paid the minor only about 8,000/- The minor then filed a
suit for setting aside the mortgage. It was contended that as the contract was
voidable and minor was repudiating it, the amount of Rs. 8000/- actually paid to
the minor must be refunded under section 65 of the Contract Act. The Privy
Council pointed out that as the minors contract was absolutely void, no question
of refunding money could arise in these circumstances.
b) No R No R No R No R No Ratification by Minor atification by Minor atification by Minor atification by Minor atification by Minor : : : : : agreement even on attaining majority, because a void
agreement cannot be ratified. Whether a minor borrowed a sum of money by
executing a Pronote and after attaining majority executed a second Pronote in
respect of original loan, a suit upon the second Pronote was not maintainable.
c) No Estoppel against Minor No Estoppel against Minor No Estoppel against Minor No Estoppel against Minor No Estoppel against Minor : Where a minor by misrepresenting his age and
induced the other party to enter into a contract with him, he cannot be made
liable on the contract. There can be no estoppel estoppel estoppel estoppel estoppel against minor. He can always
plead minority. Even if he has, by misrepresenting his age, induced the other
party to contract with him, he cannot be sued either in contract or in tort for fraud
because if the injured party were allowed to sue for fraud, it would be giving-him
an indirect means of enforcing the void agreement.
d) If a contract is beneficial to minor it can be enforced by him.
e) A claim for necessaries supplied to a minor is enforceable. But a minor is not
liable for any price that he may promise and never for more than the value of the
necessaries. There is no personal liability of the minor, but only his property is
liable.
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f) A minor being incompetent to contract cannot be a partner in a firm, but under
section 30 of the Partnership Act, he can be admitted to the benefits of the
partnership firm.
g) Restitution: - The court may, where a loan or some property is obtained by the
minor by some fraudulent representation and the agreement is set aside direct
him, on equitable considerations, to restore the money or property to the other
party. Whereas the law gives protection to the minors, it does not give them
liberty to cheat men.
h) There can be no specific performance of the agreements entered into by him as
they are void ab initio. A contract entered into on his behalf by his parent/guardian
or the manager of his estate can be specifically enforced by or against the minor
provided the contract is within the scope of the authority of the parent and for the
benefit of the minor.
i) He cannot be adjudged as an insolvent. This is because he is incapable of
contracting debts.
j) He can be an agent. An agent is merely a connecting link between his principal
and a third party. As soon as the principal and the third party are brought together,
the agent drops out. A minor binds the principal by his acts without incurring any
personal liability.
k) His parents are not liable for the contract entered into by him, even though the
contract is for the supply of necessaries to the minor.
l) Minor is not liable under Law of Contracts but he is always liable under Law of
Torts. In order to make him liable under Law of Torts the tortious act must be
independent of contract.
m) Beneficial Contracts of Service: - Some Contracts of Service e.g., for
apprenticeship, are beneficial to the infant as they provide him education and
enable him to earn his livelihood. Such contracts are valid and the other party to
the contract can be enforced against him.
2) Persons of Unsound Mind
What is a sound mind for the purposes of contracting.-A person is said to be of
sound mind for the purpose of making a contract if, at the time when he makes it, he is
capable of understanding it and of forming a rational judgment as to its effect upon his
interests.
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A person, who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind.
A person, who is usually of sound mind, but occasionally of un-sound mind, may
not make a contract when he is of unsound mind.
Illustrations
(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals.
(b) A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract or form a rational judgment as to its effect on
his interests, cannot contract whilst such delirium or drunkenness lasts.
a) Idiots Idiots Idiots Idiots Idiots: Idiot is one who has no understanding capacity from his birth. Agreement
with him is void except for necessaries.
b) L LL LLunatic unatic unatic unatic unatic: He can make valid contract during lucid intervals.
c) Drunken P Drunken P Drunken P Drunken P Drunken Persons ersons ersons ersons ersons: A contract by a drunken person is altogether void. It must be
clearly shown that, at the time of contracting the person pleading drunkenness
was so intoxicated as to be temporarily deprived of reason and so could not give
valid consent to the contract.
Who can Enter into Arbitration Agreement?
Every person who is competent to contract can enter into an arbitration agreement.
He must be of the age of majority according to the law to which he is subject and must
be of sound mind and must not be disqualified from contracting by the law by which he
is governed with regard to his contractual capacity. In case of a partnership, a partner
can enter, on behalf of the partnership subject to what is stated hereafter, into an
arbitration agreement if so authorized in writing by the other partners or by the deed of
partnership subject to authorization and/or restriction, if any, contained in the articles
of association of a company, the directors or others officers of a company may enter
into an arbitration agreement on behalf of the company. Though section 389 of the
Companies Act, 1956 had been deleted by the Companies (Amendment) Act, 1960 its
deletion is not a matter of any consequence so far as the authority to enter into an
arbitration agreement is concerned [Society De Traction v. Kamani Engineering Co Ltd.
AIR 1964 SC 558]. So also subject to compliance of the constitutional requirements,
the Central and State Governments can enter into arbitration agreement. Public
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undertakings can also enter into arbitration agreements. If the subject matter of the
arbitration agreement is capable of assignment then the assignee would step into the
shoes of his assignor and be both bound by it and entitled to enforce it [Patanji v.
Rawalpindi Theatres Pvt Ltd. AIR 1970 Del 19]. A karta of a joint family can make a
valid reference to arbitration and where he acts bona fide the award binds other members
[Keshrimal Pyarchand v. Basantilal Pyarchand AIR 1966 MP 56]. Though trustees can
enter into an arbitration agreement, for reference of disputes arising amongst themselves
to arbitration, in a case where an arbitration clause provided that disputes between
trustees shall be referred for arbitration and two of the trustees referred the disputes to
the arbitrator without the concurrence of the third, who challenged it on facts, held that
the acceptance of terms of trust did not mean that the trustees agreed inter-parties to
carry out every term of the trust deed and hence the arbitration agreement could not be
said to have been constituted [Bijoy Ballav Kundu v. Tapeti Ranjan Kundu AIR 1965 Cal
628].
Minors and Lunatics
Contracts by minors and lunatics are void, and therefore, by themselves, they cannot
enter into a valid arbitration and they can enter through their natural or legal guardians
[Ponnayya Moopaner v. Suppammal AIR 1946 Mad 391]. In reference out of court, the
natural guardian of a minor can submit disputes to arbitration [Raghupati Dutta v. Ram
Gopal Dutt AIR 1939 Cal 557]. But where there is no legal or natural guardian, the de
facto guardian of a Mohammedan minor has no authority to enter into an agreement
of reference on behalf of the minor [Mohammed Anwar v. Mohammad Aslam AIR 1955
(NOC) 546]. If the minor is not properly represented and his guardian fails in his duty
to protect his interest, the award is not binding on the minor [Sadashiv Ram Chandra
Datar v. Trimbak Keshar AIR 1920 Bom 32]. Leave of the court must be obtained under
order XXXII rule 7, of the Code of Civil Procedure, 1908 before a reference to arbitration
on behalf of the minor is made. However leave of the court under order XXXII rule 7
need not be obtained if the reference is made without the intervention of the court
[Vishram Mauji v. Gangaram Ladha AIR 1935 Sind 235]. A guardian ad litem or a next
friend of a minor has the authority to refer to arbitration on behalf of the minor. However,
to make the reference valid, permission of the court to refer the dispute should be
obtained under order XXXII Rule 7. In the absence of such permission the reference is
invalid [Chhoba Lal v. Kallu Mal AIR 1946 PC 272].
A Minor is not bound by a reference to arbitration made by a person who is neither
the de facto nor the de jure guardian of the minor [Satya Narayan v. Jugal Kishore AIR
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1950 ALL 512]. A guardian of a minor interested in the subject matter of reference and
himself a party to the reference cannot submit to arbitration on behalf of the minor
[Ram Gopal v. Shantilal AIR 1942 All 65].
The Hindu Minority and Guardianship Act of 1956 (XXXII of 1956) which received
the assent of the President on the 25
th
August 1956 governs the extent of powers which
guardian can exercise over the property of the minors. So now the cases as regards the
powers of guardian over the minors property are to be read subject to the provision of
that Act. Under that Act a natural guardian of a minor has power to do all acts which
are necessary of reasonable and proper for the realization, protection or benefit of the
minors estate and he may refer disputes involving the minors property to arbitration
provided the reference is for his benefit or for reasonable and proper protection of the
minors property [Kamal Singh v. Shekar & Chand AIR 1952 CAL 447].
A de facto guardian of minor is not competent under the Mohammedan law to
enter on their behalf into an agreement to refer to arbitration any dispute, even where
there is no de jure guardian of the minor, as such agreement would necessarily, if acted
upon involve dealings with the immovable properties of the minor [Shah Mohammad
Jamil v. Shah Mohammad Hofizata AIR 1928 Oudh 449].
Under the Hindu law all acts of a natural guardian which the infant might, if of age,
reasonably and prudently do for himself must be upheld, when done for him by the
guardian. A natural guardian has therefore, power to submit a dispute to arbitration on
behalf of a minor, if the submission is for the benefit of the minor, and the minor would
in such a case be bound by the award made by the arbitrators on such submission. A
partition by arbitration may be binding on minor but only when he is not injuriously
affected thereby when it is fair and when he has been duly represented [Ma Gyi v.
Maung Po Bur Lt 46].
After obtaining leave of the court under order XXXII rule 7 of the Code of Civil
Procedure 1908, a next friend or guardian, ad litem of a minor, can refer the pending
suit to arbitration [Ramanthan v. Kumarappa AIR 1940 Mad 650]
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CHAPTER-III
FREE CONSENT
Section 13 to 22: Definition of Consent and Free Consent:
Sec 13 Sec 13 Sec 13 Sec 13 Sec 13 lays down that two or more persons are said to consent
when they agree upon the same thing in the same sense. When they
agree upon the same thing in the same sense they are said to be ad
idem i.e. identity of minds.
Not only the parties to a contract should have identity of minds but
the consent of the parties must also real and free.
S.14. Free Consent: -
14. Free consent defined.-Consent is said to be free when it is not
caused by-
(1) coercion, as defined in section 15, or
(2) undue influence, as defined in section 16, or
(3) fraud, as defined in section 17, or
(4) misrepresentation, as defined in section 18, or
(5) mistake, subject to the provisions of sections 20, 21.and
22.Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence, fraud,
misrepresentation or mistake.
Section 14 of the Act lays down that a consent is said to be free
when it is not caused by coercion as defined in section 15 or undue
influence as defined in section 16, isrepresentation as defined in section
18 or fraud as defined in section 17 or mistake subject to the provisions
of sections 20, 21 and 22 of the Act.
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S SS SS.19 .19 .19 .19 .19. Voidability of agreements without free consent: - When consent to an
agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.
A party to a contract whose consent was caused by fraud or mis-representation,
may, if he thinks fit, insist that the contract shall be performed, and that he shall be put
in the position in which he would have been if the representations made had been true.
Exception.- If such consent was caused by misrepresentation or by silence, fraudulent
within the meaning of section 17, the contract, nevertheless, is not voidable, if the party
whose consent was so caused had the means of discovering the truth with ordinary
diligence.
Explanation.- A fraud or misrepresentation which did not cause the consent to a
contract of the party on whom such fraud was practiced, or to whom such
misrepresentation was made, does not render a contract voidable.
Illustrations
(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo
are made annually at As factory, and thereby induces B to buy the factory. The
contract is voidable at the option of B.
(b) A, by a misrepresentation, leads B erroneously to believe that, five hundred maunds
of indigo are made annually at As factory.
B examines the accounts of the factory, which show that only four hundred maunds
of indigo have been made. After this B buys the factory. The contract is not voidable
on account of As misrepresentation.
(c) A fraudulently informs B that As estate is free from in cumbrance. B thereupon
buys the estate. The estate is subject to a mortgage. B may either avoid the
contract, or may insist on its being carried out and the mortgage debt redeemed.
(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal,
and does conceal, the existence of the ore from A. Through As ignorance B is
enabled to buy the estate at an under-value. The contract is voidable at the
option of A.
(e) A is entitled to succeed to an estate at the death of B; B dies: C, having received
intelligence of Bs death, prevents the intelligence reaching Al and thus induces A
to sell him his interest in the estate. The sale is voidable at the option of A.
FREE CONSENT
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S SS SS.19A. .19A. .19A. .19A. .19A. Power to set aside contract induced by undue influence. - When consent to
an agreement is caused by undue influence, the agreement is a contract voidable at
the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if the party who was entitled
to avoid it has received any benefit there under, upon such terms and conditions as to
the Court may seem just.
Illustrations:
a) As son has forged Bs name to a promissory note. B, under threat of prosecuting
As son, obtains a bond from A for the amount of the forged note. If B sues on this
bond, the Court may set the bond aside.
(b) A, a money-lender, advances Rs. 100 to B, an agriculturist, and, by undue influence,
induces B to execute a bond for Rs. 200 with interest at 6 per cent. Per month.
The Court may set the bond aside; ordering B to repay the Rs. 100 with such
interest as may seem just.
When the consent is not free due to coercion or undue influence or
misrepresentation or fraud then the agreement becomes a contract voidable at
the option of one party, i.e. the aggrieved party. When the consent is not free due
to mistake as a general rule the agreement becomes void.
Mistake:-
S SS SS.20. .20. .20. .20. .20. Agreement void where both parties are under mistake as to matter of fact.
Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.
Explanation.- An erroneous opinion as to the value of the thing which forms the
subject-matter of the agreement is not to be deemed a mistake as to a matter of fact.
Illustrations
(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain, the ship
conveying the cargo had been cast away and the goods lost. Neither party was
aware of the facts. The agreement is void.
(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the
time of the bargain, though neither party was aware of the fact. The agreement is
void.
FREE CONSENT
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(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at
the time of the agreement, but both parties were ignorant of the fact. The agreement
is void.
S SS SS. 21 . 21 . 21 . 21 . 21. Effect of mistakes as to law.- A contract is not voidable because it was
caused by a mistake as to any law in force in India; but a mistake as to a law not in
force in India has the same effect as a mistake of fact.
Illustration
A and B make a contract grounded on the erroneous belief that a particular debt is
barred by the Indian Law of Limitation: the contract is not voidable.
S SS SS. 22 . 22 . 22 . 22 . 22. Contract caused by mistake of one party as to matter of fact.-A contract is
not voidable merely because it was caused by one of the parties to it being under a
mistake as to a matter of fact.
Mistake is a misconception or error. Mistake means that parties intending to do one
thing have by intentional error done something else. Mistake may be classified as.
(i) Mistake of Law (ii) Mistake of Fact
Mistake of Law
Mistake of Law may be of two kinds. They are a) mistake of law of land b) mistake
of foreign law. The effect of mistake of law on a contract is expressed by no ground for
avoiding a contract. But this rule is applicable only to the law of the country and not
foreign law.
Ignorance of foreign law is excusable. No one is expected to be conversant with
foreign law, though he is deemed to know the law of his own country. Mistake of
foreign law stands on the same footing as the mistake of fact.
Mistake of Fact
Mistake of fact may be either bilateral mistake or unilateral mistake.
BIlateral Mistake
A mistake of fact in the minds of both parties negatives consent and the contract
becomes void. The cases falling under bilateral mistake are discussed below:
FREE CONSENT
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Mistake as to the Subject Matter
One of the essentials of every contract is the subject matter of contract. Mistake as
to subject matter may take various forms:
i) Mistake as to the Existence of the Subject Matter Mistake as to the Existence of the Subject Matter Mistake as to the Existence of the Subject Matter Mistake as to the Existence of the Subject Matter Mistake as to the Existence of the Subject Matter: Where both the parties to the
contract commit mistake with reference to the existence or non-existence of the
subject matter, the agreement becomes void.
ii) Mistake as to the Identity of the Subject Matter Mistake as to the Identity of the Subject Matter Mistake as to the Identity of the Subject Matter Mistake as to the Identity of the Subject Matter Mistake as to the Identity of the Subject Matter: Where both the parties to the
contract commit mistake with reference to the identity of the subject matter, then
the agreement becomes void. In Raffles v Wichellaus (1864) 2 H & C 906, A
agreed to buy from B 125 Bales of cotton to arrive ex-Pearless from Bombay.
There were two ships of that name sailing from Bombay, one of which was in the
mind of A and the other in the mind of B. It was held that there was a bilateral
mistake and there was no contract.
ii) Mistake as to the T Mistake as to the T Mistake as to the T Mistake as to the T Mistake as to the Title of the Subject Matter itle of the Subject Matter itle of the Subject Matter itle of the Subject Matter itle of the Subject Matter: Where unknown to the parties, the
buyer is already the owner of that which the seller wants to sell, the contract is
void:
In Cooper v. Phibbs (1867) L.R.2HL 149, A agreed to take lease fishery from B.
But A was tenant for life of the fishery and B had no title at all. It was held that the
lease was void.
iv) Mistake as to the P Mistake as to the P Mistake as to the P Mistake as to the P Mistake as to the Price of the Subject Matter rice of the Subject Matter rice of the Subject Matter rice of the Subject Matter rice of the Subject Matter: Where the seller of certain plots
mentioned in his letter the price as Rs. 1250/- when he really intended to write Rs.
2250/-, the agreement is void in case if the other party accepts the contract with
the knowledge of the mistake committed by offeror.
v) )) )) Mistake as to Quantity of the Subject Matter: Mistake as to Quantity of the Subject Matter: Mistake as to Quantity of the Subject Matter: Mistake as to Quantity of the Subject Matter: Mistake as to Quantity of the Subject Matter:There is no contract between the
parties if there is a difference between the quantity sold and purchased. In Hankel
vs. Pope (1870) L.R. 6Ex.7 D wrote to P asking for a quotation of 50 rifles and
later telegraphed send three rifles. The Telegraph clerk by mistake sent the
message wrongly as send the rifles. P sent 50 rifles and upon Ds refusal to
accept files a suit for damages. The agreement was held void and it made no
difference even if the mistake was caused by the negligence of a third party.
Unilateral Mistake
A mistake of fact in the mind of one party to the contract is known as unilateral
mistake. It does not generally affect the validity of the contract. The leading case on this
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point is A. A.Singh v. Union of India AIR 1970 Mani 16. In this case, the government
sold by auction the right of fishery. The plaintiff offered the highest bid thinking that the
right was sold for three years but which was actually for one year only. It was held that
the plaintiff could not avoid the contract because it was his unilateral mistake caused
by his own negligence
However, there are two exceptions two exceptions two exceptions two exceptions two exceptions to the above rules:
1) Mistake as to the Nature of the T Mistake as to the Nature of the T Mistake as to the Nature of the T Mistake as to the Nature of the T Mistake as to the Nature of the Transaction Contracted W ransaction Contracted W ransaction Contracted W ransaction Contracted W ransaction Contracted With ith ith ith ith: Where the unilateral
mistake is fundamental and effects the character of the contract, the innocent
party is freed from liability. In Foster v. Mackinnon (1869) L.R.4 C.P. 704 an illiterate
old man A was made to put his signature on a document which was a Pronote. A
thought the document to be a will where his signature was required as a witness.
Under this presumption he signed the document which was in fact a Pronote.
Subsequently B endorsed the Pronote to C who paid value for it in good faith. C
sued A on the Pronote. It was held that A was not bound by it because he committed
mistake as to the nature of the transaction contracted with.
2) Mistakes as to the Identity of the P Mistakes as to the Identity of the P Mistakes as to the Identity of the P Mistakes as to the Identity of the P Mistakes as to the Identity of the Person Contracted W erson Contracted W erson Contracted W erson Contracted W erson Contracted With: ith: ith: ith: ith: A contract may be
avoided upon mistake as to the identity of a person. Where A intends to contract
only with B, but enters into a contract with C believing him to B, the contract is
vitiated. In Cundy v. Lindsay (1878) 3 A.C. 459, a fraudulent person named
Blenkarn by imitating the signature of a respectable firm Blenkiran & Co sent an
order for goods which were duly delivered to him by Lindsay. Blenkarn sold the
goods to Cundy who acted bona fide. It was held that Cundy must return the
goods to Lindsay. Although Cundy was an innocent purchaser, he had no title to
the goods since the contract was between Lindsay and Blenkarn.
Section 18: Misrepresentation:-
18.Misrepresentation defined.-Misrepresentation means and includes-
(1) the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true
(2) any breach, of duty which, without an intent to deceive, gains an advantage to
the person committing it, or any one claiming under him, by misleading another
to his prejudice or to the prejudice of any one claiming under him;
(3) causing, however innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
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Mispresentation means mis-statement of a fact material to the contract. It is a
false representation made innocently, before or at the time of contract, without
any intention of deceiving the other party. Consent to an agreement obtained by
misrepresentation is not real and valid. It is a voidable contract.
Essentials of Misrepresentation
1) There must be a representation made by one party to another.
2) Such representation must relate to material fact. It must not relate to a matter of
opinion.
3) Such representation must be untrue.
4) Such representation must be the cause of the consent.
5) Such representation must be made with the intention that it shall be acted upon
by the other party
Example: A by misrepresentation, leads B erroneously to believe that 500 maunds
of indigo are made annually at As factory. B examines the accounts of the factory
which show that only 400 maunds of indigo have been made. After this B buys the
factory. The contract is not voidable on account of As misrepresentation.
Section 17: Fraud:-
17. Fraud defined.-Fraud means and includes any of the following acts
committed by a party to a contract, or with his connivance, or by his agent with intent to
deceive another party thereto of his agent, or to induce him to enter into the contract:-
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it
to be true ;
(2) the active concealment of a fact by one having knowledge or belief of the fact ;
(3) a promise made without any intention of performing it
(4) any other act fitted to deceive ;
(5) any such act or omission as the law specially declares to be fraudulent.
Explanation.- Mere silence as to facts likely to affect the willingness of a person to
enter into a contract is not fraud, unless the circumstances of the case are such that,
regard being had to them, it is the duty of the person keeping silence to speak,1* or
unless his silence is, in itself, equivalent to speech.
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Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to
B about the horses unsoundness. This is not fraud in A.
(b) B is As daughter and has just come of age. Here, the relation between the parties
would make it As duty to tell B if the horse,is unsound.
(c) B says to AIf you do not deny it, I shall assume that the horse is sound. A says
nothing. Here, As silence is equivalent to speech.
(d) A and B, being traders, enter upon a contract. A has private information of a
change in prices which would affect Bs willingness to proceed with the contract. A
is not bound to inform B.
Fraud is a false statement made knowingly or without belief in its truth or recklessly
careless, whether it be true or false. It is a wilful misrepresentation made with a
view to cheat the other party to the contract.
Essentials
In addition to the above essentials, the following conditions also must be satisfied.
1) The representation must have deceived the other party. A deceit which does not
deceive is no fraud.
2) The representation must have induced the other party to enter into the contract.
3) The party who has been deceived must suffer some loss.
In Smith v. Chadwick (1884) 9 AC 184, A bought shares in a company on the faith
of a Prospectus which contained a statement that B was one of the directors of the
company. A had never heard his name and therefore, the statement was immaterial
from his point of view. A wanted to set aside the contract on the ground of mis-statement
in the Prospectus. It was held that he could not do so because the false statement did
not induce A to buy the shares.
A contract caused by fraud is voidable at the option of the defrauded party.
Coercion (Sec 15)
15. Coercion defined.- Coercion is the committing, or threatening to commit,
any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening
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to detain, any property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement. (45 of 1860.)
Explanation.- It is immaterial whether the Indian Penal Code is or is not in force in
the place where the coercion is employed.
Illustration
A, on board an English ship on the high seas, causes B to enter into an agreement
by an act amounting to criminal intimidation under the Indian Penal Code. (45 of
1860.)
A afterwards sues B for breach of contract at Calcutta.
B. A has employed coercion, although his act is not an offence by the law of
England, and although section 506 of the Indian Penal Code was not in force at the
time when or place where the act was done. (45.of 1860.)
Coercion (Sec 15)
In simple words, coercion is threat or force used by one party against another for
compelling him to enter into a contract. It is defined as the committing or threatening to
commit, an act forbidden by the Indian Penal Code or an unlawful detaining, or
threatening to detain, any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.
In Ranganayakamma v. Alwar Chetti (1889) 13 Mad. 214, a girl of 13, lost her
husband and her husbands relatives refused to have the husbands corpse removed
unless she adopted a child of their choice, it was held that the adoption was not
binding on her as her consent was obtained under coercion within the meaning of
section 15, since any person who obstructed a dead body from being removed would
be guilty of an offence under section 297 of IPC.
Coercion in India is known as duress in England. If the consent of the other party
to a contract is obtained under fear caused by threats of bodily harm, it is known as the
use of duress. The following are the points of distinction between the two.
a) Coercion may be directed even against a third party. But duress must be aimed
against the life of the contracting party his wife or children.
b) Coercion may be aimed against the person or property of another but duress
must be aimed against the life or liberty of the person.
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c) Duress must proceed from the party to the contract or his agent. Coercion may
proceed from any person.
d) Duress must be such as to cause immediate violence. In the case of coercion it is
not necessary.
S.16. Undue Influence
S.16. Undue influence defined.- (1) A contract is said to be induced by undue
influence where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses that position to obtain
an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a
person is deemed to be in a position to dominate the will of another-
(a) where he holds a real or apparent authority over the other or where he
stands in a fiduciary relation to the other or
(b) where he makes a contract with a person whose mental capacity is temporarily
or permanently affected by reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was
not induced by undue influence shall lie upon the person in a position to dominate
the will of the other.
Nothing in this sub-section shall affect the provisions of section Ill of the Indian
Evidence Act, 1872. (1 of 1872.)
Illustrations
(a) A having advanced money to his son, B, during his minority, upon Bs coming of
age obtains, by misuse of parental influence, a bond from B for a greater amount
than the sum due in respect of the advance. A employs undue influence.
(b) A, a man enfeebled by disease or age, is induced, by Bs influence over him as his
medical attendant, to agree to pay B an unreasonable sum for his professional
services. B employs undue influence.
c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on
terms which appear to be unconscionable. It lies on B to prove that the contract
was not induced by undue influence.
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(d) A applies to a banker for a loan at a time when there is stringency in the money
market. The banker declines to make the loan except at an unusually high rate of
interest. A accepts the loan on these terms. This is a transaction in the ordinary
course of business, and the contract is not induced by undue influence.
Section 16 of the Act provides that a contract is said to be induced by undue
influence where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of the other and uses the position to obtain
unfair advantage over the other. The essentials are: (i) that the relation subsisting
between the parties should be such that one of the parties is in a position to dominate
the will of the other, (ii) that the dominant party uses his dominant position, (iii) that the
dominant party obtains an unfair advantage over the other.
In Sunder Kumari v. Kishore 5 WR 246, a lady gifted all her property worth Rs.
7000/- to P a medical man who was attending on her. The lady disputed the gift deed
as soon as she recovered from her illness. Ps suit For Possession Was Set Aside.
Presumptions of Undue Influence:
In the following relationships undue influence is presumed to exist.
1) Parent and child.
2) Guardian and ward.
3) Doctor and patient.
4) Lawyer and client.
5) Religious Advisor and Disciple.
6) Trustee and Beneficiary.
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CHAPTER-IV
LEGALITY OF OBJECT AND CONSIDERATION
S SS SS. 23. . 23. . 23. . 23. . 23. What considerations and objects are lawful and what not.-
The consideration or object of an agreement is lawful, unless-
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the provisions of
any law; or
is fraudulent; or
involves or implies injury to the person or property of another or;
the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement
is said to be unlawful. Every agreement of which the object or
consideration is unlawful is void.
Illustrations
a) A agrees to sell his house to B for 10,000 rupees. Here Bs promise
to pay the sum of 10,000 rupees is the consideration for As promise
to sell the house, and As promise to sell the house is the
consideration for Bs promise to pay the 10,000 rupees. These are
lawful considerations.
b) A promises to pay B 1,000 rupees at the end of six months, if C,
who owes that sum to B, fails to pay it. B promises to grant time to
C accordingly. Here the promise-of each party is the consideration
for the promise of the other party and they are lawful considerations.
(c) A promises, for a certain sum paid to him by B, to make good to B
the value of his ship if it is wrecked on a certain voyage. Here As
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promise is the consideration for Bs payment and Bs payment is the consideration
for As promise and these are lawful considerations.
(d) A promises to maintain Bs child and B promises to pay A 1,000 rupees yearly for
the purpose. Here the promise of each party is the consideration for the promise
of the other party. They are lawful considerations.
(e) A, B and C enter into an agreement for the division among them of gains acquired,
or- to be acquired, by them by fraud. The agreement is void, as its object is
unlawful.
(f) A promises to obtain for B an employment in the public service, and B promises
to pay 1,000 rupees to A. The agreement is void, as the consideration for it is
unlawful.
(g) A, being agent for a landed proprietor, agrees for money, without the knowledge
of his principal, to obtain for B a lease of land belonging to his principal. The
agreement between A and B is void. as it implies a fraud by concealment, by A,
on his principal.
(h) A promises B to drop a prosecution which he has instituted against B for robbery,
and B promises to restore the value of the things taken. The agreement is void, as
its object is unlawful.
(i) As estate is sold for arrears of revenue under the provisions of an Act of the
Legislature, by which the defaulter is prohibited from purchasing, the estate. B,
upon an understanding with A, becomes the purchaser, and agrees to convey the
estate to A upon receiving from him the price which B has paid. The agreement is
void, as it renders the transaction, in effect a purchase by the defaulter, and
would so defeat the object of the law.
29.(j) A, who is Bs mukhtar, promises to exercise his influence, as such, with B in favour
of C, and C promises to pay 1,000 rupees to
A. The agreement is void, because it is immoral.
(k) A agrees to let her daughter to hire to B for concubinage.
The agreement is void, because it is immoral, though the letting may not be
punishable under the Indian Penal Code. According to section 23 of the Act an
agreement of which the object or consideration is unlawful is void. The word
object in section 23 means purpose or design of the contract. The word lawful
means permitted by law.
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The consideration or the object of an agreement is unlawful in the following cases.
1) If it is F If it is F If it is F If it is F If it is Forbidden by L orbidden by L orbidden by L orbidden by L orbidden by Law aw aw aw aw The agreement is forbidden by law, if thelegislature
penalizes it or prohibits it.
Example: A promises to obtain for B an employment in the public service and B
promises to pay Rs. 1,000/- to A. The agreement is void as the consideration for
it is unlawful.
2) If it is of such a nature that if permitted it would defeat the provisions of any law.
If the object or consideration of an agreement is of such a nature that if permitted
it would defeat the provisions of any law, the agreement is void.
In Alexander v. Rayson (1936) 1 K.B.169, A let out a flat for 1200 pounds a year.
To reduce the municipal taxes, he entered into two agreements with B. One by which
the rent was stated to be 450 pounds only and the other by which B agreed to pay 750
pounds. It was held that the agreement was made to defraud the municipal authorities
and was void. A cannot recover the money.
3) If it is fraudulent: If both the parties entered into an agreement with a view to
cheat the other person or public, then the agreement is not enforceable. If any
person transfers his properties to his friends or relatives with a view to cheat the
creditors, the Insolvency Law says the transfer is fraudulent.
4) If it involves or implies an injury to the person or property of another: The object
or consideration of an agreement will be unlawful if it tends to injure the person
or property of another. Thus, an agreement to destroy another persons property
is unlawful.
5) If the court regards it as immoral the word immoral means contrary to good
morals. Rent due in respect of a flat let out to a prostitute for the purpose of her
trade cannot be recovered.
6) If the court regards it as being opposed to public policy:
An agreement is said to be opposed to public policy when it is harmful to the
public welfare. Public policy is that principle of law which provides that no person
can lawfully do that which is injurious to the public or is against the interest of the
society or the state. Public policy is not capable of exact definition. It is an illusive
concept and has been defined as an unruly horse which is difficult to ride.
The Courts in India have declared the following agreements as opposed to public
policy.
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1) Trading with the enemy.
2) An agreement which seeks to prevent the prosecution of guilty party is opposed to
public policy and is void.
3) When a person agrees to help another by money or otherwise in litigation in
which he is not himself interested, it is called maintenance. These are the
agreements which tend to promote speculative litigation. When a person agrees
to provide financial assistance with a view to share the profits of litigation, it is
called champerty. This is also opposed to public policy.
4) Agreement for sale or transfer of public offices or for appointment to public offices
in consideration of money is illegal, being opposed to public policy.
5) Agreements unduly restraining personal liberty have been held to be void as
being opposed to public policy.
6) Agreements interfering with the course of justice.
7) Agreements in restraint of legal proceedings.
8) Agreements to vary the period of litigation.
9) Agreements in restraint of marriage of major.
10) Agreements tending to create monopolies.
11) Agreements in restraint of parental rights.
12) Agreements interfering with marital duties.
13) Agreements in restraint of trade.
Void Agreements
24.Agreement void, if considerations and objects unlawful in part.-If any part of a
single consideration for one or more objects, or any one or any part of any one of
several considerations for a single object, is unlawful, the agreement is void.
Illustration
A promises to superintend, on behalf of B, a legal manufacture of indigo, and an
illegal traffic in other articles.
B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the
object of As promise, and the consideration for Bs promise, being in part unlawful.
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An agreement seeking to restrain a person from exercising a lawful profession
trade or business of any kind is void to that extent (sec.27). Public policy required that
every person should be at liberty to work for himself and should not be at liberty to
deprive himself or the state of his labour, skill or talent by any contract that he enters
into.
26. Agreement in restraint of marriage void.-Every agreement in restraint of the
marriage of any person, other than a minor, is void.
27. Agreement in restraint of trade void.-Every agreement, by which any one is
restrained from exercising a lawful profession, trade or business of any kind, is to that
extent void.
Saving of agreement not to carry on business of which good-will is sold.- Exception
1.- One who sells the good-will of a business may agree with the buyer to refrain from
carrying on a similar business, within specified local limits, so long as the buyer, or any
person deriving title to the good-will from him, carries on a like business therein, provided
that such limits appear to the Court reasonable, regard being had to the nature of the
business.
28. Agreements in restraint of legal proceedings void.- Every agreement,-
(a) by which any party thereto is restricted absolutely from enforcing his rights under
or in respect of any contract, by the usual legal proceedings in the ordinary
tribunals, or which limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges any party thereto
from any liability, under or in respect of any contract on the expiry of a specified
period so as to restrict any party from enforcing his rights, is void to that extent.
Saving of contract of refer to arbitration dispute that may arise.- Exception 1.- This
section shall not render illegal a contract, by which two or more persons agree that any
dispute which may arise between them in respect of any subject or class of subjects
shall be referred to arbitration, and that only the amount awarded in such arbitration
shall be recoverable in respect of the dispute so referred.
Suits barred by such contracts.- When such a contract has been made, a suit may
be brought for its specific performance) and if a suit, other than for such specific
performance, or for the recovery of the amount so awarded, is brought by one party to
such contract against any other such party, in respect of any subject which they have so
agreed to refer, the existence of such contract shall be a bar to the suit.
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Savi ng of contract to refer questi ons that have al ready ari sen.-
Exception 2.- Nor shall this section render, illegal any contract in writing, by which two
or more persons agree to refer to arbitration any question between them which has
already arisen, or affect any provision of any law in force for the time being as to
references to arbitration.
29. Agreements void for uncertainty.- Agreements, the meaning of which is not
certain, or capable of being made certain, are void.
Illustrations
(a) A agrees to sell to B a hundred tons of oil. There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified description, known as
an article of commerce. There is no uncertainty here to make the agreement
void.
(c) A, who is a dealer in cocoanut-oil only, agrees to sell to B one hundred. tons of
oil. The nature of As trade affords an indication of the meaning of the words,
and A has entered into a contract for the sale of one hundred tons of cocoanut-
oil.
(d) A agrees to sell to B all the grain in my granary at Ramnagar. There is no
uncertainty here to make the agreement void.
(e) A agrees to sell B one thousand mounds of rice at a price to be fixed by C . As
the price is capable of being made certain, there is no uncertainty here to make
the agreement void.
(f) A agrees to sell to B my white horse for rupees five hundred or rupees one
thousand. There I am nothing to show which of the two prices was to be given.
The agreement is void,
The Indian law as stated in Sec 27 prevents a partial as well as a total restraint of
trade. Accordingly all agreements in restraint of trade whether general or partial qualified
or unqualified are void. The restraint in trade is taboo even if it is partial unless it comes
within the exception laid down in the section.
In Oakes & Co v. Jackson (1876) 1 Mad. 134, D agreed with P not to carry on the
same business of dress makers on the expiry of the period of his service anywhere within
800 miles of Madras. The agreement was held void.
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Exceptions
The following exceptions to section 27 are recognized under Indian Law:
a) On the sale of the goodwill of a business, the seller may agree not to carry on
similar business within specified local limits so long as the buyer carries on like
business therein, provided that such limits appear to the court as reasonable.
a) Under section 11(2) of the Partnership Act, partners may enter into an
agreement that a partner will not carry on any business other than that of the
firm while he is a partner.
b) Upon or in anticipation of the dissolution of a partnership firm, some or all
the partners may agree not to carry on the same business within a specified
period or within specified local limits (Section 54 of the Partnership Act).
c) Section 36 (2) of the Partnership Act provides that a retiring partner may
agree with his partners that he will not carry on any business similar to that of
the firm within a specified period or within local limits. The agreement shall
be valid if the restrictions are reasonable.
d) Section 55 (3) of the Partnership Act provides that a partner may upon the
sale of the goodwill of a firm, make an agreement with the buyer that such
partner will not carry on any business similar to that of the firm within a
specified period or within specified local limits. Such agreement shall be
valid only if the restrictions imposed are reasonable.
e) Service agreements Service agreements Service agreements Service agreements Service agreements: An agreement or contract of service by which an
employee binds himself during the term of his agreement not to compete
with his employer directly by carrying on similar business, or accepting any
other employment during the term of his agreement is not in restraint of
trade. The employer can prevent the employees from working elsewhere
during the period covered by the agreement.
f) T TT TTrade combinations rade combinations rade combinations rade combinations rade combinations: An agreement between different firms in the nature of
a trade combination order to maintain a price level and avoid underselling
is not illegal. Further an agreement between manufacturers not to sell their
goods below a certain price to pool profits and to divide the business and
profits in a certain proportion is perfectly valid.
g) Agreements by way of wager Agreements by way of wager Agreements by way of wager Agreements by way of wager Agreements by way of wager
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30. Agreements by way of wager void.- Agreements by way of wager are void; and
no suit shall be brought for recovering anything alleged to be won on any wager, or
entrusted to any person to abide by the result of any game or other uncertain event on
which any wager is made.
Exception in favour of certain prizes for horse-racing.- This section shall not be
deemed to render unlawful a subscription or contribution, or agreement to subscribe or
contribute, made or entered into for or toward any plate, prize or sum of money, of the
value or amount of five hundred rupees or upwards, to be awarded to the winner or
winners of any horse-race.
Section 294A of the Indian Penal Code not affected.- Nothing in this section shall
be deemed to legalize any transaction connected with horse-racing, to which the
provisions of section 294A of the Wager means bet. It may be defined as an agreement
to pay money or monies worth on the happening or non-happening of a specified
uncertain event. It is void because it is opposed to public policy. No suit will lie for
recovering anything alleged to be won on any wager or entrusted to any person to
abide by the results of any game or other uncertain event on which any wager is made
(Sec. 30 of the Act).
Example: There is an agreement between A and B which provides that if it rains on
a particular day, A will pay B Rs. 100 and if it does not rain B will pay the same amount
to A. It is a wagering agreement.
Effect of Transactions Collateral to Wager
All agreements by way of wager are void (They are illegal in case of Maharastra
and Gujarat). The winner cannot maintain any action against the loser for breach of his
promise. A wagering agreement being only void and not illegal, a collateral contract
can well be enforced at law.
Exceptions: Subscriptions or contributions made for any plate or prize of the value
of Rs. 500/- or above to be awarded to a winner in a horse race.
Lottery: Conducting Lottery after obtaining license from the Government.
Contingent Contracts
A contract may be conditional or unconditional. Conditional contracts are called
contingent contracts and unconditional contracts are called absolute contracts. Section
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31 of the Act defines contingent contracts as a contract to do or not to do something if
some event collateral to such contract does or does not happen.
Example: A promises to sell his house to B for Rs. 5,000 in case it rains the next day.
The performance of the contract depends upon the future event. This contract is therefore
a contingent contract.
Rules Relating to Contingent Contract
1) Contracts contingent upon the happening of a future uncertain event cannot be
enforced by law unless and until that event has happened.
2) Contracts contingent upon the non-happening of an uncertain future event can
be enforced when the happening of that event becomes impossible and not before.
3) Contracts contingent upon the happening of an event within a fixed time become
void if the event has not happened before the expiration of the fixed time.
4) Contracts contingent upon the non-happening of an event within a fixed time
may be enforced by law when the event does not happen or becomes impossible
before the expiration of the fixed time.
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CHAPTER-V
DISCHARGE OF CONTRACT AND REMEDIES
FOR BREACH OF CONTRACT
Discharge of Contract
A contract creates rights and obligations. When the rights and
obligations created by a contract come to an end, the contract is said to
be discharged.
Methods of Discharge
1) Discharge by performance.
2) Discharge by breach of contract.
3) Discharge by impossibility of performance.
4) Discharge by agreement.
5) Discharge by operation of law.
6) Discharge by lapse of time.
Now we will discuss each method of discharge:
1) Discharge by Performance
A contract is an agreement to do or not to do an act. It creates legal
rights and obligations. Performance of a contract means fulfillment of
legal obligations created by a contract.
Section 37 of the Act lays down that the parties to a contract must
either perform or offer to perform their respective promises under the
contract, unless such performance is dispensed with or excused under
the provisions of law.
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Contracts which need not be Performed
1) If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed.
2) Promisee may dispense with or remit performance or promise.
3) When a voidable contract is rescinded, the other party need not perform his
promise.
4) Where the failure of performance has been caused by the promisees neglect or
refusal the promisor will be excused.
Tender
An offer to perform ones obligations under a contract is called tender. It is also
called attempted performance. It is equal to performance. Section 38 of the Act lays
down that where the promisor, has made an offer of performance to the promisee and
the offer has not been accepted the promisor is not responsible, nor does hereby loses
his rights under the contract.
Kinds of Tender
T TT TTender of Goods: ender of Goods: ender of Goods: ender of Goods: ender of Goods: If the offeror or promisor produces goods of the correct quality
and quantity, the rejection of his offer discharges him from further liability. He can bring
an action for non-acceptance or defend an action for non-delivery.
T TT TTender of Money: ender of Money: ender of Money: ender of Money: ender of Money: If a debtor makes a valid tender of money but the creditor
refuses to accept it, the debtor thereby is not discharged from making the payment.
Tender in this case does not constitute discharge of the debt. Debtor shall continue to
be liable for the payment of the debt. He is however not liable for any interest on the
debt from the date valid tender.
Essentials of Valid Tender
1. It must be unconditional.
2. It must be made at proper time and proper place.
3. The party making the tender must always be ready and willing to perform the
promise whenever called upon.
4. It must be made to the proper person.
DISCHARGE OF CONTRACT AND REMEDIES FOR BREACH OF CONTRACT
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5. It must be in respect of whole of the promise.
6. If the tender relates to the delivery of goods, reasonable opportunity must be
given to the promisee for inspection of goods.
7. In case of tender of money, exact amount should be tendered.
8. Tender may be made to one of several joint promises.
S SS SS.39 .39 .39 .39 .39. Effect of refusal of party to perform promise wholly.- When a party to a
contract has refused to perform, or disabled himself from performing, his promise in its
entirety, the promisee may put an end to the contract, unless he has signified, by words
or conduct, his acquiescence in its continuance.
Illustrations
(a) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre two nights in every week during the next two months, and B engages to
pay her 100 rupees for each nights performance. On the sixth night A wilfully
absents herself from the theatre. B is at liberty to put an end to the contract.
(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at his
theatre two nights in every. week during the next two months, and B engages to
pay her at the rate of 100 rupees for each night. On the sixth night A wilfully
absents herself. With the assent of B, A sings on the seventh night. B has signified
his acquiescence in the continuance of the contract, and cannot now put an end
to it, but is entitled to compensation for the damage sustained by him through As
failure to sing on the sixth night.
S SS SS.40. .40. .40. .40. .40. Person by whom promise is to be performed.- If it appears from the nature of
the case that it was the intention of the parties to any contract that any promise contained
in it should be performed by the promisor himself, such promise must be performed by
the promisor. In other cases, the promisor or his representatives may employ a competent
person to perform it.
Illustrations
(a) A promises to pay B a sum of money. A may perform this promise, either by
personally paying the money to B or by causing it to be paid to B by another ;
and, if A dies before the time appointed for payment, his representatives must
perform the promise, or employ some proper person to do so.
(b) A promises to paint a picture for B. A must perform this promise personally.
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S SS SS.41. .41. .41. .41. .41. Effect of accepting performance from third person.- When a promisee accepts
performance of the promise from a third person, he cannot afterwards enforce it against
the promisor.
S SS SS.42. .42. .42. .42. .42. Devolution of joint liabilities.- When two or more persons have made a joint
promise, then, unless a contrary intention appears by the contract, all such persons,
during their joint lives, and, after the death of any of them, his representative jointly with
the survivor or survivors, and, after the death of the last survivor, the representatives of
all jointly, must fulfil the promise.
S SS SS.43 .43 .43 .43 .43. Any one of joint promisors may be compelled to perform.-When two or;
more persons make a joint promise, the promisee may, in the absence of express
agreement to the contrary, compel any one or more of such joint promisors, to perform
the whole of the promise.
Each promisor may compel contribution. Each of two or more joint promisors may
compel every other joint promisor to contribute equally with himself to the performance
of the promise, unless a contrary intention appears from the contract.
S SS SS.43. Sharing of loss by default in contribution. .43. Sharing of loss by default in contribution. .43. Sharing of loss by default in contribution. .43. Sharing of loss by default in contribution. .43. Sharing of loss by default in contribution.- If any one of two or more joint
promisors makes default in such contribution, the remaining joint promisors must bear
the loss arising from such default in equal shares.
Explanation.- Nothing in this section shall prevent a surety from recovering from his
principal; payments made by the surety on behalf of the principal, or entitle the principal
to recover anything from the surety on account of payments made by the principal.
Illustrations
(a) A, B and C jointly promise to pay D 3,000 rupees. D may compel either A or B or
C to pay him 3,000 rupees.
(b) A, B and C jointly promise to pay D the sum of 3,000 rupees.
C is compelled to pay the whole. A is insolvent, but his assets are sufficient to pay
one-half of his debts. C is entitled to receive 500 rupees from As estate, and
1,250 rupees from B.
(c) A, B and C are under a joint promise to pay D 3,000 rupees.
C is unable to pay anything, and A is compelled to pay the whole. A is entitled to
receive 1,500 rupees from B.
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(d) A, B and C are under a joint promise to pay D 3,000 rupees, A and B being only
sureties for C. C fails to pay. A and B are compelled to pay the whole sum. They
are entitled to recover it from C.
S SS SS.44. Effect of release of one joint promisor .44. Effect of release of one joint promisor .44. Effect of release of one joint promisor .44. Effect of release of one joint promisor .44. Effect of release of one joint promisor.- Where two or more persons have
made a joint promise, a release of one of such joint promisors by the promisee does
not discharge the other joint promisor or joint promisors ; neither does it free the joint
promisors so released from responsibility to the other joint promisor or joint promisors.
S SS SS.45. Devolution of joint rights .45. Devolution of joint rights .45. Devolution of joint rights .45. Devolution of joint rights .45. Devolution of joint rights.- When a person has made a promise to two or
more persons jointly, then, unless a contrary intention appears from the contract, the
right to claim performance rests, as between him and them, with them during their joint
lives, and, after the death of any of them, with the representative of such deceased
person Jointly with the survivor or survivors, and, after the death of the last survivor, with
the representatives of all jointly.
Illustration
A, in consideration of 5,000 rupees, lent to him by B and C, promises B and C
jointly to repay them that sum with interest on a day specified. B dies. The right to claim
performance rests with Bs representative jointly with C during Cs life and after the death
of C with the representatives of B and C jointly.
Time and Place of Performance
Sections 46 to 50 of the Act lay down certain rules in this regard:
S SS SS.46. .46. .46. .46. .46. Time for performance of promise, when no application is to be made and no
time is specified.- Where, by the contract, a promisor is to perform his promise without
application by the promisee, and no time for performance is specified, the engagement
must be performed within a reasonable time.
Explanation.- The question what is a reasonable time is, in each particular case,
a question of fact.
1) Where a contract does not specify any time for performance the promisor must
perform it within a reasonable time.
S SS SS.47 .47 .47 .47 .47. Time and place for performance of promise, where time is specified and no
application to be made.- When promise is to be performed on a certain day, and the
promisor has undertaken to perform it without application by the promisee, the promisor
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may perform it at any time during the usual hours of business on such day and at the
place at which the promise ought to be performed.
Illustration
A promises to deliver goods at Bs warehouse on the first January. On that day A
brings the goods to Bs warehouse, but after the usual hour for closing it, and they are
not received. A has not performed his promise.
When a contract is to be performed on a particular day, without any application the
promisee being required, the promisor may perform the contract on that particular day
during the usual hours of the business on such day at the place at which the promise
ought to be performed
S SS SS.48. .48. .48. .48. .48. Application for performance on certain day to be at proper time and place.-
When a promise is to be performed on a certain day, and the promisor has not undertaken
to perform it without application by the promisee, it is the duty of the, promisee to apply
for performance at a proper place and within the usual hours of business.
Explanation. - The question what is a proper time and place. is, in each particular
case, a question of fact.
Where the promise has to be performed on a certain day but promisor had not
undertaken to perform it without application by the promisee, the promisee is bound to
apply for performance at a proper place and within the usual hours of business.
What is a proper time and place is a question of fact.
S SS SS.49. .49. .49. .49. .49. Place for performance of promise, where no application to be made and no
place fixed for performance.- When a promise is to be performed without application
by the promisee, and no place is fixed for the performance of it, it is the duty of the
promisor to apply to the promisee to appoint a reasonable place for the performance
of the promise, and to perform it at such place.
Illustration
A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply
to B to appoint a reasonable place for the purpose of receiving it, and must deliver it to
him at such place.
2) When a promise to be performed without application by the promisee and not
place is fixed for the performance of it, it is duty of the promisor to apply to the promisee
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to appoint a reasonable place for the performance of the promise, and to perform it at
such place
S SS SS.50. .50. .50. .50. .50. A contract should be performed in the manner and at the time prescribed in
the contract. A promisor is discharged from liability if he performs the promise in a
manner or at a time prescribed or sanctioned by the promisee.
S SS SS.51. .51. .51. .51. .51. Promisor not bound to perform, unless reciprocal promisee ready and willing
to perform. When a contract consists of reciprocal promises to be simultaneously
performed, no promisor need perform his promise unless the promisee is ready and
willing to perform his reciprocal promise.
Illustrations
a) A and B contract that A shall deliver goods to B to be paid for by B on delivery.
A need not deliver the goods, unless B is ready and willing to pay for the goods
on delivery.
B need not pay for the goods, unless A is ready and willing to deliver them on
payment.
(b) A and B contract that A shall deliver goods to B at a price to be paid by installments,
the first installment to be paid on delivery.
A need not deliver, unless B is ready and willing to pay the first installment on
delivery.
B need not pay the first installment, unless A is ready and willing to deliver the
goods on payment of the first installment.
52. 52. 52. 52. 52. Order of performance of reciprocal promises.- Where the order in which
reciprocal promises are to be performed is expressly fixed by the contract, they shall be
performed in that order; and, where the order is not expressly fixed by the contract, they
shall be performed in that order which the nature of the transaction requires.
Illustrations
(a) A and B contract that A shall build a house for B at a fixed price. As promise to
build the house must be performed before Bs promise to pay for it.
(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price and
B promises to give security for the payment of the money. As promise need not be
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performed until the security is given, for the nature of the transaction requires that
A should have security before he delivers up his stock.
53. 53. 53. 53. 53. Liability of party preventing event on which the contract is to take effect.- When
a contract contains reciprocal promises, and one party to the contract prevents the
other from performing his promise, the contract becomes voidable at the option of the
party so prevented; and he is entitled to compensation.
Illustration
A and B contract that B shall execute certain work for A for a thousand rupees. B is
ready and willing to execute the work accordingly, but A prevents him from doing so.
The contract is voidable at the option of B ; and, if he elects to rescind it, he is entitled
to recover from A compensation for any loss which he has incurred by its non-
performance.
54. 54. 54. 54. 54. Effect of default as to that promise which should be first performed, in contract
consisting of reciprocal promises.- When a contract consists of reciprocal promises,
such that one of them cannot be performed, or that its performance cannot be claimed
till the other has been performed, and the promisor of the promise last mentioned fails
to perform it, such promisor cannot claim the performance of the reciprocal promise,
and must make compensation to the other party to the contract for any loss which such
other party may sustain by the non-performance of the contract.
Illustrations
(a) A hires Bs ship to take in and convey, from Calcutta to the conveyance. A does
not provide any cargo for the ship. A
cannot claim the performance of Bs promise, and must make compensation to B
for the loss which B sustains by the non-performance of the contract.
(b) A contracts with B to execute certain builders work for a fixed price, B supplying
the scaffolding and timber necessary for the work. B refuses to furnish any
scaffolding or timber, and the work cannot be executed. A need not execute the
work, and B is bound to make compensation to A for any loss caused to him by
the non-performance of the contract.
(c) A contract with B to deliver to him, at a specified price, certain merchandise on
board a ship which cannot arrive for a month, and B engages to pay for the
merchandise within a week from the date of the contract. B does not pay within
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the week. As promise to deliver need not be performed, and B must make
compensation.
(d) A promises B to sell him one hundred bales of merchandise, to be delivered next
day, and B promises A to pay for them within a month. A does not deliver according
to his promise. Bs promise to pay need not be performed, and A must make
compensation.
55. 55. 55. 55. 55. Effect of failure to perform at fixed time, in contract in which time is essential.-
When a party to a contract promises to do a certain thing at or before a specified time,
or certain things at or before specified times, and fails to do any such thing at or before
the specified time, the contract, or so much of it as has not been performed, becomes
voidable at the option of the promisee, if the intention of the parties was that time
should be of the essence of the contract.
Effect of such failure when time is not essential.-If it was not the intention of the
parties that time should be of the essence of the contract, the contract does not become
voidable by the failure to do such thing at or before the specified time; but the promisee
is entitled to ompensation from the promisor for any loss occasioned to him by such
failure.
Effect of acceptance of performance at time other than that agreed upon. If, in
case of a contract voidable on account of the promisors failure to perform his promise
at the time agreed, the promisee accepts performance of such promise at any time
other than that agreed, the promisee cannot claim compensation for any loss occasioned
by the non-performance of the promise at the time agreed, unless, at the time of such
acceptance he gives notice to the promisor of his intention to do so.
Where Time is the Essence of the Contract
Where time is of the essence of a contract and a party who is bound to perform his
promise within the time fixed fails to do so, the contract becomes voidable at the option
of the other party. An intention to make time is the essence of the contract must be
expressed in a very clear language.
Where Time is not the Essence of Contract
Where time is not the essence of the contract and promisor fails to perform it within
the specified time, the promisee is not entitled to compensation from the promisor for
any loss occasioned to him by such failure.
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Acceptance of Performance out of Time
Where the promisee accepts performance of a promise at any time other then that
agreed, the promisee cannot claim compensation for any loss occasioned by the non-
performance of the promise unless at the time of such acceptance he gives notice to
the promisor of his intention so to do.
Devolution of Joint Rights and Liabilities
1) When two or more persons have made a joint promise, all of them must jointly
fulfill the promise. If any of the joint promisors dies, his legal representatives will
be jointly liable for the performance along with the surviving promisor or promisors.
If all the original promisors die, then the legal representatives of all such promisors
will be jointly responsible for the performance of the promise.
2) The rule of course is subject to a contract to the contrary.
When two or more persons make a joint promise, the promisee is entitled, in the
absence of an express agreement to the contrary to compel any one or more of
such joint promisors to perform the whole of such promise. In other words, the
liability of joint promisors is joint and several. When one of several joint promisors
has performed the promise, he is entitled to contribution from the other joint
promisors.
If a joint promisor makes default in such contribution, the remaining joint promisors
must share the loss equally.
3) A release of one of joint promisors by the promisee does not discharge the other
joint promisors.
4) Where there are joint promisors, the benefits of the promise devolve on the
representatives of the deceased promisors. All the joint promisors must join together
to claim performance of the promise.
Sections 57. Sections 57. Sections 57. Sections 57. Sections 57. Reciprocal promise to do things legal, and also other things illegal.-
Where persons reciprocally promise, firstly, to do certain things which are legal, and,
secondly, under specified circumstances to do certain other things which are illegal, the
first set of promises is a contract, but the second is a void agreement.
Illustration
A and B agree that A shall sell B a house for 10,000 uses it as a gambling house,
he shall pay A 50,000 rupees for it.
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The first set of reciprocal promises, namely, to sell the house and to pay 10,000
rupees for it, is a contract.
The second set is for an unlawful object, namely, that B may use the house as a
gambling house, and is a void agreement.
58. 58. 58. 58. 58. Alternative promise, one branch being illegal.- In the case of an alternative
promise, one branch of which is legal and the other illegal, the legal branch alone can
be enforced.
Illustration
A and B agree that A shall pay B 1,000 rupees for which B shall afterwards deliver
to A either rice or smuggled opium.
This is a valid contract to deliver rice, and a void agreement as to the opium.
Appropriation of Payments
59. 59. 59. 59. 59. Application of payment where debt to be discharged is indicated.-Where a
debtor, owing several distinct debts to one person, makes a payment to him, either with
express intimation, or under circumstances implying that the payment is to be applied
to the discharge of some particular debt, the payment, if accepted, must be applied
accordingly.
Illustrations
(a) A owes B, among other debts, 1,000 rupees upon a promissory note which falls
due on the first June. He owes B no other debt of that amount. On the first June
A pays to B 1,000 rupees. The payment is to be applied to the discharge of the
promissory note.
(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and
demands payment of this sum A sends to B 567 rupees. This payment is to be
applied to the discharge of the debt of which B had demanded payment.
60. 60. 60. 60. 60. Application of payment where debt to be discharged is not indicated.- Where
the debtor has omitted to intimate and there are no other circumstances, indicating to
which debt the payment is to be applied, the creditor may apply it at his discretion to
any lawful debt actually due and payable to him from the debtor, whether its recovery
is or is not barred by the law in force for the time being as to the limitation of suits.
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61. 61. 61. 61. 61. Application of payment where neither party appropriates.- Where neither party
makes any appropriation the payment shall be applied in discharge of the debts in
order of time, whether they are or are not barred by the law in force for the time being
as to the limitation of suits. If the debts are of equal standing, the payment shall be
applied in discharge of each proportionally.
Appropriation of Payment
Where there are several debts owing by one person to another, and a certain
payment is made by the debtor which is insufficient to cover the debts, a question arises
as to which of the debts the payment is to be appropriated. The debtor has a right to
instruct the creditor to which account the money so paid is to be appropriated and the
creditor is bound by those instructions. But a difficulty arises when no such instructions
are given by the debtor. The English law relating to appropriation of payment is laid
down in Claytons case and those principles are embodied in sections 59 to 61 of the
Act and are as follows:
1) Appropriation by Debtor Appropriation by Debtor Appropriation by Debtor Appropriation by Debtor Appropriation by Debtor: If the debtor owes several distinct debts to the same
creditor and makes payment, he has the right to request the creditor to apply the
payment to the discharge of some particular debt. If the creditor accepts the
payments, he must apply it as directed.
2) Appropriation by Creditor Appropriation by Creditor Appropriation by Creditor Appropriation by Creditor Appropriation by Creditor: If the debtor makes payment without indication of his
intention, the creditor is at liberty to apply it to any lawful debt actually due and
payable to him. The creditor may even apply the payment to a debt which is time-
barred.
3) Appropriation by L Appropriation by L Appropriation by L Appropriation by L Appropriation by Law aw aw aw aw: When neither the creditor nor the debtor appropriates the
payment, the law gets the right to appropriate the payment. The law prefers to
apply the payment in discharge of debts in the order of time in which they were
incurred. If the debts are of equal standing, payment shall be applied in discharge
of each debt proportionately.
4) P PP PPrincipal and Interest rincipal and Interest rincipal and Interest rincipal and Interest rincipal and Interest: If the debtor fails to clearly state whether the payments is to
be adjusted towards capital or interest, it must be applied towards interest first
and then towards capital.
Discharge by Breach of Contract:
Parties to a contract are expected to perform their respective obligations. If any
party fails to perform his obligations, there occurs a breach of contract. Breach of the
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contract operates as discharge of the contract. The breach of contract may be actual or
anticipatory.
Actual Breach:
When a person does not perform his part of the contract at the time when it is due,
he will be liable for breach. Thus where A agrees to deliver to B 100 bags of rice on 1
st
July and fails to do so on that day, there is a breach of contract by A.
Anticipatory Breach of Contract
A breach of contract occurring before the due date of performance is known as
anticipatory breach of contract.
A agrees to supply certain goods to B on 15
th
January. Before this date, he informs
B that he is not going to supply the goods. This is anticipatory breach of contract.
Effect of an Anticipartory Breach
If the promisee accepts the repudiation of the promisor, the contract is discharged.
He is no longer bound by any obligation under the contract. He is excused from
performing his part of the contract. He is also entitled to sue the promisor for damages
or specific performance immediately.
If the aggrieved party refuses to accept the repudiation of the promisor, the contract
will remain operative for the benefit of both the parties. The party who has previously
repudiated may still perform it, if he can. If an event happens which discharges the
contract legally, the promisor may take advantage of such a change.
Discharge by impossibility of Performance
Law does not compel people to do impossible things. It generally results in the
discharge of the contract. Section 56 of the Act lays down that an agreement to do an
act impossible in itself is void.
1) When the impossibility is known to the parties at the time of making of the contract,
it is known as initial impossibility. Ex. A agrees to sell to B two planets for Rs. one
lakh.
2) At the time of entering into a contract parties are not aware about the impossibility
of performance. Ex. A agreed to sell his house to B. But unknown to both the
parties the house is destroyed two days before.
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3) Impossibility which arises subsequent to the formation of the contract is called
supervening impossibility.
Examples
a) When the subject matter of a contract, subsequent to its formation is destroyed,
the contract is discharged.
b) Where the performance of a contract depends on the personal skill of a party, a
contract is discharged on the illness or incapacity or death of that party.
c) Subsequent to the formation of the contract, if there is any change in the law the
parties are discharged from other obligations under the contract.
d) An agreement with an alien enemy is not valid. But before and after declaration
of war, agreements with that alien are valid.
e) If a contract is made on the basis of continued existence of particular state of
things, the contract stands discharged if the state of things changes or ceases to
exist.
In Krell vs. Henry (1903) 2. K.B.740, H hired a room from K for two days to witness
coronation procession of King Edward VII. K knew the object of the contract. K sued for
the rent. It was held that H need not pay the rent as the existence of the procession was
the basis of the contract. Its cancellation discharged the contract.
Effects of Frustration In English Law
In 1943 the Law Reform (Frustrated Contracts) Act, 1943, was passed in England.
As per the Act the following are the effects of frustration.
When a contract is discharged by frustration, parties are excused from performing
their respecting obligations.
a) Money paid before the frustrated event is recoverable.
b) Money not yet paid need not be paid.
c) Compensation can be recovered for the work done by a party.
Indian Law:
The Indian Law regarding frustration was made clear in Satyabrata Ghose vs.
Mugneeram Bangur & Co. In this case, M & Co., owned a large area of land in
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Calcutta. It started a scheme for the development of the land for residential purposes.
It invited offers from the intending buyers. It received advances from applicants and
allotted plots to them. Satyabrata was allotted a plot on payment of earnest money. At
this stage the whole area was requisitioned by the government for military purposes. As
a result, the company pleaded frustration, returned the money received as advance
and took possession of all the plots. Satyabrata refused to take back the advance and
expressed his will to keep the contract alive till the army vacates the land. When the
Government vacated the land, Satyabarta insisted on the enforcement of the contract.
Rejecting the pleas of frustration, the Supreme Court accepted his plea. It was held that
the contract was not frustrated.
Frustration of Contract containing Arbitration Agreement
Effect of-
Under section 56 of the Indian contract Act 1872, a contract to do an act which
after the contract was made becomes impossible, becomes void. It is therefore only
that contract which is for doing such an act that becomes frustrated. An agreement to
refer a dispute to arbitration arising out of a contract cannot be said to be a contract to
do an act. In a contract containing an arbitration clause there is (1) a promise by one
party to do an act for a consideration furnished by the other party and (2) an agreement
to refer disputes arising out of that contract to arbitration. Section 56 of the contract Act
applies to the former and not to the latter agreement. Referring dispute to arbitration is
not a duty to be performed under a contract and there is hardly any question of
performance of the duty being rendered impossible. Moreover, whether a contract is
frustrated or not itself a dispute than arises under a contract and if the contract contains
an arbitration clause that dispute can be referred to arbitration. Hence even if a contract
is said to be frustrated the arbitration clause remains operative.
Doctrine of frustration comes into play when a contract becomes impossible of
performance after it is made on account of circumstances beyond the control of the
party. Contract is not frustrated merely because the circumstances in which the contract
was made underwent a change. A contract is not frustrated if the frustration of contract
is self-generated or the disability is self-induced. Court can relieve a contracting party
from the obligations of a contract under section 56 of the Indian Contract Act only by
reason of a supervening event or untoward happening beyond the control of the parties
which renders the contract impossible of performance after the same was made.
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62. 62. 62. 62. 62. Effect of novation, rescission, and alteration of contract.- If the parties to a
contract agree to substitute a new contract for it, or to rescind or alter it, the original
contract need not be performed.
Illustrations
(a) A owes money to B under a contract. It is agreed between A, B and C that B shall
thenceforth accept C as his debtor, instead of A.
The old debt of A to B is at an end, and a new debt from C to B has been
contracted.
(b) A owes B 10,000 rupees. A enters into an arrangement with B, and gives B a
mortgage of his (As) estate for 5,000 rupees in place of the debt of 10,000
rupees. This is a new contract and extinguishes the old.
(c) A owes B 1,000 rupees under a contract. B owes C 1,000 rupees. B orders A to
credit C with 1,000 rupees in his books, but C does not assent to the arrangement.
B still owes C 1,000 rupees, and no new contract has been entered into.
63. 63. 63. 63. 63. Promisee may dispense with or remit performance of promise.- Every promisee
may dispense with or remit, wholly or in part, the the performance of the promise made
to him, or may extend the time for such performance, or may accept instead of it any
satisfaction which he thinks fit.
Illustrations
(a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no
longer bound to perform the promise.
(b) A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole
debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were
payable. The whole debt is discharged.
(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B accepts them, in
satisfaction of his claim on A. This payment is a discharge of the whole claim. 2*
(d) A owes B, under. a contract, a sum of money, the amount of which has not been
ascertained. A without ascertaining the amount, gives to B, and B, in satisfaction
thereof, accepts, the sum of 2,000rupees. This is a discharge of the whole debt,
whatever may be its amount.
e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an
arrangement with his creditors, including B, to pay them a 3* [composition] of
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eight annas in the rupee upon their respective demands. Payment to B of 1,000
rupees is a discharge of Bs demand.
64. 64. 64. 64. 64. Consequences of rescission of voidable contract.- When a person at whose
option a contract is voidable rescinds it, the other party thereto need not perform any
promise therein contained in which he is promisor. The party rescinding a voidable
contract shall, if he have received any benefit there under from another party to such
contract, restore such benefit, so far as may be, to the person from whom it was received.
65. 65. 65. 65. 65. Obligation of person, who has received advantage under void agreement, or
contract that becomes void.- When an agreement is discovered to be void, or when a
contract becomes void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make compensation for it to the
person from whom he received it.
Illustrations
(a) A pays B 1,000 rupees in consideration of Bs promising to marry C, As daughter.
C is dead at the time of the promise. The agreement is void, but B must repay A
the 1,000 rupees.
(b) A contracts with B to deliver to him 250 maunds of rice before the first of May. A
delivers 130 maunds only before that day, and none after. B retains the 130
maunds after the first of May. He is bound to pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her a
hundred rupees for each nights performance. On the sixth night, A willfully absents
herself from the theatre, and B, in consequence, rescinds the contract. B must pay
A for the five nights on which she had sung.
d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance.
A is too ill to sing. A is not bound to make compensation, to B for the loss of the
profits which B would have made if A had been able to sing, but must refund to B
the 1,000 rupees paid in advance.
66. 66. 66. 66. 66. Mode of communicating or revoking rescission of voidable contract.- The
rescission of a voidable contract may be communicated or revoked in the same manner,
and subject to the same rules, as apply to the communication or revocation of a proposal.
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67. 67. 67. 67. 67. Effect of neglect of promisee to afford promisor reasonable facilities for
performance.- If any promisee neglects or refuses to afford the promisor reasonable
facilities for the performance of his promise, the promisor is excused by such neglect or
refusal as to any non-performance caused thereby.
Illustration
A contracts with B to repair Bs house.
B neglects or refuses to point out to A the places in which his house requires repair.
A is excused for the nonperformance of the contract if it is caused by such neglect
or refusal.
Remedies for Breach of Contract
73. 73. 73. 73. 73. Compensation for loss or damage caused by breach of contract.-When a
contract has been broken, the party who suffers by such breach
is entitled to receive, from the party who has broken the contract, compensation for any
loss or damage caused to him thereby, which naturally arose in the usual course of
things from such breach, or which the parties knew, when they made the contract, to be
likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by
contract.-When an obligation resembling those created by contract has been incurred
and has not been discharged, any person injured by the failure to discharge it is entitled
to receive the same compensation from the party in default, as if such person had
contracted to discharge it and had broken his contract.
Explanation.- In estimating the loss or damage arising from a breach of contract,
the means which existed of remedying the inconvenience caused-by the non-performance
of the contract must be taken into account.
Illustrations
a) A contracts to sell and deliver 50 maunds of saltpeter to B, at a certain price to be
paid on delivery. A breaks his promise. B is entitled to receive from A, by way of
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compensation, the sum, if any, by which the contract price falls short of the price
for which B might have obtained 50 maunds of saltpeter of like quality at the time
when the saltpeter ought to have been delivered.
b) A hires Bs ship to go to Bombay, and there take on board, on the first of January,
a cargo which A is to provide and to bring it to Calcutta, the freight to be paid
when earned. Bs ship does not go to
Bombay, but A has opportunities of procuring suitable conveyance for the cargo
upon terms as advantageous as those on which he had chartered the ship. A
avails himself of those opportunities, but is put to trouble and expense in doing
so. A is entitled to receive compensation from B in respect of such trouble and
expense.
(c ) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed
for delivery. A afterwards informs B that he will not accept thrice if tendered to
him. B is entitled to receive from A, by way of compensation, the amount, if any,
by which the contract price exceeds that which B can obtain for the rice at the
time when A informs B that he will not accept it.
(d) A contracts to buy Bs ship for 60,000 rupees, but breaks his promise. A must pay
to B, by way of compensation, the excess, if any, of the contract price over the
price which B can obtain for the ship at the time of the breach of promise.
(e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for
sale at that place, starting on a specified day.
The boat, owing to some avoidable cause, does not start at the time appointed,
whereby the arrival of the cargo at Mirzapur is delayed beyond the time when it
would have arrived if the boat had sailed according to the contract. After that
date, and before the arrival of the cargo, the price of jute falls. The measure of
the compensation payable to B by A is the difference between the price which B
could have obtained for the cargo at Mirzapur at the time when it would have
arrived if forwarded in due course, and its market price at the time when it actually
arrived.
(f) A contracts to repair Bs house in a certain manner, and receives payment in
advance. A repairs the house, but not according to contract. B is entitled to
recover from A the cost of making the repairs conform to the contract.
(g) A contracts to let his ship to B for a year, from the first of January, for a certain
price. Freights rise, and, on the first of January, the hire obtainable for the ship is
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higher than the contract price. A breaks his promise. He must pay to B, by way of
compensation, a sum equal to the difference between the contract price and the
price for which B could hire a similar ship for a year on and from the first of
January.
(h) A contracts to supply B with a certain quantity of iron at a fixed price, being a
higher price than that for which A could procure and deliver the iron. B wrongfully
refuses to receive the iron. B must pay to A, by way of compensation, the difference
between the contract price of the iron and the sum for which A could have obtained
and delivered it.
(i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to
As mill informing B that his mill is stopped for want of the machine. B unreasonably
delays the delivery of the machine, and A, in consequence, loses a profitable
contract with the Government. A is entitled to receive from B, by way of
compensation, the average amount of profit which would have been made by the
working of the Mill during the time that delivery of it was delayed, but not the loss
sustained through the loss of the Government contract.
(j) A having contracted with B to supply B with 1,000 tons of iron at 100 rupees a
ton, to be delivered at a stated time, contracts with C for the purchase of 1,000
tons of iron at 180 rupees a ton, telling C that he does so for the purpose of
performing his contract with B. C fails to perform his contract with A, who cannot
procure other iron, and B, in consequence, rescinds the contract. C must pay to
A 20,000 rupees, being the profit which A would have made by the performance
of his contract with B.
(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price,
a certain piece of machinery. A does not deliver the piece of machinery at the
time specified, and in consequence of this, B is obliged to procure another at a
higher price than that which he was to have paid to A, and is prevented from
performing a contract which B had made with a third person at the time of his
contract with A (but which had not been then communicated to A), and is
compelled to make compensation for breach of that contract.
A must pay to B, by way of compensation, the difference between the contract
price of the piece of machinery and the sum paid by B for another, but not the
sum paid by B to the third person by way of compensation.
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(l) A, a builder, contracts to erect and finish a house by the first of January, in order
that B may give possession of it at that time to C, to whom B has contracted to let
it. A is informed of the contract between B and C. A builds the house so badly
that, before the first of January, it falls down and has to be re-built by B, who, in
consequence, loses the rent which he was to have received from C, and is obliged
to make compensation to C for the breach of his contract.
A must make compensation to B for the cost of rebuilding the house, for the rent
lost, and for the compensation made to C.
(m) A sells certain merchandise to B, warranting it to be of a particular quality, and B,
in reliance upon this warranty, sells it to
C with a similar warranty. The goods prove to be not according to the warranty,
and B becomes liable to pay C a sum of money by way of compensation. B is
entitled to be reimbursed this sum by A.
(n ) A contracts to pay a sum of money to B on a day specified. A does not pay the
money on that day; B, in consequence of not receiving the money on that day, is
unable to pay his debts, and is totally ruined. A is not liable to make good to B
anything except the principal sum he contracted to pay, together with interest up
to the day of payment.
(o) A contracts to deliver 50 maunds of saltpeter to B on the first of January, at a
certain price. B afterwards, before the first of January, contracts to sell the saltpeter
to C at a price higher than the market price of the first of January. A breaks his
promise.
In estimating the compensation payable by A to B, the market price of the first of
January, and not the profit which would have arisen to B from the sale to C, is to
be taken into account.
(p ) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows
nothing of Bs mode of conducting his business. A breaks his promise, and B,
having no cotton, is obliged to close his mill. A is not responsible to B for the loss
caused to B by the closing of the mill.
(q ) A contracts to sell and deliver to B, on the first of January, certain cloth which B
intends to manufacture into caps of a particular kind, for which there is no demand,
except at that season. The cloth is not delivered till after the appointed time, and
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too late to be used that year in making caps. B is entitled to receive from A, by
way of compensation, the difference between the contract price of the cloth and
its market price at the time of delivery, but not the profits which he expected to
obtain by making caps, nor the expenses which he has been put to in making
preparation for the manufacture.
(r) A, a ship-owner, Contracts with B to convey him from Calcutta to Sydney in As
ship, sailing on the first of January, and B pays to A, by way of deposit, one-half
of his passage-money. The ship does not sail on the first of January, and B, after
being in consequence detained in Calcutta for some time and thereby put to
some expense, proceeds to Sydney in another vessel, and, in consequence, arriving
too late in Sydney, loses a sum of money. A is liable to repay to Bhis deposit with
interest, and the expense to which he is put by his detention in Calcutta, and the
excess, if any, of the passage-money paid for the second ship over that agreed
upon for the first, but not the sum of money which B lost by arriving in Sydney too
late.
74. 74. 74. 74. 74. Compensation for breach of contract where penalty stipulated for.- When a
contract has been broken, if a sum is named in the contract as the amount to be paid
in case of such breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not actual damage
or loss is proved to have been caused thereby, to receive from the party who has broken
the contract reasonable compensation not exceeding the amount so named or, as the
case may be, the penalty stipulated for.
Explanation.- A stipulation for increased interest from the date of default may be a
stipulation by way of penalty.
Exception.- When any person enters into any bail-bond, recognizance or other
instrument of the same nature, or, under the provisions of any law, or under the orders
of the [Central Government] or of any
State Government, gives any bond for the performance of any public duty or act in
which the public are interested, he shall be liable, upon breach of the condition of any
such instrument, to pay the whole sum mentioned therein.
Explanation.- A person who enters into a contract with Government does not
necessarily thereby undertake any public duty, or promise to do an act in which the
public are interested.
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Illustrations
(a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day.
A fails to pay B Rs. 500 on that day. B is entitled to (recover from A such
compensation, not exceeding Rs.1,000, as the Court considers reasonable.
(b) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B
Rs. 5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation,
not exceeding Rs. 5,000, as the Court considers reasonable.
(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on
a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.
(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent. At
the end of six months, with a stipulation that, in case of default, interest shall be
payable at the rate of 75 per cent from the date of default. This is a stipulation by
way of penalty, and B is only entitled to recover from A such compensation as the
Court considers reasonable.
(e) A, who owes money to B a money-lender, undertakes to repay him by delivering
to him 10 maunds of grain on a certain date, and stipulates that, in the event of
his not delivering the stipulated amount by the stipulated date, he shall be liable
to deliver 20.maunds. This is a stipulation by way of penalty, and B is only entitled
to reasonable compensation in case of breach.
f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly installments,
with a stipulation that in default of payment of any installment, the whole shall
become due. This stipulation is not by way of penalty, and the contract may be
enforced according to its terms.
(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly
installments of Rs. 40, with a stipulation that, in default of payment of any
installment, the whole shall become due. This is a stipulation by way of penalty.
75. 75. 75. 75. 75. Party rightfully rescinding contract entitled to compensation.- A person who
rightfully rescinds a contract is entitled to compensation for any damage which he has
sustained through the non-fulfillment of the contract.
Illustration
A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two
nights In every week during the next two months, and B engages to pay her 100 rupees
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for each nights performance. On the sixth night, A willfully absents herself from the
theatre, and B, in consequence, rescinds the contract. B is entitled to claim compensation
for the damage which he has sustained through the non-fulfillment of the contract.
As a general rule the aim of Law of contracts is to award liquidated damages, i.e.
fixed damages. The person who commits breach of contract is called defaulting party
and the person against whom breach is committed is called the aggrieved party. A
person who commits breach of contract must make compensation therefore to the
injured party, who is to be placed in the same financial position in which he would have
been if the contract had been performed. The term damages are used to mean
compensation in money as a substitute for the promised performance. Damages for
the breach of a contract are intended to compensate the injured party so far as money
can do so.
Damages are of Four Kinds
1) General or Ordinary Damages General or Ordinary Damages General or Ordinary Damages General or Ordinary Damages General or Ordinary Damages: General damages are those which arise naturally
in the usual course of things for the breach of contract. These include damages
which are the natural and probable consequences of the breach of the contract.
General damages are those damages which the law presumes from the breach
of the contract. General damages are usually assessed on the basis of actual loss
suffered.
2) Special Damages Special Damages Special Damages Special Damages Special Damages: Special damages are those which are a result of usual
circumstances affecting the plaintiff. These are the damages, which the parties
knew, when they made the contract, as likely to arise from the breach of contract.
The notice of special circumstances involved in a contract must be known to the
party against whom special damages are claimed for breach of a contract. If he
had no knowledge, he is not answerable. Knowledge of the special circumstances
must be on the date of the contract. Subsequent knowledge of the special
circumstances will not create any special liability. Special damages being
exceptional in character do not follow ordinary course. The leading case on this
point is Hadley vs. Baxendale (1854) 9 Ex. 341. The plaintiffs mill had been
stopped due to the breakage of a crank shaft. The broken shaft had to be sent to
the makers of Greenwich as a pattern for preparing the new one. The defendants
who were common carriers, agreed to carry the broken shaft to Greenwich. The
only information given to the carriers was that the article to be carried was the
broken shaft of a mill and the plaintiffs were millers of the shaft. Owing to the
defendants negligence the delivery of the shaft was delayed. Due to this delay the
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mill remained stopped for a longer time, than it would have been, had the shaft
been delivered at Greenwich without any delay. The plaintiffs brought an action
to recover damages for the loss of profits arising out of the delay. It was held that
it could not be contemplated sending the shaft, as the millers might have another
shaft in reserve. Moreover, the special circumstances were not communicated by
the plaintiffs to the defendants. The plaintiffs were, therefore, not entitled to recover
the loss.
3) V VV VVin in in in indictive or Exemplary Damages dictive or Exemplary Damages dictive or Exemplary Damages dictive or Exemplary Damages dictive or Exemplary Damages: They are awarded with a view to punish the
wrong-doer and not primarily with the idea of awarding compensation to the
injured party. The conduct of the defendant cannot be adequately punished only
by awarding proportionate financial loss actually suffered. It should be sufficiently
exemplary or vindictive. Generally vindictive damages are not awarded for breach
of contract, but are as a rule awarded in actions, or tort. But there are two exceptions
to this rule namely.
i) breach of contract to marry;
ii) Wrongful dishonor of a customers cheque by a banker having sufficient
funds of the customer at the disposal, to honor his cheque.
iii) Nominal Damages: They are also called contemptuous damages. Nominal
damages are those which are awarded only for the namesake. These damages
are quite small in amount. It is based on the principle where there is a right
there must be a remedy.
4) Liquidated Damages and P Liquidated Damages and P Liquidated Damages and P Liquidated Damages and P Liquidated Damages and Penalty enalty enalty enalty enalty: When the amount of damages fixed by an
agreement between the parties to be paid, in case of breach, is in the nature of a
fair and honest pre-estimation of probable damages, it is called liquidated
damages.
At the time of entering into a contract, if the amounts of damages are fixed and
these damages are disproportionate to the damage likely to accrue in the event
of the breach, it will be termed as penalty.
Indian law does not make any distinction between liquidated damages and penalty.
The injured party is allowed only a reasonable compensation.
Rules Relating to the Assessment of Damages
1) The aggrieved party is entitled to recover by way of compensation, only the actual
loss suffered by him.
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2) Damages are paid only for the proximate consequences of the breach of a contract.
3) The court may allow special damages, if such damages may reasonably be
supposed to have been in the contemplation of both the parties at the time of
making of the contract.
4) The aggrieved party is to be placed in the same financial position in which he
would have been if the contract had been performed.
5) The injured party can recover the cost of getting the decree along with the damages.
6) In a contract for the sale of goods the measure of damages on the breach of
contract is the difference between the contract price and the market price of such
goods on the date of the breach of contract.
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CHAPTER-VI
QUASI CONTRACTS, STANDARD FORM OF
CONTRACTS AND CYBER CONTRACTS
Quasi Contracts
Every contract creates rights and obligations. But under certain special
circumstances, the law creates and enforces legal rights and obligations
although the parties have never entered into a contract. Such obligations
imposed by law are known as quasi contracts. They are contracts not
in fact but in law. They are created by lawyers and judges. The Act
describes them as certain relations resembling those created by contract.
In English Law they are called as implied contracts or constructive
contracts. In U.S.A. they are discussed under the head Restitution. Quasi
contracts are based on the principles of justice, equity and
good consci ence. Its mai n obj ect i s to prevent unj ust
enrichment.
The Act deals with the following quasi-contractual obligations.
Section 68: Claims for Necesseries Supplied
Where necessaries are supplied to a person who is incompetent to
contract or to someone whom he is legally bound to support, the supplier
is entitled to recover the price from the property of the incompetent
person under section 68 of the Act. E.g. A supplied B, a minor, with
necessaries suitable to his condition in life. A is entitled to be reimbursed
from Bs property.
Essential elements of the section:-
a) If a person supplies necessaries to a person who is incapable of
contracting or to any one whom he is legally bound to support;
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b) The necessaries must be suited to his condition in life;
c) The person supplying the necessaries is entitled to be reimbursed; but
d) The liability of such person incapable of contracting is limited to his property or in
other words he incurs no personal liability for the obvious reason that he is
incompetent to contract.
Thus we see that the person supplying the necessaries shall be entitled to be
reimbursed only when the necessaries are suited to the condition in life of the incapable
person. Things necessary are those without which an individual cannot reasonably
exist.
The word necessaries has been used here in a technical sense. It includes not
only the bare necessiries of existence such as clothes and food, but all things that may
be reasonably necessary and suited to the minors conditions in life e.g., a watch or a
bicycle. But the articles of luxury are by no means necessaries.
Expenses for minors education, his sisters marriage, expenses incurred in funeral
of minors parents, expenses incurred for necessary litigation, etc., have generally been
held as necessaries. Expenses for minors marriage have also been held to be
necessaries.
Last but not the least, only the minors property is liable for necessaries, and no
personal liability is incurred by him, as it may be under English Law.
Section 69: Payment by an Interested Person
A person who is interested in the payment of money which another is bound by law
to pay, and who therefore pays it, is entitled to be reimbursed by the other.
For e.g. B holds lands in Bengal, on a lease granted by A, the Zamindar. The
revenue payable by A to the Government being in arrears, his land is advertised for
sale by the Government. Under the revenue law, the consequence of such sale will be
the annulment of Bs lease. B, to prevent the sale and consequent annulment of his
lease, pays to the Government the sum due from A. A is bound to make good to B the
amount so paid.
Conditions of Liability:-
P PP PPayer must be interested in making P ayer must be interested in making P ayer must be interested in making P ayer must be interested in making P ayer must be interested in making Paymen aymen aymen aymen ayment:- Firstly, the plaintiff should be interested
in making the payment. The interest which the plaintiff seeks to protect must, of course,
QUASI CONTRACTS, STANDARD FORM OF CONTRACTS AND CYBER CONTRACTS
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be legally recognizable. His honest belief that he has an interest to protect is enough.
Where a party had agreed to purchase certain mills, he was allowed to recover from
the seller the amount of already overdue municipal taxes paid by him in order to save
the property from being sold in execution. By agreeing to purchase the property he had
acquired sufficient interest in it to safeguard.
But should not be bound to P But should not be bound to P But should not be bound to P But should not be bound to P But should not be bound to Pay: ay: ay: ay: ay:- Secondly, it is necessary that the plaintiff himself
should not be bound to pay. He should only be interested in making the payment in
order to protect his own interest. Where a person is jointly liable with others to pay, a
payment by him of the others share would not give him a right of recovery under this
section.
P PP PPayment should be by one to another:- ayment should be by one to another:- ayment should be by one to another:- ayment should be by one to another:- ayment should be by one to another:- Lastly, the plaintiff should have made the
payment to another person and not to himself. Thus, where a certain Government was
the tenant of a land and paid to itself out of the rent due to the landlord the arrears of
land revenue due to itself, the Government could not recover from the landlord. It was
a transfer of money from one head to another within the Government and not payment
to another and though it was done to save the land from being sold in execution, it did
not come within the principle of the section.
Section 70: Obligation of a Person enjoying Benefit of Non-gratutious
Act
Where a person lawfully does anything for another person or delivers anything to
him, not intending to do so gratuitously, and such other person enjoys the benefit
thereof, the latter is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.
E.g. A, a tradesman leaves goods at Bs house by mistake. B treats the goods as his
own. He is bound to pay A for them.
Conditions of Liability under the Section:-
It is plain that three conditions must be satisfied before this section can be invoked:
1) a person should lawfully do something for another person or deliver something to
him;
2) in doing the said thing or delivering the said thing he must not intend to act
gratuitously;
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3) The other person for whom something is done or to whom something is delivered
must enjoy the benefit thereof.
4) Non gratuitous act: A number of villages were drawing irrigation waters from a
tank. Some of the villages were under direct State tenancy, others under Zamindars.
The Government carried out repairs to the tank for its preservation. The Zamidars
also enjoyed the benefits of the repairs. They were accordingly held liable to
make proportional contribution towards the expenses of repair. The case shows
that even where the party making payment or rendering services is personally
interested in the matter, he can recover proportional contribution from those who
have enjoyed the benefits of his services.
Section 71: Responsibility of Finder of Goods
A person, who finds goods belonging to another and takes them into his custody, is
subject to the same responsibility as a bailee.
A finder of goods is bound to take as much care of the goods found as a man of
ordinary prudence would take of his own goods under similar circumstances. He cannot
appropriate the goods without taking proper steps to find out the owner and should
keep them for a reasonable time so that the owner may turn up and take them. The
finder of the goods is entitled to retain the goods against the owner until he received
compensation for him. He is also entitled to the possession of the goods as against the
whole world except the true owner.
Section 72: Money paid by mistake or under Coercion
A person to whom money has been paid or anything delivered by mistake or under
coercion must repay or return it. E.g. A and B jointly owe 100 rupees to C. A alone pays
the amount to C and B not knowing of this fact pay 100 rupees over again to C. C is
bound to repay the amount to B.
Refund of Tax Money paid without being Due:-
The Supreme Court in its decision in Sales Tax Officer, Banaras v. Kanhaiya Lal
Mukund Lal Saraf (1959) SCR 1350, applied section 72 and ordered the refund of
money paid by mistake.
A certain amount of sales tax was paid by a firm under the U.P. Sales Tax law on its
forward transaction and subsequently to the payment; the Allahabad High Court ruled
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the levy of sales tax on such transactions to be ultra vires. The firm sought to recover
back the tax money.
Rejecting the contention based on English, American and Australian laws which do
not allow payments made under mistake of law to be recovered, the Supreme Court
allowed the recovery. The section in terms does not make any distinction between a
mistake of law and a mistake of fact. The term mistake has been used without any
qualification or limitation whatever. The court found no ground for any estoppel
against the firm and disapproved the following statement of the Nagpur High Court
(Nagorao v. Governor-General in Council, AIR, 1951 Nag 372)
If the reason for the rule is that a person paying money, they under mistake is
entitled to recover it, because it is against the conscience of the receiver to retain it,
then when the receiver has no longer the money with him or cannot be considered as
still having it, as in a case where he has spent it on his own purposes, different
consideration must necessarily arise.
In reference to this Supreme Court said that no such equitable consideration can
be imported when the terms of section 72 are clear and unambiguous.
If a mistake either of law or of fact is established, the assessee is entitled to recover
the money and the party receiving it is bound to return it irrespective of any other
consideration. Money paid under a mistake of law comes within mistake in section
72 of the Contract Act and there is no question of estoppel when the mistake of law is
common to both the assessee and the taxing authority.
Standard form of Contracts
Due to enormous increase in the volume and complexities of trade and business a
concern may have to enter into a large number of contracts with its customers or
clients. When a large number of contracts have got to be entered into by a person,
from a practical point of view and for the sake of convenience, a standard form for the
numerous contracts may be used. The contracts with standard terms may be drafted by
one party and on the same terms contracts may be made with numerous persons. For
instance, an insurance company may prepare a draft of insurance policy, which may
form the basis of the contract with a large number of insured persons.
So it would be difficult for such large scale organizations to draw up a separate
contract with every individual. They, therefore, keep printed forms of contract. Such
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standardized contract contains a large number of terms and conditions in fine print
which restrict and after exclude liability under the contract. The individual can hardly
bargain with the massive organizations and therefore, his only function is to accept the
offer, whether he like its terms or not. He cannot alter those terms or even discuss them
they are there for him to take or leave. He therefore, does not undertake the laborious
and profitless task of discovering what the term is. Lord Denning pointed out in Thorton
vs. Shoe Lane Parking Ltd. (1971) 1 All ER 686 CA, no customer in a thousand ever
reads the conditions. If he had stopped to do so, he would have missed the train or the
boat.
Such contracts have been variously described as Contracts of Adhesion which
means that the individual has no choice but to accept; he does not negotiate, but
merely adheres.
Protective Devices
The individual, therefore, deserves to be protected against the possibility of
exploitation inherent in such contracts.
Following are some of the modes of protection which have been evolved by the
courts.
1) R RR RReasonable Notice: easonable Notice: easonable Notice: easonable Notice: easonable Notice: In the first place it is the duty of the person delivering a
document to give adequate notice to the offeree of the printed terms and conditions.
Where this is not done, the acceptor will not be bound by the terms.
2) Notice should be Contemporaneous with Contract: Notice should be Contemporaneous with Contract: Notice should be Contemporaneous with Contract: Notice should be Contemporaneous with Contract: Notice should be Contemporaneous with Contract: Notice of the terms should
be given before or at the time of the contract. A subsequent notification will
indeed amount to a modification of the original contract and will not bind the
other party unless he has assented thereto;
3) Theory of F Theory of F Theory of F Theory of F Theory of Fundamental Breach: undamental Breach: undamental Breach: undamental Breach: undamental Breach: Even where adequate notice of the terms and
conditions in a document has been given, the party imposing the conditions may
not be able to rely on them if he has committed a breach of the contract which
can be described as fundamental. An easy illustration is to be found in cases
where goods different from those contracted are delivered.
4) Strict Construction: Strict Construction: Strict Construction: Strict Construction: Strict Construction: Exemption clauses construed strictly particularly where a clause
is so widely expressed as to be highly unreasonable. Any ambiguity in the mode
or expressing an exemption clause is resolved in favor of the weaker party.
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5) Liability In T Liability In T Liability In T Liability In T Liability In Tort: ort: ort: ort: ort: Even where an exemption clause is exhaustive enough to exclude
all kinds of liability under the contract, it may not exclude liability in tort.
6) Unreasonable T Unreasonable T Unreasonable T Unreasonable T Unreasonable Terms: erms: erms: erms: erms: Another mode of protection is to exclude unreasonable
terms from the contracts. A term is unreasonable it would defeat the very purpose
of the contract or if it is repugnant to public policy.
7) Exemption Clauses and Third P Exemption Clauses and Third P Exemption Clauses and Third P Exemption Clauses and Third P Exemption Clauses and Third Parties: arties: arties: arties: arties: One of the basic principles of the law of
contract is that a contract only between the parties to it and no third party can
either enjoy any rights or suffer any liability under it. This should apply to standard
form of contracts also. The effect would be that where goods are supplied or
services rendered under a contract which exempts the supplier from liability and a
third party is injured by the use of them, the supplier is liable to him notwithstanding
that he has purchased his exemption from the other party to the contract.
Information Technology-contract Formation
Conclusion of contract by electronic means is a new concept. It is not a paper
document. The validity of electronic contract cannot be questioned in the absence of a
paper document, if the agreement is enforceable by law. The means of communication
are not important. Any means can be adopted. The Information Technology Act, 2000
is a commercial code of e-business transactions, containing provisions dealing with,
among others, how a contract can be formed electronically. It does not amend the
Indian Contract Act, 1872 as regards the legal requirement for the formation of a valid
contract. It only provides legal certainty as to the conclusion of contracts by electronic
means.
The Information Technology Act, 2000 does not specifically provide the manner of
forming a contract. The offer and acceptance may be communicated electronically.
Admissibility of data message as evidence has been recognized. The contract formed
by the use of data message is, therefore legally effective and admissible in evidence.
The Law relating to contracts made through telephone, telex or when the parties
are in each others presence is mutatis mutadis applicable to electronic contracts.
Contract Formation & Relevant Provisions of Information Technology Act 2000:
Originator and Addressee:-
The expressions of proposer and acceptor as used in regular contract are substituted
by the words originator and Addressee in case of Electronic Contracts. Section 11 of
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Information Technology Act, 200 referring to these expressions says:-
An electronic record shall be attributed to the originator:
1. if it was sent by the originator himself
2. by a person who had the authority to act on behalf of the originator in respect of
that electronic record; or
3. by an information system programmed by or on behalf of the originator to operate
automatically.
In case of E-Contracts the originator may send the offer by means of electronic
record. The originator may not be sure whether the electronic record sent by him has
been received by the addressee. The originator may therefore desire to have an
acknowledgment from the addressee of the receipt of electronic record sent by him.
Section 12 of the Information Technology Act, 2000 referring to the acknowledgement
and receipt says:-
Acknowledgement of Receipt.-
(1) Where the originator has not agreed with the addressee that the acknowledgement
of receipt of electronic record be given in a particular form or by a particular
method, an acknowledgement may be given by-
1. any communication by the addressee, automated or otherwise, or
2. any conduct of the addressee, sufficient to indicate to the originator that the
electronic record has been received.
(2) Where the originator has stipulated that the electronic record shall be binding
only on receipt of an acknowledgement of such electronic record shall be deemed
to have been never sent by the originator
(3) Where the originator has not stipulated that the electronic record shall be binding
only on receipt of such acknowledgement and the acknowledgement has not
been received by the originator within the time specified or agreed or if no time
has been specified or agreed to within a reasonable time, then the originator may
give notice to the addressee stating that no acknowledgement has been received
by him and specifying a reasonable time by which the acknowledgement must be
received by him and if no acknowledgement is received within the aforesaid time
limit he may after giving notice to the addressee, treat the electronic record as
though it has never been sent.
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As per section 12(1) of the Act where there is no agreement between the originator
and the addressee as to the form or mode by which acknowledgment is to be sent
by the addressee, the addressee may acknowledge the receipt of electronic record
by any communication automated or otherwise or by any conduct which may be
sufficient to indicate to the originator as to the receipt of such electronic record.
According to section 12(2) of the Act an electronic record shall not be binding
until an acknowledgement of receipt of electronic record is received from the
addressee if the originator has stipulated so and in the absence of such
acknowledgement, the electronic record is deemed to have been never sent by
the originator. Further as per section 12(3) of the Act in the absence of any
stipulation by the originator that the electronic record shall be binding only on the
receipt of electronic record within the time stipulated or agreed or in case no time
is fixed then within a reasonable time, the originator may give a notice to the
addressee about the non receipt of the acknowledgement by him and specify
further reasonable time for the receipt of the same. The originator is entitled to
deem as if no electronic record was sent by him even after he has failed to receive
the acknowledgement from the addressee within such aforesaid reasonable time.
In such a case no proposal is said to have been made by means electronic record
and the question of acceptance does not arise resulting in no enforceable electronic
contract.
Communication of Acceptance through Internet:-
Electronic Contracts being instantaneous contracts are deemed to be complete
only on such acceptance is received by the originator. The originator after making the
proposal, he may do it so before the acceptance of such proposal is transmitted by the
addressee/acceptor. It may appear that the addressee after transmitting the acceptance
involving instantaneous communication cannot revoke the acceptance. But according
to section 4 of the Contract Act the communication of acceptance is complete only
when it comes to the knowledge of the proposer. In view of this an addressee can
revoke the acceptance transmitted through internet before such acceptance comes to
the knowledge of the originator. Where the originator fails to open the mail box and
thereby the acceptance does not come to his knowledge, there cannot be a contract if
he comes to know about the revocation of acceptance before the communication of
acceptance. Thus a contract through internet is legally complete only when an acceptance
is received at the end of the originator.
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Dr. K. V. S. Sarma
Professor of Law
PART - II
LAW OF TRANSFER OF PROPERTY
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THE TRANSFER OF PROPERTY ACT, 1882.
ACT No. 4 OF 1882. [17th February, 1882.]
CHAPTER-I
INTRODUCTION
Meaning of Property:-
It has been used in many senses. Property includes all the legal rights
of a person of whatever description. In a narrow sense, property includes
the proprietary rights of a person and not his personal rights. Proprietary
rights constitute his estate or property and personal rights constitute his
status or personal condition. In this sense, the land, chattels, shares and
debts due to a person are his property but not his life or liberty or
reputation.
Kinds of Property:-
Property is essentially of two kinds: Corporeal and incorporeal.
Corporeal property can be further divided into movable and immovable
property and real and personal property. Incorporeal property is of two
kinds: rights in re propria and rights in re aliena or encumbrances.
Corporeal Property:-
Corporeal Property is also called tangible property. It relates to
material things. The right of ownership of a material thing is the general,
permanent and inheritable right of the user of the thing.
Kinds of Corporeal Property:-
It is of two kinds. Moveable and Immoveable property. Land is
immoveable property and chattels are moveable property.
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Incorporeal Property:-
Incorporeal Property is intangible property. It is also called intellectual or conventional
property.
Kinds of incorporeal Property:-
Incorporeal Property is of two kinds - Viz., rights in re propria and rights in Re
aliena. Rights in re propria are those rights of ownership in ones own property which
are not exercised over material objects. Generally, the law of property deals with
material objects. However, in some cases, ownership of some non-material things
produced by human skill and labour is recognized as property. The most important of
such rights are patents, literary copyright, artistic copyrights, musical and dramatic
copyright, commercial goodwill, trade marks and trade names.
Rights in Re Aliena:-
Rights in re aliena are known by the name of encumbrances. They are rights in rem
over- a res owned by another. Such rights run with the res encumbered. They bind the
res in whomsoever hands it may pass. Encumbrances are the rights of a particular user
as distinguished from ownership which is right of general user. Encumbrances prevent
the owner from exercising some definite rights with regard to his property. The main
kinds of encumbrances are leases, servitudes, securities and trusts.
a) L LL LLeases eases eases eases eases:- :- :- :- :- A lease is an encumbrance giving a right to the possession and use of
the property of another person. It is the transfer of a right to enjoy certain property.
b) Servitudes Servitudes Servitudes Servitudes Servitudes:- :- :- :- :- A servitude is that form of encumbrances which consists in a right
to the limited use of a piece of land without possession of it. When a person
secures exclusive possession of a piece of land without getting its ownership, it is
called lease. When a person acquires the right to use that land in some definite
way without getting either its ownership or possession, then he acquires only
servitude. Generally servitudes exist with respect to land only. Examples of
servitudes are the right of way across the land of somebody, the right of light and
air, the right of view of prospect, the right of the public to pass across a land, right
of pasturage, right of recreation on a piece of land, right of fishing, public right of
navigations.
c) Securities Securities Securities Securities Securities:- :- :- :- :- A security is a possession such that the grantee or holder of the
security holds as against the grantor a right to resort to some property or some
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fund for the satisfaction of some demand, after whose satisfaction the balance of
the property or fund belongs to the grantor. According to Salmond, securities are
of two kinds. They are mortgage and lien.
d) T TT TTrust rust rust rust rust:- :- :- :- :- A trust is an obligation annexed to the ownership of property. It arises out
of a confidence reposed in and accepted by the owner or declared and accepted
by him for the benefit of another, or of another and the owner. The persons for
whose interest trusts are created are infants, lunatics, unborn persons, etc.
Modes of Acquisition of Property:-
There are four modes of acquisition of property. Those are a) possession, b)
prescription c) agreement and d) inheritance.
a) P PP PPossession ossession ossession ossession ossession: - If property belongs to no body, the person who captures it and
possesses it has a good title against the whole world. In this way, the birds of the
air and the fish of the sea are the property of that person who first catches them.
According to Salmond prescription may be defined as the effect of lapse of time
creating and destroying rights.
b) Agreement Agreement Agreement Agreement Agreement: - Another method of acquiring property is by means of an agreement.
There is a general rule that the title of the transferee by agreement cannot be
better than that of the transferor. This is due to the fact that no man can transfer
a better title than what he himself possesses.
c) Inheritance Inheritance Inheritance Inheritance Inheritance:- Another method of acquiring property is by means of inheritance.
When a person dies, certain rights survive him and pass on to his heirs and
successors. There are others rights which die with him. Those rights which survive
him are called heritable rights. Those rights which do not survive him are called
uninheritable rights. Proprietary rights are heritable as they possess value. Personal
rights are not inheritable as they constitute merely his status.
Succession to the property of a person may be either testate or intestate. It may
be by means of a will or without a will. If there is a will, succession takes place
according to the terms of the will. If there is no will, succession takes place by the
operation of law. If there are no heirs at all, the property goes to the State.
Legal Rights and Duties:-
The terms wrong and duty are closely connected with rights and it is desirable to
refer to them before discussing the important subject of legal rights.
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Legal Wrong:-
According to Salmond A wrong is simply a wrong act an act contrary to the rule
of right and justice. A synonym of it is injury, in its true and primary sense of injuria,
though by a modern perversion of meaning this term has acquired the secondary sense
of harm or damage whether rightful or wrongful and whether inflicted by human agency
or not.
Wrongs are of two kinds, legal or moral. The essence of a legal wrong is that it is
a violation of justice according to the law- not the manner in which the guilty are
treated. It is a legal wrong if a debt is not paid within the period of limitation. A moral
wrong is an act which is morally or naturally, wrong. It is contrary to the rule of natural
justice. It is a moral wrong to disobey ones parents. A legal wrong need not be a
moral wrong and vice versa.
Duty:-
According to Salmond A duty is an obligatory act that is to say, it is an act opposite
of which would be a wrong. Duties and wrongs are correlatives. The commission of a
wrong is the breach of a duty and the performance of a duty is the avoidance of
wrong.
Duties are of two kinds, legal and moral. A legal duty is an act the opposite of
which is a legal wrong. It is an act recognized as a duty by law and treated as such for
the administration of justice. A moral or natural duty is an act the opposite of which is
a moral or natural wrong. A duty may be moral but not legal, or legal but not moral, or
both at once. In the case of England, there is a legal duty not to sell or have for sale
adulterated milk knowingly. There is no legal duty in England to refrain from offensive
curiosity about ones neighbours even if its satisfaction does them harm. There is a
moral duty but not a legal duty. There is both a legal and moral duty not to steal.
Duties may be positive or negative. When the law obliges us to do an act, the duty
is called positive. When the law obliges us to forbear from doing an act, the duty is
negative. If P has a right to a land, there is a corresponding duty on persons generally
not to interfere with his exclusive use of the land. Such a duty is a negative duty. It is
extinguished only if the right itself is extinguished. If T owes a sum of money to A, the
latter is under a duty to pay the amount due. This is a positive duty. In the case of
positive duties, the performance of the duty extinguishes both duty and rights but a
negative duty can never be extinguished by fulfillment.
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Duties can also be primary and secondary. Primary duties are those which exist per
se and independently of any other duty. An example of a primary duty is to forbear
from causing personal injury to another. A secondary duty is that which has no
independent existence but exists only for the enforcement of other duties. An example
of a secondary duty is the duty to pay a man damages for the injury already done to his
person. It is also called a remedial, restitutory or sanctioning duty.
Definition of Legal Right:-
According to Salmond A right is an interest recognized and protected by a rule of
right. It is any interest, respect for which is a duty and disregard of which is a wrong. A
legal right must obtain not merely legal protection, but also legal recognition.
Essentials of Legal Right:-
According to Salmond, every legal right has five essential elements:-
i) There must be a person who is the owner of the right. He is the subject of the legal
right. He is sometimes described as the person of inherence.
ii) A legal right accrues against another person or persons who are under a
corresponding duty to respect that right. Such a person is called the person of
incidence or the subject of the duty.
If A has a particular right against B, A is the person of inherence and B the subject
of incidence.
iii) Another essential element of a legal right is its content or substance. It may be
an act which the subject of incidence is bound to do or it may be forbearance on
his part.
iv) Next essential element is the object of the right. This is the thing over which the
right is exercised. This may also be called the subject-matter of the right.
v) Another essential element of a legal right is the title to the right. Facts must show
how the right is vested in the owners of the right. That may be by purchase, gift,
inheritance, assignment, prescription, etc.
Relation Between Legal Right and Legal Liberty:-
Liberty or privilege denotes the absence of restraint. It is a legal freedom on the part
of one person as against another to do a given act or a legal freedom not to do a given
act. In liberty, the prominent idea is the absence of restraint while protection for the
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enjoyment of that liberty is the secondary idea. Right denotes the protection and connotes
the absence of restraint.
Right and Power:-
A power is an ability on the part of a person to produce a change in a given legal
relation by doing or not doing a given act. When a person speaks of a testamentary
power, it means that he has the ability to make a will and thereby dispose of his property.
A power of appointment enables a person to dispose of the property of another for his
own benefit or that of others. In the case of power, there is no correlative duty imposed
on another. In this respect, power differs from right and resembles liberty. The distinction
between liberty and power consists in the fact that liberty is what one may do innocently
without committing a wrong while power is what one may do effectively and validly.
Powers and Immunity:-
Exemption from the power of another is immunity. The correlative of immunity is
disability. A foreign sovereign enjoys immunity from legal proceedings in our courts.
Immunity stands to power in much the same relation as liberty is to right. Liberty arises
from the absence of a right in another and the absence of a duty in oneself. Immunity
arises from the absence of a power in another and the absence of liability in oneself.
Ownership:-
According to Salmond Ownership, in its most comprehensive signification, denotes
the relation between a person and right that is vested in him. That which a man owns is
in all cases a right. Every right is owned, and nothing can be owned except a right.
Ownership is a relation between a person and any right that is vested in him. That
which a man owns is a right and not a thing. To own a piece of land means to own a
particular kind of right in the land.
Essentials of Ownership:-
1) The first essential of ownership is that it is indefinite in point of user.
2) Another essential of ownership is that it is unrestricted in point of disposition.
3) That owner has a right to possess the thing which he owns. It is immaterial whether
he has actual possession of it or not.
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4) Another essential of ownership is that the owner has the right to exhaust the thing
while using it, if the nature of the thing owned is such.
5) The last essential of ownership is that it has a residuary character. The owner may
part with several rights in respect of the thing owned by him. In spite of that, he
continues to be the owner of the thing in view of the residuary character of
ownership.
6) The owner has the right to destroy or alienate the thing he owns.
Possession:-
According to Salmond in the whole range of legal theory, there is no conception
more difficult than that of possession.
Many important legal consequences flow from the acquisition and loss of possession.
Possession is the prima facie evidence of the title of ownership. Transfer of possession is
one of the chief modes of transferring ownership. The first possession of a thing which
as yet belongs to no one is a good title of right.
Essential Elements of Possession:-
There are two elements of possession and those are the corpus of possession and
animus or the intention to hold possession. Thees two elements must be present in a
case of possession and neither of them alone is sufficient to constitute possession.
Corpus of Possession:-
By corpus is meant that there exists such physical power or physical contact of the
possessor in relation to the thing possessed so as to give rise to the reasonable assumption
that other people will not interfere with it.
The corpus of possession can be considered under two heads: the relation of the
possessor to the other persons and the relation of the possessor to the thing possessed.
When a man possesses a thing it means that others shall not interfere with the use of
that thing;
The next element in the corpus possession is the relation of the possessor to the
thing possessed. All that is necessary is that the possessor must have the physical power
of dealing with the thing exclusively as his own.
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Animus Possidendi or the Subjective Element in Possession: -
It is the intent to appropriate to oneself the exclusive use of the thing possessed.
The animus possidendi is the conscious intention of individual to exclude others from
the control of an object. According to Inhering, possession is the objective realization
of ownership. It is the external realization of ownership. It is a valuable piece of evidence
to show the existence of ownership. It is the de facto exercise of a claim while ownership
is the de jure recognition of that claim. Possession is the de facto counterpart of
ownership. According to Salmond ownership without possession is like a soul without
a body. So to claim ownership in any particular thing possession is very important and
it may be either actual or constructive.
Title:-
The term title is derived from the term Titulus of Roman Law and Titre of French
Law. According to Salmond, title is the fifth element of a legal right. To quote him
Every legal right has a title, that is to say, certain facts or events by reason of which the
right has become vested in its owner. Legal rights are created by title. A person has a
right to a thing because he has a title to that thing. The title is the de facto antecedent
of which the right is the de jure consequent. A person may acquire right on account of
his birth or he may acquire the same by personal efforts later on but in both cases title
is essential. Title is the root from which the rights proceed. Title leads to a right.
Titles are of two kinds. They are original or derivative. Original titles are those that
create a right de novo i.e., for the first time, whereas derivative titles are those that
transfer an existing right to a new owner. Thus, a fisherman catching fish is an instance
of an original title of the right of ownership, as before him, the right did not exist in
anyone else. However, when the fisherman sells such fish, the buyer acquires a derivative
title. In legal theory, no new right is created. That right which is acquired by the purchaser
is identical to the one lost by the fisherman, the vendor.
Facts establishing title are of three kinds.
They are a) Vestitive b) Investitive and c) Divestive.
a) V VV VVestitive F estitive F estitive F estitive F estitive Facts acts acts acts acts: - A vestitive fact is one which determines positively or negatively,
the vesting of a right in its owner. It is one which either creates or destroys or
transfer rights. If A gifts a house to B, As right to ownership in the house is
divested, this right then vests in B. These two are thus what Salmond calls vestitive
facts.
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b) Investitive F Investitive F Investitive F Investitive F Investitive Facts (T acts (T acts (T acts (T acts (Titles) itles) itles) itles) itles):- An investitive fact is the defacto antecedent of which the
right is the de jure consequence. An investitive fact is also commonly called Title.
In other words, every right involves a title or source from which it is derived.
Thus, an investitive fact is one which shows how the right in question came to be
created or vested. Thus, a right may be vested in X by the law, as for example,
when he enjoyed such right because he is a judge of High Court or Member of
Parliament. Again, it may vest in him by the will of parties to a contract. Thus, X
may be given certain rights over Ys property under an agreement between X and
Y. In the former case, i.e., when the right is conferred by the State, the investitive
fact is also called a privilege, where as in two latter cases, the term title is more
familiarly used.
c) Divestitive F Divestitive F Divestitive F Divestitive F Divestitive Facts acts acts acts acts: - Just as facts create rights, so do they also take them away.
Divestitive facts are those which either destroy rights or transfer them to some one
else.
Divestitive facts are of two kinds, viz., extinctive and alienative. They are extinctive
when they divest a right by completely destroying it. The surrender of a lease to
the lessor, for example, divests the right of the lessee by destroying the lease, and
therefore, it is an extinctive fact.
Divestitive facts are alienative when they divest an owner of his right by transferring
it to somebody else. Thus in the above example, instead of surrendering the
lease, transferred it to a sub-lessee, such a transfer would have been alienative
fact. It may be noted that vestitive and divestitive facts are the opposite of each
other. If X sells a book to Y, the right is divested from X and is vested in Y.
An original title is one in which a right is created de novo, i.e., for the first time. A
derivative title is one in which there is some transfer of an original right, so that its
owner gets divested the moment the transferee gets the right. It means that the
transferee derives his title from a derivative title. Thus, if A builds a house himself,
he acquires an original title to it, but if he purchases a house from someone else,
his title is derivative.
Derivative titles are alienative or extinctive. Thus, if a person alienates his property
by sale, the one who purchases that property gets a derivative title by reason of
such sale. But in case of a debt, if the debtor pays up the debts, the creditors
right against him is extinguished by such payment. It means that the right which
the creditor has, now been extinguished as a result of the debtor performing his
legal duty.
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An Act to amend the law relating to the Transfer of Property by act of Parties.
Preamble
Whereas Whereas Whereas Whereas Whereas it is expedient to define and amend certain parts of the law relating to the
transfer of property by act of parties; it is hereby enacted as follows:
Preamble:-
The preamble to the Act lays down that it is an Act meant to define and amend the
law relating to Transfer of Property by act of Parties. It does not deal with the transfer of
property by operation of law i.e., from dead man to living person.
Objects of the Transfer of Property Act:-
The chief objects of the Transfer of Property Act are two: firstly, to bring the rules
which regulate the transmission of property between living persons into harmony with
the rules affecting its devolution upon death and thus to furnish the complement to the
work commenced in framing the law of intestate and testamentary succession; and
secondly, to complete the Code of Contract Law, so far as it relates to immovable
property.
The Act merely defines certain expressions used in relation to transfer of property
and amends the then prevailing rules governing the same. It therefore does not purport
to introduce any new principles of law. One of the basic objectives of the Act was to
bring in harmony the rules relating to transfer of property between living persons and
those applicable in case of devolution of the same, in the event of the death of a
person, through intestate and testamentary succession. The Act also seeks to complete
the law of contract, as most of the transfers primarily arise out of a contract between the
parties. The Act has also, by providing for the compulsory registration of the transfers,
changed the nature of a transfer of property from private to a public affair.
Act not Exhaustive:-
The Act is not, and does not purport to be an exhaustive enactment. In other words,
it does not contain the whole law on the subject of property. This means that it does not
cover the entire law relating to transfer of property but deals with certain aspects only.
The fact that it is not exhaustive is also apparent from the language that is used in the
Preamble. Unlike the Indian Evidence Act, 1872 that uses the term consolidate, hinting
at the completeness of the subject dealt with under the Act, the present Act seeks to
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define and amend only certain parts of the law relating to transfer of property and not
all areas or all parts of this branch of law. One of the consequences of the Act not
being exhaustive, is that if a particular situation is not covered by any provision of the
Act, the courts in India are empowered to settle the same by applying the rules of
equity, justice and good conscience or even with the help of English cases on the
relevant aspects, but only when the same is not prohibited by any statutory provision of
India. However, where the issue is expressly covered by the Transfer of Property Act, or
by any other Indian Statute, the Indian courts have no such power.
Scope of the Act:-
The Act is limited to the transfer of property by act of parties as distinguished from
a transfer by operation of law, e.g., in case of inheritance, insolvency, forfeiture, or sale
in execution of decree. It relates to transfers of property inter vivos, i.e., voluntary
transfers between living persons and has no application to the disposal of property by
will.
The Act applies only to transfers inter vivos, i.e., transfers by one living person to
another living person. Transfer of Property is always either by act of parties or by
operation of law. If X sells or mortgages or gifts away his house, it is a case of voluntary
transfer by act of parties. But if X becomes an insolvent, his property vests in the Official
Assignee or Receiver, whether X likes it or not. So also, if Xs property is sold in execution
of a decree against him, it would be a case of a transfer much against the will or desire
of X. This is, therefore, known as transfer by operation of law.
Transfer by act of parties is of two kinds.
i) Transfer of inter vivos, and
ii) Transfer by will, i.e., testamentary dispositions of property.
Thus, if X sells his property to Y, it is a case of transfer between living persons. If the
property is movable, the Sale of Goods Act will apply, and if it is immovable, the
Transfer of Property Act will govern the case. If however X bequeaths his property to Y
under his will, Y will get nothing as long as X is living, but as soon as X dies, Y will get
the property. It is, therefore, sometimes said that this is really a gift from the dead to the
living. This is known as testamentary disposition of property. Transfer inter vivos is
governed by the Transfer of Property Act if the property transferred is movable or
immovable. Transfer by Will is known as testamentary disposition of property (whether
movable or immovable), is governed by the Indian Succession Act. Therefore, the Transfer
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of Property Act relates to the transfer of property inter vivos and has no application to
the disposal of property by will. It does not deal with cases of succession.
The scope of this Act is limited to transfer of property by act of parties in the life
time. It does not cover transfer by operation of law e.g., in forfeiture or sale in execution
of a decree, in case of insolvency, in a transfer by will (AIR 1922, Mad.457) and in a
case of succession (Kishore v. Krishna Kamini 37 Cal. 377) and in a transfer made by
or on behalf of the Government (Dwaraka Prasad v. Kathlen I.L.R. 1955 Nag. 538).
Beside these limitations section 2 of this Act saves the rules of Muslim Law in so far
as they are inconsistent with any of the provisions contained in Chapter II. Further
section 129 of the Act provides that nothing in Chapter VII of the Act applies to Muslim
Law.
Thus we can say that this Act is not exhaustive, it can not be called a complete
code. It did not introduce new principles. The result of the Act being not exhaustive is
that where any case is not covered by any provisions of this Act, the Court as a court of
equity is entitled to apply the principles laid down in English or Indian cases which are
not distinctly prohibited by Statute. (Maharaja of Jaipur v. Rukmini, 42 Mad. 589)
History History History History History: - A complete law with regard to transfer of immovable property was
introduced in India in a codified form, first time in the year 1882. Before passing this
Act, this subject was governed by the principles of justice, equity and good conscience
and English Law. Though there were some Regulations and Acts passed by the
Governor General in Council but in the absence of a statutory provision upon a point
the Courts had to follow English Law or Equity. So the case law became confused and
conflicting. To remove this, a commission was appointed in England to prepare a
substantive law of Transfer of Property for India.
Legislative Competence:-
Transfer of Property other than of agricultural land, is a subject specified in the
concurrent list. The Constittion of India under its seventh schedule by virtue of Entry 6
of List III empowers both the States, as well as the Parliament, to frame laws on this
topic. As far as agricultural land is concerned, the States alone are empowered to
legislate on the same by virtue of Entry 18 List III of the seventh Schedule of the Constitution
of India, and in cases where there is a conflict, a State law relating to transfer of
agricultural land can override a parallel conflicting provision of the Transfer of Property
Act 1882. The State, therefore, has the power to make special provisions or rules with
respect to the transfer of agricultural property which may include registration, or
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prohibiting persons from alienating such land, including a power to frame rules with
respect to reopening of such transfers or alienations.
The Act contains 137 sections .These 137 sections are divided into 8 chapters.
Ch I Preliminary of Ss 1 4
Ch II Of transfer of property Ss 5 53A
Ch III Of sale of immovable property 54 57
Ch IV Of mortgages of immovable property and charges 58 - 104
Ch V Of the leases of immovable property 105 - 117
Ch VI Of exchanges 118 - 121
Ch VII Of gifts 122 129
Ch VIII Of transfer of actionable claims 130 - 137
Ch VII is not applicable to Muslim law.
Preliminary (Ss 1 4)
Section 2. Application of the Act:-
SAVING OF CERTAIN ENACTMENTS, INCIDENTS, RIGHTS, LIABILITIES, etc.:-
In the territories to which this Act extends for the time being the enactment specified
in the Schedule hereto annexed shall be repealed to the extent therein mentioned. But
nothing herein contained be deemed to affect
a) the provisions of any enactment not hereby expressly repealed;
b) any terms or incidents of any contract, or constitutions of property which are
consistent with provisions of this Act, and are allowed by the law for the time
being in force;
c) any right or liability arising out of a legal relation constituted before this Act
comes into force, or any relief in respect of any such right or liability; or
save as provided by section 57 and Chapter IV of this Act, any transfer by operation
of law or by, or in execution of, a decree or order of a court of competent
jurisdiction;
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and nothing in the second chapter of this Act shall be deemed to affect any rule
of Mohammedan law.
The Act expressly repeals the enactments specified in the schedule but saves the
provisions of any enactment that has not been so repealed.
Chapter II of the Act does not apply to transfer of property among Muslims, in so
far as there is a contrary provision under Muslim Law. The rule is not that the
Transfer of Property Act does not apply to Muslims, but the rule is that if there is a
rule of Muslim Law at variance or different from that specified under the Transfer
of Property Act, it is the Muslim Law that would prevail. However, if there is no
contrary or inconsistent rule under Muslim Law, Muslims would be subject to the
provisions of this chapter as well. Notable in this part are the rules with respect to
gifts and settlement of property in perpetuity. Under the general rules specified in
the Transfer of Property Act, a gift of immovable property must be executed with
the help of a written, attested and registered gift deed. The delivery of possession
of the property is not an essential requirement to the validity of the gift, and will
depend upon the contract between the parties. Under Muslim Law, however, a
gift of immovable property can be effected orally, and generally, the gift is not
valid unless it is followed by immediate delivery of possession of the property.
Sec 3:- Immovable property:-
The Act has not defined this term. Sec 3 merely lays down that immovable property
does not include standing timber, growing crops or grass.
The definition of immovable property given in section 3 is a negative one and is
neither comprehensive nor exhaustive. Thus we can say the following things are
immovable property-
a) Land
b) Benefits to arise out of land
c) Things attached to earth.
d) Some things judicially recognized to be immovable property.
Land: - It includes the following elements-
a) A determinate portion of the earths surface.
b) Possibly the column of space above the surface
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c) All objects which are on or under the surface in its natural state e.g., minerals.
d) Buildings, walls and fences.
Benefit to Arise out of Land:-
The Registration Act includes in the term immovable property, the words namely-
benefits to arise out of land, hereditary allowances, right of way, lights, ferries and
fisheries. A debt decreed by a mortgage of immovable property is also immovable
property.
Things Attached to the Earth:-
It includes things rooted in the earth e.g., trees bearing fruits, things imbedded in
the earth e.g., an anchor imbedded in the land to hold a ship, things attached to what
is so imbedded, for example doors and windows, chattel attached to earth or building.
General Clauses Act, 1897.
Immovable property shall include land, benefit to arise out of land, things attached
to the earth or permanently fastened to any thing attached to the earth; Sec 3(25).
Registration Act, 1908 :-
Immovable property includes land buildings, hereditary allowances right to way,
lights, ferries, fisheries or any other benefits to arise out of land and things attached to
earth, but do not include standing timber, growing crops or grass.
Immovable property includes:
(a) Right to collect rent of immovable property
(b) Right to fishery
(c) Office of a hereditary priest of a temple
(d) Right to collect lac from trees
(e) Mortgagors right to redeem
f) A right of ferry
g) A right of way
h) A right of easement
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i) The equity of redemption
j) A right to severe and collect leaves of the tendu trees.
k) A pension or periodical payment or allowance, granted in permanence.
On the other hand the following are not immovable property:-
a) A right of worship
b) A royalty
c) A decree for sale of immovable property
d) A decree for arrears of rent
e) A right to recover maintenance allowance
f) Standing timber, growing crops and grass.
Attached to the earth :- It means
(a) Rooted in the earth , as in the case of trees and shrubs ; or
(b) imbedded in the earth , as in the case of walls or buildings; or
(c) attached to what is so imbedded for the permanent enjoyment of that to which it
is attached ( doors , windows etc.) quicquid plantatur solo, solo cedit- what is
planted on the soil belongs to the soil.
Sec 3 Attested :
Attested , in relation to an instrument , means , and shall be deemed always to
have meant , attested by two or more witnesses each of whom has :-
(i) a) seen the executant sign or
b) affix his mark to the instrument
or
(ii) c) seen some other person sign the instrument in the presence of, and by the
direction of the executant; or
d) Received from the executant, a personal acknowledgement of his signature
of such other person, and
e) signed the instrument in the presence of the executant.
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It is not at all necessary that all the witnesses should be present at the same time.
No particulars form or attestation is necessary.
To attest means to sign and witness any fact viz., the fact of execution by the
executants.
In Kaderbhai Ismailji v Fatmalbhai Golamhusain (1944) A.B. 25 it was held that a
mere signature is sufficient. It may be made at any place on the document.
There is no particular form prescribed in the Act for a valid attestation. An attesting
witness need not be formally described as such on the face of the document. It may be
in any form.
It cannot, however, take place before the execution of the deed. The lone requirement
is that the witness must sign in the presence of the executant. If the executant was not
present when the witness signed the document, attestation would not be valid. It is not
necessary that more than one of such witnesses should be present at the same time.
Status of An Attesting Witness:-
An attesting witness merely testifies that the executant of the document signed the
document in his presence. He is not supposed to know the contents of the document
which is executed by the executant. (Sarkar Shah v. Abdullah Shah AIR 1963 J & K 14.)
Who can Attest:-
In M.N.Abdul Jabbar v H. VenkataSastri and sons. AIR 1966 S.C. 1147 it was held
that such signatures can only amount to a valid attestation if the attesting witnesses had
put their signatures with the intention to attest. The court further held that ordinarily the
registering officer puts his signature in the performance of his statutory duty and not
with an intention to attest.
In this Act no qualification is prescribed to become an attesting witness. Any person,
whether literate or illiterate is competent to attest the document. The only requirement
is that the attesting witness must put his signature for the purpose of attesting the
signature.
Since the object of the attestation is to provide protection against fraud and undue
influence, therefore it is necessary that it must be attested by a person who is not a party
to the transaction. A scribe, i.e., writer of the deed who has signed on behalf of a party
cannot be an attesting witness because that would amount to attestation of his own
signature.
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In Bhagavat v Gorakh. AIR 1934 Pat 34 it was held that the witness need not know
the contents of the document.
If the Attestation is invalid, the documents cannot be enforced in the court of law.
As a general rule every document which is required to be registered must be attested
by at least two witnesses.
Notice: Notice: Notice: Notice: Notice: - Kinds of notice:-
Section 3 of the Act lays down that under what circumstances a person is said to
have notice of fact. He may himself have actual notice or he may have constructive
notice, when information of the fact has been obtained by his agent in the course of the
business transacted by the agent for him.
(1) Actual or express notice
(2) Constructive or implied notice.
(a) Willful abstention from an enquiry or search
(b) Gross negligence
(c) Registration
(d) Actual possession
(e) Notice to agent
Express or Actual Notice:-
An express or actual notice of a fact is a notice whereby a person acquires actual
knowledge of the fact. It must be definite information given by a person interested in the
thing.
Constructive Notice:-
It is a notice which treats a person, who ought to have known a fact, as if he
actually does not know it. A person is said to have constructive notice of all facts of
which he would have acquired actual notice had he made those inquiries which he
ought reasonably to have made. It is a legal presumption. It arises as under:-
a) W WW WWillful abstention illful abstention illful abstention illful abstention illful abstention- The words wilful abstention are said to be such absention
from inquiry or search as would show want of bona fides in respect of a particular
transaction, for example, A refuses a registered letter, which contains certain
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information relating to property which A proposes to purchase. A will be deemed
to have notice of the contents of the letter.
b) Gross Negligence Gross Negligence Gross Negligence Gross Negligence Gross Negligence- Gross Negligence may be stated to be the omission to do
some thing which a reasonable man, guided by those consideration which
ordinarily regulate the conduct of human affairs would do or doing something
which a prudent and reasonable man would not do.
c) R RR RRegistration egistration egistration egistration egistration- Registration operates as notice in the following cases-
a) The instrument should be compulsorily registrable. If it is not required by law
to be registered, its registration does not amount to notice.
b) The instrument should be registered in the manner prescribed by the Indian
Registration Act, 1908. It should be entered into the books kept under sec.51
of the Act and its particulars correctly entered in the indices under sec. 55.
c) The person affected with notice should have acquired his interest subsequent
to the registration. The registration of a sub-mortgage does not amount to
notice to the mortgagor.
d) Possession- It is the general rule that it should be deemed as constructive
notice of the rights of a person in possession.
e) Notice to Agent Notice to Agent Notice to Agent Notice to Agent Notice to Agent- The knowledge of the Agent is the knowledge of the principal.
The notice should have been received by the agent i) as an agent ii) during
the agency iii) in the course of agency business iv) in the matter material to
the agency business. However, there is an exception to this rule. The
knowledge of the agent will not be imputed to his principal if the agent
fraudulently conceals the fact.
Actionable Claim:-
It means a claim to any debt, other than a debt secured by mortgage of immovable
property or by hypothecation or pledge of movable property or to any beneficial interest
in movable property not in the possession, either actual or constructive of the claimant,
which the civil courts recognize, as affording grounds for relief whether such debt or
beneficial interest be existent, accruing, conditional or contingent.
Illustrations:
1. A owes Rs.5, 000/- to B, Bs claim is an actionable claim.
2. A borrows Rs.500 from B and mortgages his house to him. The mortgage debt is
not an actionable claim.
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Some instances of actionable claim:-
a) Claim for arrears of rent
b) Claim of benefit arising out of a contract for the purchase of goods.
c) A share in partnership.
d) A claim to money due under an insurance policy.
e) A right to proceeds of the business
f) A claim for return of earnest money.
g) A right to receive money for license given to another to remove back from
the licensors trees is transferable.
h) Usufructuary mortgagees liability to pay to the mortgagor the balance left
after paying the mortgagors creditors.
i) Both ordinary and endowment life policies
j) Provident fund amount payable after retirement and not presently.
k) A decree
l) The right to recover damages for breach of contract.
m) A claim to mesne profits
n) A copy right
o) A right to recover profits from the co-shares
p) A debt secured by mortgage of immovable property or hypothecation of
movable property.
Transfers Governed by the Act:-
It deals with the transfer by act of living persons. According to this Act a property
can be transferred by the following ways-
1) Sale
2) Mortgage
3) Charge
4) Lease
5) Exchange
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6) Gift
7) Actionable Claims
1) Sale Sale Sale Sale Sale: - Sections 54 to 57 relate to sale of immovable property. Sale of
movable property is not governed by this Act; this is governed by Sale of
goods Act, 1930.
2) Mortgage Mortgage Mortgage Mortgage Mortgage: - Sections 58 to 98 relate to mortgage of immovable property.
This chapter of mortgage deals with six kinds of mortgages.
3) Charge Charge Charge Charge Charge: - Section 100 and 101 relate to charge upon immovable property.
Charge is security for the payment of money, not by way of mortgage of
immovable property. This Act deals with charges by act of parties only.
4) L LL LLease ease ease ease ease: :: :: - Lease of immovable property can be made according to the provisions
of sections 105 to 117 of the Act.
5) Exchange Exchange Exchange Exchange Exchange: - Sections 118 to 121 deal with exchanges of immovable as well
as of movable property.
6) Gift Gift Gift Gift Gift: - Sections 122 to 129 of the Act deal with the provisions of gifts of
immovable and also of movable property.
7) A AA AActionable Claims ctionable Claims ctionable Claims ctionable Claims ctionable Claims: - Transfer of Actionable Claims of both immovable and
movable property is explained by this Act from sections 130 to 137.
Transfers Not Governed by this Act:-
This Act deals with the transfer by act of parties and transfer inter vivos. Therefore
some other transfers which are not between living persons or which are not created by
act of parties are not governed by the provisions of this Act. These transfers are as
follows:-
a) Transfer by a will or a testamen
b) Transfer on the death of a person
c) Transfer by way of trust.
d) Transfer by operation of law.
e) Transfer of Goods where of Sale of Goods Act, 1930 applies.
f) Transfer in cases of partition between the members of a Hindu undivided family.
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CHAPTER-II
OF TRANSFER OF PROPERTY BY ACT OF
PARTIES. (Ss 5 53A)
(A)Transfer of property whether movable or immovable.
Sec. 5:- T Sec. 5:- T Sec. 5:- T Sec. 5:- T Sec. 5:- Transfer of property:- ransfer of property:- ransfer of property:- ransfer of property:- ransfer of property:-
An act by which a living person conveys property , in present or in
future , to one or more other living persons , or to himself and one or
more others living persons, and to transfer property is to perform such
act.
In this section living person includes a company or association or
body of individuals, whether incorporated or not; but nothing herein
contained shall affect any law for the time being in force relating to
transfer of property to or by companies, associations or bodies of
individual.
T TT TTransfer ransfer ransfer ransfer ransfer:- :- :- :- :- This word has also been used in a wide sense. It may
mean transfer of all the rights and interests in the property or transfer of
one or more of subordinate rights in the property.
Thus the term transfer of property is a transaction which has the
effect of conveying property from one living person to another. Conveying
of the property involves the creation of new title or interests in favour of
the transferee.
Essentials of a valid transfer:- Essentials of a valid transfer:- Essentials of a valid transfer:- Essentials of a valid transfer:- Essentials of a valid transfer:-
i) The property must be transferable. S.6
ii) The transferor must be competent to transfer. S.7
iii) The transferee must be competent. S.6(h)(3).
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iv) The consideration and object must be lawful. S.6(h)(2).
v) The transfer must not be opposed to the nature of the interest affected thereby.
vi) The transfer must be made in the manner and in the form required by the Act, if any.
Compromise:-
A mere compromise does not amount to transfer. (AIR 1996.S.C.869). Compromise
means agreement for the settlement of doubtful claims between the parties in respect
of some property. Like family settlement here too the titles or interests of the parties are
antecedent or already existing; the compromise deed simply defines them. Since there
is no conveyance, a compromise deed is not a deed of transfer.
Family Settlement:-
Family Settlement or Family Arrangement is not a transfer of property. In a joint-
family property all the members, have their specific shares but they are not separated
and are held co-jointly by all of them. When a family settlement takes place, the already
existing specific shares of the members of the family are defined and separated in order
to avoid any possible dispute. Thus, in a family settlement there is a mutual agreement
between the members of a family to hold their respective shares separately. It simply
acknowledges and defines the title of each member. In a family settlement since there
is no creation of any new title or interest in favour of any member, there is no conveyance;
therefore, it is not a transfer of property.
Partition:-
Partition is not a transfer of property. Partition means separating the parts of co-
owned property. If in a property there are several co-owners having, under the law, their
respective interests but the whole property is neither used nor enjoyed by them separately
then, after the partition each member gets merely the separate right of enjoyment.
Accordingly, it has been held that partition is really a process by which a joint enjoyment
is transformed into an enjoyment severally, and no conveyance is involved in the process
as the conferment of a new title is not necessary. It simply effects a change in the mode
of enjoyment of property but it is not an act of conveyancing property from one living
person to another. (Chandravathi v. Lakshmi Chand AIR 1988 Del.13).
OF TRANSFER OF PROPERTY BY ACT OF PARTIES. (Ss 5 53A)
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Surrender:-
Surrender is also not a transfer of property within the meaning of section 5 of the
Act. Technically, surrender means merging of a lesser interest with a greater interest in
such a manner that the greater interest is not enlarged. Surrender is therefore falling of
a lesser estate into a greater. Example: Lessee surrendering the leased property to the
lessor.
Release:-
Release is a transfer of property. If a larger interest falls into a smaller interest in
such a way that smaller interest is enlarged then, for the holder of smaller interest there
is creation of new titles or interest. Since some new titles or interest are added to his
already existing interest, there is conveyance hence it amounts to transfer of property.
Relinquishment:-
It means giving up ones rights or interests. Its effect is extinction of ones rights in
a property; there is no intention that the person relinquishing his interest is conveying
that interest in favour of another person. Relinquishment is therefore, not a transfer of
property. Moreover, since relinquishment connotes the extinction of a right therefore,
there is nothing left to transfer so that it may amount to a transfer of property as defined
under section 5 of the Act.
Charge:-
Charge is not a transfer of property. Charge is created on a property for securing
a payment out of that property. When the property of a person is charged for securing
certain payments e.g., maintenance, it is simply securing personal obligation out of his
property. A charge is, therefore, not a transfer because the only right created under it is
a right to payment out of the property subjected to the charge.
Property Situated outside Inida:-
The definition of transfer of property given under section 5 is applicable also to
properties situated outside India or the territories to which the Act is not applicable. It
may be noted that because of its very nature, transfer of immovable property is governed
by the law of the land where the property is situated. But, this does not mean that a
person can not claim rights under the transfer of that property under this Act. However,
his claim is subject to contrary claims or rights of the affected party under the law of the
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land where property is situated. But it is for the affected party to prove that the transfer
is defective or invalid under the law of the land where property situates. (Central Bank
of India v. Nusservanji A.I.R.1932 Bom. 642).
Sec 6:- Sec 6:- Sec 6:- Sec 6:- Sec 6:-What property may be transferred:- What property may be transferred:- What property may be transferred:- What property may be transferred:- What property may be transferred:-
For a valid transfer of property, the property must be a transferable property. As a
general rule, property of every kind may be transferred. But there are certain kinds of
properties the transfer of which is not allowed under the law. Such properties are called
non-transferable properties. Transfer of any non-transferable property is void. It may
be stated, therefore, that transferability of property is the general rule; its non-transferability
is an exception. According to section 6 property of every kind may be transferred. But
the same section says that the following rights can not be transferred:-
a) The chance of an heir-apparent succeeding to an estate , the chance of a relation
obtaining a legacy on the death of a kinsman or any other mere possibility of a
like nature, cannot be transferred.
Anand Mohan v Gaur Mohan 50 Cal.929
b) a mere right of re- entry for breach of a condition subsequent can not be transferred
to anyone except the owner of the property affected thereby.
c) an easement can not be transferred apart from the dominant heritage.
d) an interest in the property restricted in its enjoyment to the owner personally can
not be transferred to him.
e) a right to future maintenance, in what so ever manner arising, secured or
determined, cannot be transferred.
f) a mere right to sue cannot be transferred.
g) a public office can not be transferred, nor can the salary of a public officer
whether before or after it has become payable.
h) Stipends allowed to military, naval, air force and civil pensioners of the Govt. and
political pensions can not be transferred.
i) No transfer can be made (i) in so far as it is proposed of the interest affected
thereby; or (ii)for an unlawful object or consideration within the meaning of
Sec. 23 of the Indian Contract Act, 1872; or
(iii) to a person legally disqualified to be transferee.
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(i) Nothing in the section shall be deemed to authorize a tenant having an
untransferable right of occupancy the farmer of an estate in respect of which
default has been made in paying revenues, or the lessee of an estate, under the
management of a court of wards, to assign his interest as such tenant, farmer or
lessee.
Nitya Gopal v Nanilal 47 Cal.990 it was held that the right of priests to share in
the offerings that may be made in a temple worshippers is a mere possibility and
so inalienable.
Non-transferable under any other law:- Non-transferable under any other law:- Non-transferable under any other law:- Non-transferable under any other law:- Non-transferable under any other law:-
Besides the Transfer of Property Act, there are other law, e.g., Hindu Law, Muslim
Law, Civil Procedure Code etc., which are enforced in India. Under any such law there
are certain properties the transfer of which is prohibited by that law; those properties
are non-transferable also under section 6 of the Transfer of Property Act.
Clause (a): Clause (a): Clause (a): Clause (a): Clause (a): Spes-Successionis:- Spes-Successionis means expectation of succession.
Expectation of succession is expecting or having a chance of getting a property through
succession (inheritance or will). Spes-Successionis is therefore, not any present property.
It is merely a possibility of getting certain property in future. Spes-Successionis under
this clause includes:
i) Chance of an heir-apparent succeeding to an estate
ii) Chance of a relation obtaining a legacy on the death of a kinsman or
iii) Any other mere possibility of a like nature.
Heir apparent is apparently an heir but not legal heir. Heir-apparent is a person
who would be heir in future if he survives the propositus (the deceased whose property
he inherits) and if the propositus dies intestate (without making any will).
Chance of a legacy means expectancy of getting certain property under a will. The
well settled law of wills is that a will operates only after the death of the testator (who
makes the will) not on the date when it is written. Further, it is the last will which prevails
and if two or more wills have been executed in favour of different persons, only the
legatee under the last will is entitled to get the property. Accordingly, where a person
executes any will, before the death of that testator, the legatee has simply a chance of
getting property because i) the legatee may not survive the testator and ii) the will in his
favour might not be the last will. Before a will operates properties in future provided it
is the last will.
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Any other possibility of a like nature would mean any other possible interest or
property which is as uncertain as the chances of an heir-apparent or chance of a
relation of getting property under a will.
Right to receive future offerings:-In Badrinath v. Punna (AIR 1979 SC 1314) It was
held that the right to receive the offerings being coupled with duties other than those
involving personal qualifications, therefore, transferable and could be inherited. It was
held that the right to receive the future offerings at the sacred temple was held to be
heritable right.
Clause (b) Clause (b) Clause (b) Clause (b) Clause (b): Mere right of re-entry:- -- -- It can not be transferred. Under this clause, the
right of re-entry refers to the right of a lessor or landlord to resume possession of the
property from the lessee upon the breach of a condition subsequent.
Clause (c) Clause (c) Clause (c) Clause (c) Clause (c): Easement apart from dominant heritage:-Easement is a right which
exists for the beneficial enjoyment of a land and is exercised upon the land of another
person. The land or tenament (house) for whose beneficial enjoyment this right exists is
called dominant heritage and the land or tenament upon which the right is exercised is
called servient heritage. A who is the owner of a house has a right of way upon the
land owned by B so that he may reach the main road. As house is dominant heritage
and the land of B is servient heritage. As right of way is an easementary right. Although
this right is exercised by A but it exists for beneficial enjoyment of As house; there,
technically, the right is not of A i.e., it is not his personal right but a right attached to the
house. Since this right is part and parcel of this house i.e., dominant heritage, it cannot
be severed or detached from it. Accordingly, although it is a proprietary right and as
such a property yet, its separate transfer is prohibited. So easement cannot be transferred
apart from the dominant heritage.
Clause (d) Clause (d) Clause (d) Clause (d) Clause (d): Restricted interest: - An interest in property restricted in its enjoyment to
the owner personally as been made non-transferable. For example religious offices,
service tenures i.e., right in certain land which is given to a person by way of remuneration
for personal services being discharged by that person, are also non-transferable.
Clause (dd) Clause (dd) Clause (dd) Clause (dd) Clause (dd): Right to future maintenance: - Where a person is entitled to receive
maintenance allowance, it is his personal right because it is given or is promised to be
given in future solely for his own benefit. As such, the right to future maintenance is a
restricted interest which is non-transferable under section 6(d) of the Act.
Clause (e): Clause (e): Clause (e): Clause (e): Clause (e): Mere right to sue: Right to sue for a certain sum of money is actionable
claim. Actionable claim is a claim for a certain amount of money and can be transferred.
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But right to sue for uncertain or indefinite sum of money is not transferable. The right to
claim damages from the wrong-doer is not a claim for any certain or fixed sum of
money and shall come within the meaning of right to sue as given in this clause.
Clause (f): Clause (f): Clause (f): Clause (f): Clause (f): Public office and salary of a public officer:- Under this clause there is
prohibition in the transfer of a public office and the salaries of public officers. The
reason why these interests are non-transferable is, to ensure the dignity to the office
held by a person appointed for qualities personal to him and getting salary for due
discharge of his public duties.
Clause (g): Clause (g): Clause (g): Clause (g): Clause (g): Pensions and stipends: The stipends allowed to military, naval, air force
and civil pensioners of the Government and the political pensions, and cannot be
transferred. These are given to the person concerned because of his past services or
personal merits, therefore, these interests are personal to the recipient. Transferability
of such interests would defeat the very purposes for which these interests exist.
Clause (h): Clause (h): Clause (h): Clause (h): Clause (h): Transfer opposed to Nature of interest etc.:- There are certain properties
which by their very nature can neither be owned nor transferred. For example, air, light,
space, seas are such properties which in their natural form are nobodys property.
Any property which is otherwise transferable shall become non-transferable if the
object or consideration of the transfer is unlawful within the meaning of section 23 of
the Indian Contract Act, 1872.
7. P 7. P 7. P 7. P 7. Persons competent to transfer ersons competent to transfer ersons competent to transfer ersons competent to transfer ersons competent to transfer. .. ..-Every person competent to contract and entitled
to transferable property, or authorized to dispose of transferable property not his own,
is competent to transfer such property either wholly or in part, and either absolutely or
conditionally, in the circumstances, to the extent and in the manner, allowed and
prescribed by any law for the time being in force.
In a valid transfer of property, following essential conditions must be fulfilled.
1) The property must be transferable property.
2) The transferor must be competent.
3) The transferor must also have right to transfer the property being transferred.
4) Transferee must also be competent.
5) Necessary formalities prescribed by law for the transfer must also be completed.
S SS SS.8. Operation of transfer .8. Operation of transfer .8. Operation of transfer .8. Operation of transfer .8. Operation of transfer. .. ..- -- --Unless a different intention is expressed or necessarily
implied, a transfer of property passes forthwith to the transferee all the interest which
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the transferor is then capable of passing in the property, and in the legal incidents
thereof.
Such incidents include, where the property is land, the easements annexed thereto,
the rents and profits thereof accruing after the transfer, and all things attached to the
earth;
and, where the property is machinery attached to the earth, the moveable parts
thereof;
and, where the property is a house, the easements annexed thereto, the rent thereof
accruing after the transfer, and the locks, keys, bars, doors, windows, and all other
things provided for permanent use therewith;
and, where the property is a debt or other actionable claim, the securities therefore
(except where they are also for other debts or claims not transferred to the transferee),
but not arrears of interest accrued before the transfer;
and, where the property is money or other property yielding income, the interest or
income thereof accruing after the transfer takes effect.
Property consists of interests. Interests of the property have several incident or
things appertaining to it. When a property is transferred, there is transfer of the interests
and together with them their incidents also passing on to the transferee. There transferor
need not specify each and every incident which shall pass on to the transferee. But, if
transferor so desires, he may express that a particular interest shall remain with him or
otherwise shall not go to the transferee. However, such intention must be clearly expressed
or be necessarily be implied in the absence of which it is presumed that transfer of the
property passes forthwith to the transferee all the interests which the transferor is then
capable of passing in the property, and in the legal incidents thereof.
9. Oral transfer 9. Oral transfer 9. Oral transfer 9. Oral transfer 9. Oral transfer.- .- .- .- .-A transfer of property may be made without writing in every case
in which writing is not expressly required by law.
This section refers to modes of transfer and provides that where writing is not necessary
under this Act, the property may be transferred orally i.e., without writing any deed.
There are two modes of transfer of property. A) Delivery of possession B) Registration.
Where writing is not necessary under law, the property may be transferred orally.
Where registration is necessary, the transfer must be in writing. When it is required to be
registered under any law, then it should be registered.
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Illegal restrictions on certain alienations: Ss. 10-12 and 17 and 18.
S SS SS.10. Condition R .10. Condition R .10. Condition R .10. Condition R .10. Condition Restraining Alienation estraining Alienation estraining Alienation estraining Alienation estraining Alienation:-Where property is transferred, subject to a
condition or limitation absolutely restraining the transferee (or any person claiming
under him) from parting with or disposing of his interest in the property such condition
or limitation (and not the transfer itself) is void.
Such a condition is, however valid in the following two cases:-
a) in the case if a lease where the condition is for the benefit of the lessor (or those
claiming under him)
b) A transfer to, or for the benefit of , a woman(not being a Hindu, Muslim or
Buddhist, so that she shall not have power, during her marriage to transfer or
change the same.
Right of disposal is one of the essential features of ownership. Section 10 incorporates
the rule that any restriction on the right of disposal would against this essential feature
of ownership rights. Accordingly, section 10 provides that if a transfer is made subject
to a condition by which the transferee is absolutely restrained from disposing of or
parting with his interest in the property, the condition is void. In such cases since the
transferee becomes owner of that property, any restriction limiting his right of disposing
the property would not be binding on him and he would be free to transfer it to anybody
by any means. For example, A makes a gift of his house to B subject to the condition
that B shall not sell it. The condition being an absolute restraint on Bs right of disposal
is void and thus B is not bound by it. If he sells the property, the sale is valid.
Absolute Restraint:-
Under Section 10 only that condition has been declared void which absolutely
restrains the alienation. Restraint on alienation is absolute if it totally takes away or
curtails the right of disposal.
Illustrations Illustrations Illustrations Illustrations Illustrations
a) A sells his house to B on a condition that B cannot transfer this house to anyone
except C. The condition is void because C may be chosen as a person who may
never purchase the property.
There is a partition of a joint family property between A, B, C and D in which they
agree that if any one of them have no issue, he will have no right to sell his share
and leave it for the other sharers. A sells his share and after sometime, dies
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issueless. The condition being absolute restraint on alienation is void. B, C and
D cannot recover the property from the purchaser
Partial Restraint:-
Section 10 is silent about the situation where the restraint is partial. Where the
restraint does not take away the power of alienation of the transferee substantially but
only limits it to some extent, the restraint is partial. A partial restraint is valid and
enforceable. In Muhammad Raza v. Abbas Bandi Bibi (AIR 1932 P.C.158)
Where the condition restricted the transferee from transferring the property to
strangers i.e. outside the family of the transferor, the Privy Council held that the condition
was merely a partial restraint which was valid and enforceable.
Exceptions:-
i) Leases:- Lease is a transfer of limited interest where the transferor (lessor) reserves
the ownership and transfers only the right of enjoyment to the transferee (lessee).
Therefore, a lessor can impose a condition on the lessee that he shall have no
right to sub-lease or assign his interest to another person. Such condition, although
it is a restraint on the lessee against alienation, is valid and he cannot transfer his
interest without the consent of the lessor.
ii) Married Woman: - Where property is transferred to a married woman who is not
a Hindu, Muslim or Buddhist, the transferor can validly impose a condition
restraining alienation. Such condition shall not be void under Section 10. Similar
provisions are laid down in the Married Womens Right to Property Act, 1874
which is applicable to married women who are not Hindu, Muslim or Buddhist.
The personal laws of Hindus, Muslims and Buddhists already provide for the
validity of restraint on alienation of the married women of these communities.
Thus, a property may be transferred to a married Hindu woman for her life with a
condition that she cannot transfer it. Reason behind such a restraint is to safeguard
the interest of the married women who could easily exploited by their unscrupulous
husbands.
11. R 11. R 11. R 11. R 11. Restriction repugnant to interest created estriction repugnant to interest created estriction repugnant to interest created estriction repugnant to interest created estriction repugnant to interest created.- .- .- .- .- Where, on a transfer of property, an
interest therein is created absolutely in favour of any person, but the terms of the transfer
direct that such interest shall be applied or enjoyed by him in a particular manner, he
shall be entitled to receive and dispose of such interest as if there were no such
direction.
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Where any such direction has been made in respect of one piece of immoveable
property for the purpose of securing the beneficial enjoyment of another piece of such
property, nothing in this section shall be deemed to affect any right which the transferor
may have to enforce such direction or any remedy which he may have in respect of a
breach thereof.
R RR RRestraint on Mode of Enjoyment:- estraint on Mode of Enjoyment:- estraint on Mode of Enjoyment:- estraint on Mode of Enjoyment:- estraint on Mode of Enjoyment:-
Section 11, provides that in the transfer of absolute interest of property, if the transferor
imposes any condition restraining the mode of its enjoyment, the condition is void and
the transferee is not bound by that condition. Absolute interest in a property means
ownership. Where a property is transferred absolutely, there is transfer of ownership
and the transferee gets all the incidents of ownership including the right to use or enjoy
the property as he likes.
Section 11 is applicable only where an absolute interest or ownership has been
transferred. Where ownership is transferred, the transferee gets ownership right which
includes the right of enjoyment of the property as he likes. Sale, exchange or gift is a
transfer of ownership or absolute interest. A condition or direction in a sale, exchange
or gift that the transferee can or cannot use or enjoy the property in a particular manner
is repugnant to the ownership rights and is, therefore, void.
i) A sells his agricultural lands to B with a condition that B can cultivate only wheat
but cannot grow the crops of paddy. The condition is void and B is free to grow
the crops of paddy.
ii) A sells a house to B directing B that he cannot reside in it but can use it only as a
godown or shop. The condition being void, B is entitled to use the house as his
residence.
This section is not applicable where the transfer is merely of partial interest in the
property. In the transfer of partial or limited interest, there is no transfer of ownership.
For example, lease is a transfer of merely partial interest in which the lessee gets only
the right of enjoyment of the property not its ownership. Condition imposed by a lessor
restraining the mode of enjoyment of the property is valid and the lessee is bound
by it.
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Exceptions:-
Easements Easements Easements Easements Easements:- :- :- :- :- There is an exception to the above rule. It provides that a condition
or direction restraining the mode of enjoyment may be made by the transferor provided
it is for the beneficial enjoyment of transferors own adjoining property. Thus, if a
person owns two properties say, a house in which he is residing and an adjacent land
he can impose a condition on the purchaser that he would not obstruct the air or light
from the windows of his house which open on the side of the land sold. This condition,
though curtails the right of enjoyment of the purchaser, is a valid condition because it is
meant for the beneficial enjoyment of transferors own property.
S SS SS.12. .12. .12. .12. .12. Condition making interest determinable on insolvency or attempted
alienation.-Where property is transferred subject to a condition or limitation making
any interest therein, reserved or given to or for the benefit of any person, to cease on his
becoming insolvent or endeavoring to transfer or dispose of the same, such condition
or limitation is void.
Nothing in this section applies to a condition in a lease for the benefit of the lessor
or those claiming under him.
Section 12 provides that where a property is transferred subject to a condition or
limitation that the interest created thereby shall cease to exist on transferee becoming
insolvent or on his attempting to transfer it, the condition is void. This section invalidates
two types of conditions: i) conditions which limit or restrict any attempted transfer by the
transferee and ii) conditions which provide that the interest of the transferee shall cease
to exist when the transferee become insolvent.
The object of this section is to protect the interest of the creditors. Although it is
unjust to lay down a condition restricting transferee from disposing of his property, it
would be equally unjust if such transferee is allowed to defeat the interest of his creditor
who had advanced money only on the basis of his property. In the absence of this
provision, the transferee may incur debts and is then adjudged insolvent. The result
would be that creditor can never recover his money because the property would already
cease to be the property of the debtor. Section 12 avoids this situation.
Section 12 is applicable whether the interest transferred is absolute interest or a
partial interest. Thus in the transfer or settlement of an interest for life the condition
that it shall cease to exist upon transferee becoming an insolvent would be a void
condition under this section.
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Direction for accumulation of Income (Ss. 17, 18)
17. Direction for accumulation: 17. Direction for accumulation: 17. Direction for accumulation: 17. Direction for accumulation: 17. Direction for accumulation:- -- --(1) Where the terms of a transfer of property direct
that the income arising from the property shall be accumulated either wholly or in part
during a period longer than
(a) the life of the transferor, or
(b) a period of eighteen years from the date of the transfer,
such direction shall, save as hereinafter provided, be void to the extent to which
the period during which the accumulation is directed exceeds the longer of the
aforesaid periods, and at the end of such last-mentioned period the property and
the income thereof shall be disposed of as if the period during which the
accumulation has been directed to be made had elapsed.
(2) This section shall not affect any direction for accumulation for the purpose of
(i) the payment of the debts of the transferor or any other person taking any
interest under the transfer, or
(ii) the provision of portions for children or remoter issue of the transferor or of
any other person taking any interest under the transfer, or
(iii) the preservation or maintenance of the property transferred; and such direction
may be made accordingly.
18. T 18. T 18. T 18. T 18. Transfer in perpetuity for benefit of public: ransfer in perpetuity for benefit of public: ransfer in perpetuity for benefit of public: ransfer in perpetuity for benefit of public: ransfer in perpetuity for benefit of public:- -- -- The restrictions in sections 14, 16
and 17 shall not apply in the case of a transfer of property for the benefit of the public
in the advancement of religion, knowledge, commerce, health, safety, or any other
object beneficial to mankind.
Transfer by Co-owners (Ss. 44 And 47)
Transfer by One Co-owner (S.44)
Where one of two or more co-owners of immoveable property legally competent in
that behalf transfers his share of such property or any interest therein, the transferee
acquires, as to such share or interest, and so far as is necessary to give effect to the
transfer, the transferors right to joint possession or other common or part enjoyment of
the property, and to enforce a partition of the same, but subject to the conditions and
liabilities affecting, at the date of the transfer, the share or interest so transferred.
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Where the transferee of a share of a dwelling-house belonging to an undivided
family is not a member of the family, nothing in this section deemed to entitle him to
joint possession or other common or part enjoyment of the house.
Where one co-owner of immovable property transfer his share, the transferee
acquires as to that share (1) the right of joint possession, or (2) the right to partition to
the extent enjoyed by the transferor. This would apply to a transferee of all kinds,
including mortgages and lessees. But where the transferee of a dwelling house belonging
to an undivided family is not a member of the family, he is not entitled to joint possession
or other common or part-enjoyment of the house.
This section is based on the principle of subrogation or substitution. Thus, A, B and
C mortgage their field to X. C then transfer his share of the field to D. Under these
circumstances, D will have the right to joint possession with A and B, and also a right to
claim partition and separate possession of his share. But the recently acquired share of
D is still subject to the mortgage.
P PP PPriority by co riority by co riority by co riority by co riority by co- -- --owners of share in common property (S owners of share in common property (S owners of share in common property (S owners of share in common property (S owners of share in common property (S.47) .47) .47) .47) .47)
Where several co-owners of immoveable property transfer a share therein without
specifying that the transfer is to take effect on any particular share or shares of the
transferors, the transfer, as among such transferors, takes effect on such shares equally
where the shares were equal, and, where they were unequal, proportionately to the
extent of such shares.
Illustration Illustration Illustration Illustration Illustration
A, the owner of an eight-anna share, and B and C, each the owner of a four-anna
share, in mauza Sultanpur, transfer a two-anna share in the mauza to D, without specifying
from which of their several shares the transfer is made. To give effect to the transfer
one-anna share is taken from the share of A, and half-an-anna share from each of the
shares of B and C
Joint Transfers (Ss.45-46)
1. Joint transfer for consideration (S 1. Joint transfer for consideration (S 1. Joint transfer for consideration (S 1. Joint transfer for consideration (S 1. Joint transfer for consideration (S.45) .45) .45) .45) .45)
Where immoveable property is transferred for consideration to two or more persons,
and such consideration is paid out of a fund belonging to them in common, they are,
in the absence of a contract to the contrary, respectively entitled to interests in such
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property identical, as nearly as may be, with the interests to which they were respectively
entitled in the fund; and, where such consideration is paid out of separate funds belonging
to them respectively, they are, in the absence of a contract to the contrary, respectively
entitled to interests in such property in proportion to the shares of the consideration
which they respectively advanced.
In the absence of evidence as to the interests in the fund to which they were
respectively entitled, or as to the shares which they respectively advanced, such persons
shall be presumed to be equally interested in the property.
2. T 2. T 2. T 2. T 2. Transfer for consideration by persons having distinct interest (S ransfer for consideration by persons having distinct interest (S ransfer for consideration by persons having distinct interest (S ransfer for consideration by persons having distinct interest (S ransfer for consideration by persons having distinct interest (S.46) .46) .46) .46) .46)
Where immoveable property is transferred for consideration by persons having
distinct interests therein, the transferors are, in the absence of a contract to the contrary,
entitled to share in the consideration equally, where their interest in the property were of
equal value, and, where such interests were of unequal value, proportionately to the
value of their respective interests.
(a) A, owing a moiety, and B and C, each a quarter share, of mauza Sultanpur,
exchange an eighth share of that mauza for a quarter share of mauza Lalpura.
There being no agreement to the contrary, A is entitled to an eighth share in
Lalpura, and B and C each to a sixteenth share in that mauza.
(b) A, being entitled to a life-interest in mauza Atrali and B and C to the reversion,
sell the mauza for Rs. 1,000. As life- interest is ascertained to be worth Rs. 600,
the reversion Rs. 400. A is entitled to receive Rs. 600 out of the purchase-money.
B and C to receive Rs. 400.
Priority of Rights Created by Transfer (Ss.48 And 78)
(1) P (1) P (1) P (1) P (1) Priority of rights previously created (S riority of rights previously created (S riority of rights previously created (S riority of rights previously created (S riority of rights previously created (S.48) .48) .48) .48) .48)
Where a person purports to create by transfer at different times, rights in or over the
same immovable property, and such rights cannot all exist , or be exercised to their full
extent together,- each later created right shall, in the absence of a special contract or
reservation binding the earlier transferees, be subject to the rights previously created:S.48.
S SS SS.78. P .78. P .78. P .78. P .78. Post ponement of pri or mort gagee. ost ponement of pri or mort gagee. ost ponement of pri or mort gagee. ost ponement of pri or mort gagee. ost ponement of pri or mort gagee. - -- --Where, through the fraud,
misrepresentation or gross neglect of a prior mortgagee, another person has been
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induced to advance money on the security of the mortgaged property; the prior
mortgagee shall be postponed to the subsequent mortgagee.
The following, however, are eleven exceptions to the rule that priority is determined
by order of time:
1. Section 50 of the Registration Act, under certain circumstances, giving priority to
a registered mortgage over an earlier unregistered deed of which registration is
optional.
2. Another exception to the rule is salvage lien, i.e., advances made for the purpose
of protecting a priority from revenue sale, forfeiture of destruction.
3. When a mortgage is constituted a first charge, it takes precedence over prior
mortgages by an order of the Court.
4. Land revenue falling in arrears subsequent to a mortgage takes precedence over
it.
5. A State debt (even if subsequent) takes precedence over all other debts, secured
or unsecured, in accordance with statutory provisions.
6. When the prior encumbrance misleads a subsequent encumbrancer by fraud,
misrepresentation or gross neglect, his priority is postponed.
7. When the priority is barred by estoppel, a subsequent transferee takes precedence.
8. A mortgage executed by a receiver, for the purpose of preserving the property,
takes precedence over all other loans.
9. Advances made to save a mortgaged property from loss or destruction are payable
in priority to all other charges.
10. A transfer operates from the date of execution of the deed, although it may have
been registered at a later date: S.47, Registration Act.
11. A non-testamentary document duly registered has priority over any oral transfer
though made earlier, except in the case of a mortgage by deposit of title deeds:
S.48, Registration Act.
Transferees Rights Under Policy (S.49)
Where immovable property, is transferred for consideration, and
- such property (or any part thereof) is, at the date of the transfer , insured against
loss or damage by fire, -
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- in the case of such loss or damage, the transferee may in the absence of a
contract to the contrary require any money under the policy(or so much thereof as
may be necessary)to be applied in reinstating the property:S.49.
Bona Fide Holders under Defective Title (Ss. 50-51)
This topic will be considered under the following two heads:
(1) Rent paid to holder under defective title (S.50)
(2) Improvements made by bona fide holders under defective title (S. 51).
(1) (1) (1) (1) (1) R RR RRent paid to holder under defective title (S ent paid to holder under defective title (S ent paid to holder under defective title (S ent paid to holder under defective title (S ent paid to holder under defective title (S.50) .50) .50) .50) .50)
S SS SS.50. R .50. R .50. R .50. R .50. Rent bona fide paid to holder under defective title. ent bona fide paid to holder under defective title. ent bona fide paid to holder under defective title. ent bona fide paid to holder under defective title. ent bona fide paid to holder under defective title.- -- --No person shall be
chargeable with any rents or profits of any immoveable property, which he has in good
faith paid or delivered to any person of whom he in good faith held such property,
notwithstanding it may afterwards appear that the person to whom such payment or
delivery was made had no right to receive such rents or profits.
A lets a field to B at a rent of Rs. 50, and then transfers the field to C. B, having no
notice of the transfer, in good faith pays the rent to A. B is not chargeable with the rent
so paid.
S.50 provides that no person can be charged with any rents or profits of any
immovable property, which he has, in good faith, paid or delivered to any person of
whom he, in good faith, held such property,-notwithstanding it may afterwards appear
that the person to whom such payment or delivery was made he had no right to receive
such rents or profits.
A lets a field to B at a rent of Rs 50, and then transfers the field to C. B,
having no notice of the transfer, in good faith, pays the rent to A. B is not chargeable
with the rent so paid S: 50.
(2) Improvements made by bona fide holders under defective title S 2) Improvements made by bona fide holders under defective title S 2) Improvements made by bona fide holders under defective title S 2) Improvements made by bona fide holders under defective title S 2) Improvements made by bona fide holders under defective title S.51) .51) .51) .51) .51)
S SS SS.51. Improvements made by bona fide holders under defective titles. .51. Improvements made by bona fide holders under defective titles. .51. Improvements made by bona fide holders under defective titles. .51. Improvements made by bona fide holders under defective titles. .51. Improvements made by bona fide holders under defective titles.- -- --When the
transferee of immoveable property makes any improvement on the property, believing
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in good faith that he is absolutely entitled thereto, and he is subsequently evicted there
from by any person having a better title, the transferee has a right to require the person
causing the eviction either to have the value of the improvement estimated and paid or
secured to the transferee, or to sell his interest in the property to the transferee at the
then market-value thereof, irrespective of the value of such improvement.
The amount to be paid or secured in respect of such improvement shall be the
estimated value thereof at the time of the eviction.
When, under the circumstances aforesaid, the transferee has planted or sown on
the property crops which are growing when he is evicted there from, he is entitled to
such crops and to free ingress and egress to gather and carry them.
When the transferee of immovable property makes an improvement on the property,
believing in good faith that he is absolutely entitled thereto, and he is subsequently
evicted there from by any person having a better title,
- the transferee has a right to require the person causing the eviction
either
(i) to have the value of the improvement estimated and paid or secured to the
transferee,
or
(ii) to sell his interest in the property to the transferee at the then market value thereof,
irrespective of the value of such improvement.
The amount to be paid or secured in respect of such improvement shall be estimated
value thereof at the time of eviction,
If the transferee has planted or sown(on the property) crops which are growing
when he is evicted there from, he is entitled
(i) to such crops, and
(ii) to free ingress and egress to gather and carry them:S.51.
Transfer of Property Pending Suit Relating thereto (Lis Pendens):S.52
During the pendency in any Court having authority within the limits of India excluding
the State of Jammu and Kashmir or established beyond such limits the Central
Government any suit or proceeding which is not collusive and in which any right to
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immoveable property is directly and specifically in question, the property cannot be
transferred or otherwise dealt with by any party to the suit or proceeding so as to affect
the rights of any other party thereto under any decree or order which may be made
therein, except under the authority of the Court and on such terms as it may impose.
Explanation Explanation Explanation Explanation Explanation. .. ..For the purposes of this section, the pendency of a suit or proceeding
shall be deemed to commence from the date of the presentation of the plaint or the
institution of the proceeding in a Court of competent jurisdiction, and to continue until
the suit or proceeding has been disposed of by a final decree or order, and complete
satisfaction or discharge of such decree or order has been obtained, or has become
unobtainable by reason of the expiration of any period of limitation prescribed for the
execution thereof by any law for the time being in force.
Essentials Essentials Essentials Essentials Essentials In order to constitute a lis pendens, the following six elements must be
present:
(i) There should be a suit or a proceeding.
(ii) The suit or proceeding must be one in which a right to immovable property is
directly and specifically in question.
(iii) The suit or proceeding must not be a collusive one.
(iv) The suit or proceeding must be pending.
(v) The property in a suit must be transferred during such pendency.
(vi) The suit or proceeding must be pending in a Court of competent jurisdiction.
When the above-mentioned conditions are fulfilled, the transferee is bound by the
decision of the court. If the decision of the court is in favour of the transferor, the
transferee has rights in the property transferred to him. If the decision goes against the
transferor, the transferee cannot get any interest in the property.
The law incorporated in section 52 is based on the doctrine of lis pendens. Lis
means litigation and pendens means pending. So, lis pendens would mean pending
litigation. The doctrine of lis pendens is expressed in the well-known maxim: Pendent
elite nihil innovature, which means, during pendency of litigation, nothing new should
be introduced. Under this doctrine, it is provided that during pendency of any suit
regarding title of a property, any new interest in respect of that property should not be
created. Creation of new title or interest is known as a transfer of property. Therefore,
in essence, the doctrine of lis pendens prohibits the transfer of property pending litigation.
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Under this doctrine the judgments in the immovable properties were regarded as
overriding any alienation made by the parties during pendency of litigation. Later on,
this doctrine was adopted also by equity for a better and more regular administration of
justice.
This doctrine is based on notice because a pending suit is regarded as constructive
notice of the fact of disputed title of the property under litigation. Therefore, any person
dealing with that property, pending litigation, must be bound by the decision of the
court. But the correct view is that lis pendens is founded on necessity. For administration
of justice it is necessary that while any suit is still pending in a court of law regarding title
of property, the litigants should not be allowed to take decision themselves and transfer
the disputed property.
The Indian court have also taken the view that basis of section 52 is not the doctrine
of notice but expediency i.e., the necessity for final adjudication and public policy.
Fraudulent Transfer (S.53)
S SS SS.53. F .53. F .53. F .53. F .53. Fraudulent transfer raudulent transfer raudulent transfer raudulent transfer raudulent transfer.- .- .- .- .-(1) Every transfer of immoveable property made with
intent to defeat or delay the creditors of the transferor shall be voidable at the option of
any creditor so defeated or delayed.
Nothing in this sub-section shall impair the rights of a transferee in good faith and
for consideration.
Nothing in this sub-section shall affect any law for the time being in force relating
to insolvency.
A suit instituted by a creditor (which term includes a decree-
holder whether he has or has not applied for execution of his decree)
to avoid a transfer on the ground that it has been made with intent to defeat or
delay the creditors of the transferor, shall be instituted on behalf of, or for the benefit of,
all the creditors.
2) Every transfer of immovable property made without consideration with intent to
defraud a subsequent transferee shall be voidable at the option of such transferee.
For the purpose of this sub-section, no transfer made without consideration shall
be deemed to have been made with intent to defraud by reason only that a subsequent
transfer for consideration made.
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Under the Transfer of Property Act, a transfer of immovable property by a debtor
may be set aside by his creditor
(1) if the transfer is made with intent to defeat or delay the transferors creditor, and
(2) if the transferee is not a transferee in good faith and for consideration.
A transferee from such debtor will be protected
(a) if he acquires property for value and in good faith , i.e., without being a
party to any design of the transferor to defeat or delay his creditors , even if
the debtors intention may have been fraudulent; or
(b) if he himself is a creditor and the transfer is made in satisfaction of his pre-
existing debt.
This section consists of two parts. The first part lays down that every transfer of
immovable property made with intent to defeat or delay the creditors of the transferor
shall be voidable at the option of any creditor so defeated for delayed. To take one
illustration, A, who is heavily indebted, and against whom a suit for the recovery of
debts is going to be filed, sells his house to B to save it from being attached and sold in
payment of the debt. If B knows of As fraudulent intention, the sale to B is liable to be
set aside at the option of the creditors. It will be seen that the right of a transferee in
good faith and for consideration are not affected even though the transfer is made with
intent to defeat the creditors.
The second part of the section lays down that every transfer of immovable property
made without consideration with intent to defraud a subsequent transferee shall be
voidable at the option of such transferee, but that no presumption to defraud shall
necessarily arise by reason only that a subsequent transfer for consideration was made.
Section 53, while safeguarding the rights of transferee in good faith and for
consideration, empowers the creditors to avoid any transfer of immovable property
made by the debtor with intent to defeat or delay the creditors. It, however, requires
that such a suit must be instituted either in a representative capacity or for the benefit of
all the creditors.
Part Performance (S.53A):
Where any person contracts to transfer for consideration any immovable property
by writing signed by him or on his behalf from which the terms necessary to constitute
the transfer can be ascertained with reasonable certainty.
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And the transferee has, in part performance of the contract, taken possession of the
property or any part thereof, or the transferee, being already in possession, continues in
possession in part performance of the contract and has done some act in furtherance
of the contract,
And the transferee has performed or is willing to perform his part of the contract,
then, notwithstanding that where there is an instrument of transfer, that the transfer has
not been completed in the manner prescribed therefore by the law for the time being in
force, the transferor or any person claiming under him shall be debarred from enforcing
against the transferee and persons claiming under him any right in respect of the property
of which the transferee has taken or continued in possession, other than a right expressly
provided by the terms of the contract:
Provided that nothing in this section shall affect the rights of a transferee for
consideration who has no notice of the contract or of the part performance thereof.
Essentials:-
1) There should be a contract to transfer, for consideration, any immovable property
by a writing signed by the transferor on his behalf, from which the terms necessary
to constitute the transfer can be ascertained with reasonable certainty.
(2) The transferee should, in part performance of the contract, has taken possession
of the property or any part thereof, or, if already in possession should have continued
in possession in part performance of the contract and should have done some act
in furtherance of the contract.
(3) The transferee should have performed or should be willing to perform his part of
the contract.
(4) The rights of any other subsequent transferee for consideration without notice
should not be affected.
If all the above conditions co-exist, in spite of the fact that
(i) the contract though required to be registered , has not been registered, or
(ii) the instrument of transfer has not been completed in the manner prescribed
thereof by law , e.g., where it is not attested or registered , though required
to be attested and registered,
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the transferor, or any person claiming under him will be debarred from claiming
any relief , in respect of the property as against the transferee which is inconsistent with
the terms of contract.
The proviso to S.53-A saves the right of a transferee for consideration who has no
notice of the contract or its part performance. It is to be noticed, however, that ordinarily,
possession will constitute notice of the title of person in possession.
Amendment of Section 53A and other Enactments:-
An amendment has been made in section 53-A of the Transfer of Property Act by
the Registration and other Related Laws Act (48 of 2001). This Amending Act (48 of
2001) has made following amendments relating to section 53-A:-
1. In section 53-A, para 4 of the Transfer of Property Act the words the contract,
though required to be registered, has not been registered, or, omitted.
2. In section 17 of the Registration Act, a) after sub-section (1), the following
sub-section shall be inserted:
(1A) The documents containing contracts to transfer consideration, any immovable
property for the purpose of section 53-A of the Transfer of Property Act, 1882 shall be
registered if they have been executed on or after the commencement of the Registration
and other Related Laws (Amendment) Act, 2001 and if such documents are not registered
on or after such commencement, then, they shall have no effect for the purposes of the
said section 53-A.
3. In section 49 of the Registration Act, in the proviso: the words, figures and
letter or as evidence of part performance of a contract for the purposes of
section 53-A of the Transfer of Property Act, 1882 shall be omitted.
4. The provisions of this Amending Act (Act 48 of 2001) come into force with
effect from 24-9-2001. This Amendment Act is not retrospective.
Legal Effect of the Amending Act (Act 48 Of 2001) In Section 53A:-
The amendment in section 53-A should be read together with amendments in
section 17 and section 49 of the Registration Act. In section 17 of the Registration Act,
a new clause has been inserted (17-A), which provides that written documents of the
transfer of an immovable property with consideration must be registered for the purposes
of section 53-A of the Transfer of Property Act; and, if such documents are not registered
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then, they shall have no effect for the purposes of section 53-A of the T.P.Act.Thus, an
obvious meaning of these amended provisions of section 53-A of the T.P. Act and that
of section 17-A of the Registration Act is that section 53-A shall not be applicable and
the defence of part-performance cannot be available on the basis of un-registered
documents which are executed on or after 24-9-2001, the date of enforcement of the
amending Act 48 of 2001. Therefore, the contract of the transfer of immovable property
with consideration as provided in section 53-A is now compulsorily registrable document.
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CHAPTER III
SALE OF IMMOVABLE PROPER
(Ss. 54-57)
Sale defined. Sale how made.-Sale is a transfer of ownership in
exchange for a price paid or promised or part-paid and part-promise
Sale how made.-Such transfer, in the case of tangible immoveable
property of the value of one hundred rupees and upwards, or in the case
of a reversion or other intangible thIn the case of tangible immoveable
property of a value less than one hundred rupees, such transfer may be
made either by a registered instrument or by delivery of the property.
Delivery of tangible immoveable property takes place when the seller
places the buyer or such person as he directs, in possession of the property.
Contract for sale.-A contract for the sale of immovable property is a
contract that a sale of such property shall take place on terms settled
between the parties.
It does not, of itself, create any interest in or charge on such property.
55. Rights and liabilities of buyer and seller 55. Rights and liabilities of buyer and seller 55. Rights and liabilities of buyer and seller 55. Rights and liabilities of buyer and seller 55. Rights and liabilities of buyer and seller. .. ..- -- --In the absence of a
contract to the contrary, the buyer and the seller of immoveable property
respectively are subject to the liabilities, and have the rights, mentioned
in the rules next following, or such of them as are applicable to the
property sold:
(1) The seller is bound (1) The seller is bound (1) The seller is bound (1) The seller is bound (1) The seller is bound
(a) to disclose to the buyer any material defect in the property or in the
sellers title thereto of which the seller is, and the buyer is not, aware,
and which the buyer could not with ordinary care discover;
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(b) to produce to the buyer on his request for examination all documents of title
relating to the property which are in the sellers possession or power;
(c) to answer to the best of his information all relevant questions put to him by the
buyer in respect to the property or the title thereto;
(d) on payment or tender of the amount due in respect of the price, to execute a
proper conveyance of the property when the buyer tenders it to him for execution
at a proper time and place;
(e) between the date of the contract of sale and the delivery of the property, to take
as much care of the property and all documents of title relating thereto which are
in his possession as an owner of ordinary prudence would take of such property
and documents;
(f) to give, on being so required, the buyer, or such person as he directs, such
possession of the property as its nature admits;
(g) to pay all public charges and rent accrued due in respect of the property up to the
date of the sale, the interest on all incumbrances on such property due on such
date, and, except where the property is sold subject to incumbrances, to discharge
all incumbrances on the property then existing.
(2) (2) (2) (2) (2) The seller shall be deemed to contract with the buyer that the interest which the
seller professes to transfer to the buyer subsists and that he has power to transfer the
same:
Provided that, where the sale is made by a person in a fiduciary character, he shall
be deemed to contract with the buyer that the seller has done no act whereby the
property is encumbered or whereby he is hindered from transferring it.
The benefit of the contract mentioned in this rule shall be annexed to, and shall go
with, the interest of the transferee as such, and may be enforced by every person in
whom that interest is for the whole or any part thereof from time to time vested.
(3) (3) (3) (3) (3) Where the whole of the purchase-money has been paid to the seller, he is also
bound to deliver to the buyer all documents of title relating to the property which are in
the sellers possession or power:
Provided that, (a) where the seller retains any part of the property comprised in such
documents, he is entitled to retain them all, and, (b) where the whole of such property
is sold to different buyers, the buyer of the lot of greatest value is entitled to such
SALE OF IMMOVABLE PROPER (Ss. 54-57)
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documents. But in case (a) the seller, and in case (b) the buyer, of the lot of greatest
value, is bound, upon every reasonable request by the buyer, or by any of the other
buyers, as the case may be, and at the cost of the person making the request, to
produce the said documents and furnish such true copies thereof or extracts there from
as he may require; and in the meantime, the seller, or the buyer of the lot of greatest
value, as the case may be, shall keep the said documents safe, uncancelled and
undefined, unless prevented from so doing by fire or other inevitable accident.
(4) The seller is entitled (4) The seller is entitled (4) The seller is entitled (4) The seller is entitled (4) The seller is entitled
(a) to the rents and profits of the property till the ownership thereof passes to the
buyer;
(b) where the ownership of the property has passed to the buyer before payment of
the whole of the purchase-
money, to a charge upon the property in the hands of the buyer, any transferee
without consideration or any transferee with notice of the non-payment], for the
amount of the purchase-money, or any part thereof remaining unpaid, and for
interest on such amount or partfrom the date on which possession has been
delivered.
(5) The buyer is bound (5) The buyer is bound (5) The buyer is bound (5) The buyer is bound (5) The buyer is bound
(a) to disclose to the seller any fact as to the nature or extent of the sellers interest in
the property of which the buyer is aware, but of which he has reason to believe
that the seller is not aware, and which materially increases the value of such
interest;
(b) to pay or tender, at the time and place of completing the sale, the purchase-
money to the seller or such person as he directs: provided that, where the property
is sold free from incumbrances, the buyer may retain out of the purchase-money
the amount of any incumbrances on the property existing at the date of the sale,
and shall pay the amount so retained to the persons entitled thereto;
(c) where the ownership of the property has passed to the buyer, to bear any loss
arising from the destruction, injury or decrease in value of the property not caused
by the seller;
(d) where the ownership of the property has passed to the buyer, as between himself
and the seller, to pay all public charges and rent which may become payable in
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respect of the property, the principal moneys due on any incumbrances subject to
which the property is sold, and the interest thereon afterwards accruing due.
(6) The buyer is entitled (6) The buyer is entitled (6) The buyer is entitled (6) The buyer is entitled (6) The buyer is entitled
(a) where the ownership of the property has passed to him, to the benefit of any
improvement in, or increase in value of, the property, and to the rents and profits
thereof
(b) unless he has improperly declined to accept delivery of the property, to a charge
on the property, as against the seller and all persons claiming under him, to the
extent of the sellers interest in the property, for the amount of any purchase-
money properly paid by the buyer in anticipation of the delivery and for interest
on such amount; and, when he properly declines to accept the delivery, also for
the earnest (if any)
and for the costs (if any) awarded to him of a suit to compel specific performance
of the contract or to obtain a decree for its rescission.
An omission to make such disclosures as are mentioned in this section, paragraph
(1), clause (a), and paragraph (5), clause (a), is fraudulent.
56. Marshalling by subsequent purchaser 56. Marshalling by subsequent purchaser 56. Marshalling by subsequent purchaser 56. Marshalling by subsequent purchaser 56. Marshalling by subsequent purchaser. .. ..- -- --If the owner of two or more properties
mortgages them to one person and then sells one or more of the properties to another
person, the buyer is, in the absence of a contract to the contrary, entitled to have the
mortgage-debt satisfied out of the property or properties not sold to him, so far as the
same will extend, but not so as to prejudice the rights of the mortgagee or persons
claiming under him or of any other person who has for consideration acquired an
interest in any of the properties.
57. P 57. P 57. P 57. P 57. Provision by Court for incumbrances and sale freed therefrom.- rovision by Court for incumbrances and sale freed therefrom.- rovision by Court for incumbrances and sale freed therefrom.- rovision by Court for incumbrances and sale freed therefrom.- rovision by Court for incumbrances and sale freed therefrom.-
(a) Where immoveable property subject to any incumbrance, whether immediately
payable or not, is sold by the Court or in execution of a decree, or out of Court,
the Court may, if it thinks fit, on the application of any party to the sale, direct or
allow payment into
Court,
(1) in case of an annual or monthly sum charged on the property, or of a capital sum
charged on a determinable interest in the propertyof such amount as, when
invested in securities of the Central Government, the
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Court considers will be sufficient, by means of the interest thereof, to keep down
or otherwise provide for that charge, and
(2) in any other case of a capital sum charged on the propertyof the amount
sufficient to meet the incumbrance and any interest due thereon.
a) But in either case there shall also be paid into Court such additional amount
as the Court considers will be sufficient to meet the contingency of further
costs, expenses and interest, and any other contingency, except depreciation
of investments, not exceeding one-tenth part of the original amount to be
paid in, unless the Court for special reasons (which it shall record) thinks fit
to require a large additional amount.
(b) Thereupon the Court may, if it thinks fit, and after notice to the incumbrancer,
unless the Court, for reasons to be recorded in writing, thinks fit to dispense
with such notice, declare the property to be freed from the incumbrance,
and make any order for conveyance, or vesting order, proper for giving
effect to the sale, and give directions for the retention and investment of the
money in Court.
(c) After notice served on the persons interested in or entitled to the money or
fund in Court, the Court may direct payment or transfer thereof to the persons
entitled to receive or give a discharge for the same, and generally may give
directions respecting the application or distribution of the capital or income
thereof.
d) An appeal shall lie from any declaration, order or direction under this section
as if the same were a decree.
(e) In this section Court means (1) a High Court in the exercise of its ordinary
or extraordinary original civil jurisdiction,
(2) the Court of a District Judge within the local limits of whose jurisdiction the
property or any part thereof is situate, (3) any other Court which the State Government
may, from time to time, by notification in the Official Gazette, declare to be competent
to exercise the jurisdiction conferred by this section.
Sale defined (S.54)
Sale is a transfer of ownership in exchange for a price paid or promised, or part
paid and part-promised: S.54.
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Essentials of A Valid Sale-
The following are the eight essentials of a valid sale:
1. The seller must be a person competent to transfer: see S.7.
2. The buyer must be a person competent to be a transferee. He may be any person
who is not disqualified to be a transferee under S.6.
3. The subjectmatter must be transferable immovable property: see S.6.
4. There must be a transfer of ownership.
5. The transfer must be in exchange for a price.
6. The price must be paid or promised or part paid and part promised.
7. There must be a registered conveyance in the case of
(i) tangible immovable property of the value of Rs. 100 and
upwards, or
(ii) a reversion of an intangible thing of any value.
8. In the case of tangible immovable property value is less than Rs.100, there must
either be
(i) a registered conveyance, or
(ii) delivery of property.
Sale how effected (S Sale how effected (S Sale how effected (S Sale how effected (S Sale how effected (S.54) .54) .54) .54) .54)
1. In case of-
(i) tangible immovable property of the value of Rs.100 and upwards, or
(ii) a reversion, or
(iii) any other intangible thing:
a sale can be made by a registered instrument.
2. .. .. In case of tangible immovable property of a value less than of Rs.100: a sale
can be made
(i) by a registered instrument,
or
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(ii) delivery of the property.
Delivery of tangible immovable property takes place when the seller places the
buyer , (or such person as the buyer directs) in possession of the property:S.54.
Contract for sale defined (S.54): (agreement to sell)
A contract for the sale of immovable property is a contract that the sale of such
property shall take place on terms settled between the parties . It does not, of itself,
create any interest in, or charge on, such property: S.54.
I.-Buyers Rights (S.55 (6))
(a) Before completion of sale, ie. where ownership has not passed to him Sec.
55(6)(b).
The buyer is entitled to-
1) A charge on the property for the purchase money properly paid by him in
anticipation of the delivery.
2) Interest on such purchase-money
3) The earnest, and costs awarded to him of a suit to compel specific performance
of the contract or to obtain a decree for its rescission in case he properly declines
to accept delivery.
After Completion of Sale, ie., Where Ownership has P After Completion of Sale, ie., Where Ownership has P After Completion of Sale, ie., Where Ownership has P After Completion of Sale, ie., Where Ownership has P After Completion of Sale, ie., Where Ownership has Passed toHim S assed toHim S assed toHim S assed toHim S assed toHim S.55(6)(A) .55(6)(A) .55(6)(A) .55(6)(A) .55(6)(A)
The buyer is entitled to
(i) the benefits of any improvement in, or increase in value of , the property,
and
(ii) the rents and profits thereof.
II. -Buyers Liabilities (S.55 (5))
(a) Before completion of sale [S.55(5)(a) &(b)]
The buyer is bound
1. To disclose to the seller any fact as to the nature or extent of the sellers interest in
the property of which the buyer is aware, but of which he has reason to believe
that the seller is not aware, and which materially increases the value of such
interest(An omission to make such disclosures amounts to fraud).
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2. To pay or tender the purchase money to the seller or such person as he directs.
Where the property is sold free from encumbrances, the buyer may retain, out of
the purchase-money, the amount of any encumbrances on the property existing
at the date of the sale, and shall pay the amount of any encumbrances on the
property existing at the date of the sale, and shall pay the amount so retained to
the person entitled thereto.
(b) After completion [S.55 (5) (c) & (d)]
The buyer is bound-
1. To bear any loss(not caused by seller)arising from destruction,injury,or decrease
in the value of the property.
2. To pay public charges and rents which may become payable in respect of the
property, the principal moneys due on any encumbrances subject to which the
property is sold, and the interest thereon afterwards accruing due.
III.-Sellers Rights [S.55(4)]
(a) Before completion of sale [S.55(4)(a)]
The seller is entitled to rents and profits till ownership passes to buyer.
(b) After completion of sale [S,55(4)(b)]
The seller is entitled to a charge upon the property in the hands of (i)the buyer,
or(ii)any transferee without consideration, or(iii)any transferee with notice of non-payment,
for the amount of the unpaid purchase-money.
The seller is entitled to such charge, only when the whole or part of the purchase-
money is unpaid, and the ownership of the property has passed to the buyer.
IV.-Sellers Liabilities [S.55(1),(2)&(3)]
(a) Before completion of sale [S.55(1)(a) to (g)]
The seller is bound-
1. To disclose to the buyer any material defect in(i)the property or (ii) the sellers title
thereto, of which the seller is, and the buyer is not aware, and which the buyer
could not, with ordinary care, discover.
2. To produce to the buyer, on his request, for examination, all documents of title
relating to the property which are in the sellers possession or power.
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3. To answer, to the best of his information, all relevant questions put to him by the
buyer with respect to the (i) property, or (ii) the title thereto.
4. On payment or tender of the price, to execute a proper conveyance of the property
when the buyer tenders it to him for execution at a proper time and place.
5. Between the date of the contract of sale and the delivery of the property, to take
as much care of the property, and all documents of title relating thereto, as a man
of ordinary prudence would take.
6. To pay all public charges and rent accrued due in respect of the property up to
the date of sale, the interest on all encumbrances on such property due on such
date, and (except where the property is sold subject to encumbrances) to discharge
all encumbrances on the property when existing.
(b) After completion [(S. 55(1),(2),(3)]
1) The seller is bound to give to the buyer, or to such person as he directs, such
possession of the property as its nature admits.
2) Where the whole of the purchase-money has been paid to the seller, he is also
bound to deliver to the buyer, all documents of title relating to the property which
are in the sellers possession or power.
(a) Where the seller retains any part of the property comprised in such documents,
he is entitled to retain all the documents.
(b) Where the whole of such property is sold to different buyers, the buyer of the
lot of the greatest value is entitled to such documents.
The seller, or such buyer of the lot of the greatest value, ( as the case may be) is
bound, upon the buyers request, to produce the said documents and furnish true
copies thereof, and in the meantime, the seller or the buyer of the greatest value, as the
case may be, must keep the said documents safe, uncancelled and undefaced, unless
prevented from so doing by fire or other inevitable accident.
Covenant for title: - Covenant for title: - Covenant for title: - Covenant for title: - Covenant for title: -
The seller shall be deemed to contract with the buyer that the interest which the
seller professes to transfer to the buyer subsists and that he has power to transfer the
same.
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Marshalling by subsequent purchaser (s.56):- Marshalling by subsequent purchaser (s.56):- Marshalling by subsequent purchaser (s.56):- Marshalling by subsequent purchaser (s.56):- Marshalling by subsequent purchaser (s.56):-
If the owner of two or more properties mortgages them to one person, and then
sells one or more of the properties to another, the buyer is, in absence of a contract to
the contrary, entitled to have the mortgage-debt satisfied out of property or properties
not sold to him, so far as the same will extend, but not so as to prejudice the rights of
a) the mortgagees, or b)persons claiming under him, or c) any other person who has
acquired any interest in any of the properties for consideration.
Discharge of encumbrances on sale (s.57):- Discharge of encumbrances on sale (s.57):- Discharge of encumbrances on sale (s.57):- Discharge of encumbrances on sale (s.57):- Discharge of encumbrances on sale (s.57):-
This section prescribes the procedure for discharging an encumbrance on a property
which is sold free from an encumbrance. The power which is given to the court under
this section is intended to facilitate the alienation of encumbered estates by relieving
the land from the encumbrance and substituting for the land another form of security.
This section has been enacted to facilitate the realization of fair value for encumbered
estates.
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CHAPTER IV
OF EXCHANGE
Sec.118 Sec.118 Sec.118 Sec.118 Sec.118. Exchange defined. Exchange defined. Exchange defined. Exchange defined. Exchange defined.- -- -- When two persons mutually transfer
the ownership of one thing for the ownership of another, neither thing or
both things being money only, the transaction is called an exchange.
A transfer of property in completion of an exchange can be made
only in manner provided for the transfer of such property by sale.
Sec.119. Sec.119. Sec.119. Sec.119. Sec.119. Right of party deprived of thing received in exchange. Right of party deprived of thing received in exchange. Right of party deprived of thing received in exchange. Right of party deprived of thing received in exchange. Right of party deprived of thing received in exchange.-If
any party to an exchange or any person claiming through or under such
party is by reason of any defect in the title of the other party deprived of
the thing or any part of the thing received by him in exchange, then,
unless a contrary intention appears from the terms of the exchange, such
other party is liable to him or any person claiming through or under him
for loss caused thereby, or at the option of the person so deprived, for
the return of the thing transferred, if still in the possession of such other
party or his legal representative or a transferee from him without
consideration.
Sec.120. Rights and liabilities of parties Sec.120. Rights and liabilities of parties Sec.120. Rights and liabilities of parties Sec.120. Rights and liabilities of parties Sec.120. Rights and liabilities of parties.- .- .- .- .- Save as otherwise provided
in this Chapter, each party has the rights and is subject to the liabilities of
a seller as to that which he gives, and has the rights and is subject to the
liabilities of a buyer as to that which he takes.
Sec.121. Exchange of money Sec.121. Exchange of money Sec.121. Exchange of money Sec.121. Exchange of money Sec.121. Exchange of money.- .- .- .- .- On an exchange of money, each
party thereby warrants the genuineness of the money given by him.
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CHAPTER V
OF MORTGAGES OF IMMOVABLE PROPERTY
AND CHARGES (Ss. 58-104)
A- Mortgages (Ss.58-99 & 102-104) 58. Mortgage, mortgagor,
mortgagee, mortgage-money and
mortgage-deed defined. Simple mortgage. Mortgage by
conditional sale. Usufructuary mortgage. English mortgage. Mortgage
by deposit of title-deeds. Anomalous mortgage. Mortgage when to be
by assurance.
58 58 58 58 58. Mortgage, mortgagor, mortgagee, mortgage-money
and
mortgage mortgage mortgage mortgage mortgage- -- --deed defined. deed defined. deed defined. deed defined. deed defined.-(a) A mortgage is the transfer of an
interest in specific immoveable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an
existing or future debt, or the performance of an engagement which
may give rise to a pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee;
the principal money and interest of which payment is secured for the
time being are called the mortgage-money, and the instrument (if any)
by which the transfer is effected is called a mortgage-deed.
Simple mortgage Simple mortgage Simple mortgage Simple mortgage Simple mortgage. .. ..-(b) Where, without delivering possession of the
mortgaged property, the mortgagor binds himself personally to pay the
mortgage- money, and agrees, expressly or impliedly, that, in the event
of his failing to pay according to his contract, the mortgagee shall have
a right to cause the mortgaged property to be sold and the proceeds of
sale to be applied, so far as may be necessary, in payment of the
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mortgage-money, the transaction is called a simple mortgage and the mortgagee a
simple mortgagee.
Mortgage by conditional sale Mortgage by conditional sale Mortgage by conditional sale Mortgage by conditional sale Mortgage by conditional sale.-(c) Where the mortgagor ostensibly sells the
mortgaged property
on condition that on default of payment of the mortgage-money on a certain date
the sale shall become absolute, or
on condition that on such payment being made the sale shall become void, or
on condition that on such payment being made the buyer shall transfer the property
to the seller, the transaction is called a mortgage by conditional sale and the mortgagee
a mortgagee by conditional sale:
[Provided that no such transaction shall be deemed to be a mortgage, unless the
condition is embodied in the document which effects or purports to effect the sale.]
Usufructuary mortgage Usufructuary mortgage Usufructuary mortgage Usufructuary mortgage Usufructuary mortgage. .. ..-(d) Where the mortgagor delivers possession
[or expressly or by implication binds himself to deliver possession]
of the mortgaged property to the mortgagee, and authorizes him to retain such
possession until payment of the mortgage-money, and to receive the rents and profits
accruing from the property or any part of such rents and profits and to appropriate the
same in lieu of interest, or in payment of the mortgage-money, or partly in lieu of
interest or partly in payment of the mortgage-money, the transaction is called an
usufructuary mortgage and the mortgagee an usufructuary mortgagee.
English mortgage English mortgage English mortgage English mortgage English mortgage.-(e) where the mortgagor binds himself to re-pay the mortgage-
money on a certain date, and transfers the mortgaged property absolutely to the
mortgagee, but subject to a proviso that he will retransfer it to the mortgagor upon
payment of the mortgage-money as agreed, the transaction is called an English
mortgage.
Mortgage by deposit of title Mortgage by deposit of title Mortgage by deposit of title Mortgage by deposit of title Mortgage by deposit of title- -- --deeds deeds deeds deeds deeds. - Where a person in any of the following
towns, namely, the towns of Calcutta, Madras, and
Bombay, and in any other town which the [State Government concerned] may, by
notification in the Official Gazette, specify in this behalf, delivers to a creditor or his
agent documents of title to immoveable property, with intent to create a security thereon,
the transaction is called a mortgage by deposit of title-deeds.
OF MORTGAGES OF IMMOVABLE PROPERTY AND CHARGES (Ss. 58-104)
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Anomalous mortgage. Anomalous mortgage. Anomalous mortgage. Anomalous mortgage. Anomalous mortgage.-(g) A mortgage which is not a simple mortgage, a mortgage
by conditional sale, an usufructuary mortgage, an English mortgage or a mortgage by
deposit of title-deeds within the meaning of this section is called an anomalous mortgage.
Definition [S.58 (a)]
Loans may be secured or unsecured. Where money is given simply on the basis of
debtors promise to pay i.e., on promissory note, the creditor can file suit for recovery
of his money. But if such debtor has no money to repay the loan or becomes insolvent,
the creditors money is lost because he cannot recover it from debtors property. Such
loans are, therefore, called unsecured loans. On the other hand, before giving the
loan, the creditor may take security from the debtor for the repayment of his money.
Where the loan is secured against any movable property, it is called a pledge. Where
the loan is secured against some immovable property of the debtor, it is called mortgage.
In both the cases, whether the property is movable or immovable, the loan is secured
because in default of repayment, the creditor can recover his money from the property
which has been specified as security.
When a person takes loan and specifies certain immovable property as security, it
is said that he has taken loan by mortgaging his property. The transaction of mortgage
has been a very common method of taking loan and was known to oldest systems of
law. If the money is not repaid within the stipulated period, the land belonged absolutely
to the creditor and debtor lost his rights in the property for ever. Such situation was
regarded as unjust by the equity. Some modifications were, therefore, made by equity.
It was provided by the courts of equity that where a person takes loan only in great need
of money and for which he has to put his land in security, his intention is not transfer the
land in consideration of the money taken on loan. It is a borrowing transaction rather
than transaction of sale. So, his interest must be protected in case of non-repayment
on the due date. Equity thus provided that, once a mortgage always a mortgage; it
should not become sale on non-payment of loan on the due date. In other words, the
strict common law rule of transfer of legal estate in favour of creditor in default of
repayment of loan was modified by equity to do justice with, the debtor. Accordingly,
mortgage was regarded as essentially a transaction for taking loan not a transaction
for the transfer of title of property. Further, any condition which used to take away the
mortgagors right in his property was void as being penalty for him. Law of mortgages
has developed in India on similar lines.
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A mortgage is the transfer of an interest in specific immovable property for the
purpose of securing-
(a) the payment of money advanced or to be advanced by way of loan,
(b) an existing or future debt , or
(c) the performance of an engagement which may give rise to a pecuniary liability.
The transferor is called mortgagor, and the transferee a mortgagee; the principal
money and the interest of which payment is secured for the time being are called the
mortgage money; and the instrument (if any) by which the transfer is effected is called
a mortgage deed.[The words mortgagors and mortgagees include persons deriving
title from them respectively]; Ss. 58(a) and 59-A.
In an old case, Mahmood J. said of S. 58(a): A mortgage, as understood in this
country, cannot be defined better than by the definition adopted by the Legislature in
section 58 of the Transfer of Property Act. That definition has not in any way altered the
law, but, on the contrary, has only formulated in clear language, the notions of mortgage
as understood by all writers of text books on Indian mortgages. Every word of the
definition is borne out by the decision of Indian Courts of Justice (Gopal v Parsotam,
1883 5 All. 121).
Mortgage as defined in this section is transfer of an interest in some immovable
property. It is not transfer of all the interests but only of some interest in the property.
The purpose of this transfer of interest is to give security for repayment of loan. Therefore,
where a person mortgages his property, the legal effect is that there is a transfer of an
interest of that property in consideration of money advanced to him by the money-
lender. In case the loan could not be repaid, the money-lender can recover is money
on the basis of that interest. The loan may either be present or might have been taken
in the past. It may also be in the form of any pecuniary liability of the mortgagor
towards mortgagee.
Six kinds of Mortgages and their Characteristics: -
1) Simple Mortgage S.58 (b)
2) Mortgage by conditional sale S. 58 (c)
3) Usufructuary mortgage s. 55(d)
4) English Mortgage s. 58(e)
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5) Mortgage by deposit of title deeds or Equitable Mortgage. S. 58(f)
6) Anomalous Mortgage s. 58 (g)
1) Simple Mortgage: -
Where-
a) Without delivering possession of the mortgaged property,
b) the mortgagor binds himself personally to pay the mortgage-money, and
c) A gree that, in the event of his failing to pay, the mortgagee shall have a right to
cause the mortgaged property to be sold, and the proceeds of sale to be applied
so far as may be necessary, in payment of the mortgage-money, The transaction
is called a simple mortgage, and the mortgagee a simple mortgagee.
In simple mortgage, the mortgagee must have the power to sell the property. But
the sale cannot be made out of court. He has no right of foreclosure.
So in Simple Mortgage that mortgagor binds himself personally for the repayment
of loan. Such personal liability may either be express or implied. The very acceptance
of loan involves personal liability of the borrower. The fact that some immovable property
has been mentioned as security for its repayment does not displace the personal liability
of mortgagor to repay the loan with interest. In this mortgage the possession of the
mortgaged property is not given to the creditor. In a simple mortgage, it is necessary
that mortgagee is given the right to cause sale of the mortgage-property in default of
payment. If mortgagor fails to return back the loan, the mortgagee must be entitled to
recover his money by causing the sale of the property. Mortgagee himself has no power
to sell the property; he has to get a decree from the court for the sale. When the
property is sold by intervention of the court, the mortgagee shall get the money advanced
by him with interest. Remaining part of the proceeds of sale is given in the mortgagor
whose property was sold. So in simple mortgage, the interest transferred in favour of
mortgage is his right to cause the mortgage-property sold in default of non-payment
of loan.
Mortgagees R Mortgagees R Mortgagees R Mortgagees R Mortgagees Remedy: emedy: emedy: emedy: emedy:- In a simple mortgage, if the mortgagor fails to repay the
loan within stipulated date, the following two remedies are available to the mortgagee:
i) Since in simple mortgage the mortgagor takes personal obligation to repay the
loan, the mortgagee may sue the mortgagor personally for recovery of the money.
In such a case, he shall get simple money decree.
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ii) The mortgagee may also move the court for the sale of mortgage property so that
he may recover his money. In such a case he gets a decree for the sale of
property. Proceeds of the sale are applied for payment of the debt with interest
and the remaining part of it is returned to the mortgagor.
But, in all the cases, the suit must be filed within twelve years from the date on
which the loan becomes due. Simple mortgage can be made only through a
registered document. Even if the sum of money secured is less than Rupees one
hundred, a simple mortgage must be effected by registered instrument.
2) Mortgage by Conditional Sale: -
Where the mortgagor ostensibly sells the mortgaged property on condition that
( i ) on default of payment of the mortgage-money on a certain date, the sale shall
become absolute, or
( i i ) on such payment being made, the sale shall become void, or
(iii) on such payment being made, the buyer shall transfer the property to the seller,
the transaction is called a mortgage by conditional sale.
In this form of mortgage, there is no personal liability on the part of the mortgagor
to pay the debt. The remedy of the mortgagee is by foreclosure only. The mortgagee
remains content with the property mortgaged, and cannot look to the other properties
of the mortgagor, the latter not having any personal liability. No delivery of possession
is given in this type of mortgage. Mortgagee can only acquire ownership over the
property, which, however, will not vest in him inspite of a default of payment on the due
date, until there is a decree for foreclosure. (S.67)
Mortgage by conditional sale is an apparent sale with a condition that upon
repayment of the consideration amount, the purchaser shall retransfer the property to
the seller.
Ostensible sale means a sale which apparently looks like a sale but in reality there
is no sale. In this mortgage, apparently there is a sale of an immovable property but in
reality it is intended to secure a debt. The whole transaction is given the appearance of
a sale. The seller would sell his property on a certain sum of money.
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3) Usufructuary Mortgage:- s.58(d)
Where the mortgagor
a) delivers possession, or expressly or by implication binds himself to deliver possession
of the mortgaged property to the mortgagee, and
i) to retain such possession until payment of the mortgage-money, and
ii) to receive the rents and profits accruing from the property, and
iii) to appropriate them in lieu of interest or, in payment of the mortgage-money,
or partly in lieu of interest and partly in payment of the mortgage-money, the
transaction is called a usufructuary mortgage, and the mortgagee a
usufructuary mortgagee:
The mortgagor will not be personally liable, unless there is a distinct agreement to
the contrary. Section 67 denying him the right of foreclosure and sale. A usufructuary
mortgagee cannot sue either for sale or for foreclosure. His only remedy is to retain
possession of the mortgaged property till the mortgaged-money is paid up. He is entitled
to sue for possession and mesne profits in case if he loses possession.
Since the possession is with mortgagee, he gets the usufruct i.e., produce, benefits,
rents or profts of the mortgage-property. In a usufructuary mortgage, the mortgagee is
entitled to enjoy the benefits of mortgaged-property in lieu of interest on the principal
money advanced by him. So, on payment of debt the mortgagee has no right of
possession. Where the property is capable of giving good produce or benefits, the
parties may also agree that mortgagee is entitled to get the usufruct of property not only
in lieu of interest but also in part payment of the money advanced. Registration is
necessary when the money taken under usufructuary mortgage is Rs.100 or more.
Where the mortgage-money is less than Rs.100, registration is not necessary; delivery
of possession is sufficient.
4) English Mortgage: - S.58 (e)
Where the mortgagor
a) binds himself to repay the mortgage-money on a certain date, and
b) transfers the mortgaged property absolutely to the mortgagee, but subject to a
proviso that he will re-transfer to the mortgagor upon payment of the mortgage-
money as agreed, the transaction is called an English Mortgage.
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Characteristics: -
i) there is a personal covenant to pay the amount.
ii) It is effected by an absolute transfer of property with a provision for re-
transfer in case of repayment of the amount due.
i ) Power of sale out of court is conferred on certain persons under certain
circumstances stated in S.69.
ii) His remedy is by sale, and not by foreclosure.
iii) An English Mortgagee has the right to enter into immediate possession of
the property.
iv) Absolute conveyance is converted into a mortgage.
v) Remedy of an English mortgagee is by sale.
An essential feature of English Mortgage is that mortgage binds himself to repay
the loan by transferring the property absolutely. The use of the words absolutely creates
doubt because mortgage as such is a transfer of only some interest is conveyed; not the
absolute interest. It is, therefore, settled law that the word absolutely in English mortgage
is used merely as a matter of form. What really passes to the mortgagee under this
mortgage is only an interest in the property which is liable to be redeemed by the
mortgagor under section 60 of the Act. In English Mortgage, the mortgagor binds
himself personally to pay the debt. It is also necessary that specific date be mentioned
upto which the mortgagor must repay the debt. If the mortgagor re-pays the money the
mortgage is bound to re-transfer the property to mortgagor. If the mortgagor fails to
repay the mortgaged money on the stipulated date, the mortgagee has right of sale
under section 67 of this Act. In the event of non-repayment of mortgage-money under
an English mortgage, a decree of foreclosure is not passed. In this form of mortgage,
the mortgagee has right to apply for passing decree for sale of the mortgage property.
5) Mortgage by Deposit of Title-Deeds or Equitable Mortgage: -
Where a person
a) in any of the following towns, namely, the towns of Calcutta, Madras and Bombay
and in any other town which the State Government concerned may, by notification
in the official gazette, specify in this behalf,
b) delivers to a creditor documents of title to immovable property,
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c) with intent to create a security thereon the transaction is called a mortgage by
deposit of title deeds.
Characteristics: -
a) The property need not be situated in the above-mentioned towns.
b) No delivery of possession of property takes place
c) No registration is necessary
d) It prevails against a subsequent transferee who takes under a registered
instrument
e) His remedy is by a suit for sale and he is not entitled to sue for foreclosure.
f) There is no personal liability to repay the loan.
The mortgagee has no power of sale without the intervention of court.
Mortgage by deposit of title-deeds is a peculiar kind of mortgage. It is peculiar in
the sense that in this mortgage, execution of mortgage-deed by mortgagor is not
necessary. Mere deposit of title-deeds of an immovable property by mortgagor to
mortgagee is sufficient. Under English Law this type of mortgage is known as equitable
mortgage. It is called equitable mortgage because in the absence of any legally executed
document, merely on the basis of the possession of title-deeds by mortgagee, equity
would ensure return of his money.
For a valid equitable mortgage it is not necessary that all the documents of title
should be deposited or, that the document deposited should show a complete title. It
is sufficient if the deeds, deposited bona fide, relate to the property and are material
evidence of title. Mere deposit of title-deeds is not sufficient. The title-deeds must be
deposited by the debtor with the intentio of creating security for a debt.
It is applicable only in certain specified towns of this country. Like other kinds of
mortgages, an equitable mortgage is not applicable through out the country. It may be
made only in Calcutta, Bombay and Madras and in such other town which the State
Government may by notification specify in the official Gazette.
It is significant to note that territorial restriction is only with regard to the place
where transaction takes place. The only transaction in the equitable mortgage is the
deposit of title-deeds of an immovable property. So, the title-deed of the property are
to be deposited in any of the towns to which this section is applicable, In other words,
the restriction to the specified towns refers to the place where title-deeds are delivered
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and not to the place where property is situated. The mortgage property may situate
outside the specified towns or it may partly situate within and partly outside the towns
specified. But, the transaction i.e., deposit of title-deeds, must take place within the
area specified.
R RR RRemedy in default of repayment:- emedy in default of repayment:- emedy in default of repayment:- emedy in default of repayment:- emedy in default of repayment:-
Where the debtor fails to repay the debt under a mortgage by deposit of title-
deeds, the creditor can recover his money just as a creditor recovers the money in a
simple mortgage. That is to say, the security can be enforced by a suit for a decree for
the sale of the mortgaged property. As regards the remedies of mortgagee, an equitable
mortgage is therefore, stands on the same footing as a simple mortgage. Such a suit
must be filed within 12 years from the date on which the money becomes due.
6) Anomalous Mortgage: -
Section 58 has laid down several kinds of mortgage. But the classification of
mortgage given, in this section is not exhaustive. Besides these forms of mortgage,
there are other methods of taking loans on the security of immovable property. These
methods although not included in section 58, but are in practice in India. Such modes
of taking loans fulfill the essential requirements of a mortgage but do not come under
any category of mortgage given in this section. These transactions are in their very
nature a mortgage without any specific name. Since most of such mortgages are either
customary or combinations of two or more forms of mortgages and thereby causing an
anomaly (inconsistency) they are called anomalous mortgage.
Remedy of Mortgagee is by sale and foreclosure, if the terms of the mortgage
permit it.
Definition Definition Definition Definition Definition:- :- :- :- :- According to section 58(g), a mortgage is anomalous mortgage if it is
not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, an
English Mortgage or , a mortgage by deposit of title-deeds.
When a transaction is a mortgage in all respects i.e., there is existence of debt and
security of an immovable property for re-payment of that debt but the agreement between
the debtor and creditor is of such a nature that it cannot be included in any specific
category of mortgage, the transaction is anomalous mortgage. It may also be
combination of any two or more forms of specific categories of mortgage.
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65. Implied contracts by mortgagor 65. Implied contracts by mortgagor 65. Implied contracts by mortgagor 65. Implied contracts by mortgagor 65. Implied contracts by mortgagor. .. .. In the absence of a contract to the contrary,
the mortgagor shall be deemed to contract with the mortgagee
(a) that the interest which the mortgagor professes to transfer to the mortgagee subsists,
and that the mortgagor has power to transfer the same;
(b) that the mortgagor will defend, or, if the mortgagee be in possession of the
mortgaged property, enable him to defend, the mortgagors title thereto;
(c) that the mortgagor will, so long as the mortgagee is not in possession of the
mortgaged property, pay all public charges accruing due in respect of the property;
(d) and, where the mortgaged property is a lease, that the rent payable under the
lease, the conditions contained therein, and the contracts binding on the lessee
have been paid, performed and observed down to the commencement of the
mortgage; and that the mortgagor will, so long as the security exists and the
mortgagee is not in possession of the mortgaged property, pay the rent reserved
by the lease, or, if the lease be renewed, the renewed lease, perform the conditions
contained therein and observe the contracts binding on the lessee, and indemnify
the mortgagee against all claims sustained by reason of the non-payment of the
said rent or the non-performance or non-observance of the said conditions and
contracts;
(e) and, where the mortgage is a second or subsequent encumbrance on the property,
that the mortgagor will pay the interest from time to time accruing due on each
prior encumbrance as and when it becomes due, and will at the proper time
discharge the principal money due on such prior encumbrance.
The benefit of the contracts mentioned in this section shall be annexed to and
shall go with the interest of the mortgagee as such, and may be enforced by every
person in whom that interest is for the whole or any part thereof from time to time
vested.
Implied Contracts by Mortgagor:-
The section embodies the implied covenants of the mortgagor, similar to the implied
covenants of the seller in section 55(2). The covenants will be read into a mortgage
contract where there is no contract to the contrary. The implied covenants enumerated
in this section are:
a) Covenant for title
b) Defence of title
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c) Liability to pay public charges
d) Performance of conditions of the lease where the mortgaged property is a lease.
e) Liability to discharge prior mortgages.
76. Liabilities of mortgagee in possession 76. Liabilities of mortgagee in possession 76. Liabilities of mortgagee in possession 76. Liabilities of mortgagee in possession 76. Liabilities of mortgagee in possession. .. ..- When, during the continuance of the
mortgage, the mortgagee takes possession of the mortgaged property,
(a) he must manage the property as a person of ordinary prudence would manage it
if it were his own;
(b) he must use his best endeavours to collect the rents and profits thereof;
(c) he must, in the absence of a contract to the contrary, out of the income of the
property, pay the Government revenue, all other charges of a public nature and
all rent accruing due in respect thereof during such possession, and any arrears
of rent in default of payment of which the property may be summarily sold;
(d) he must, in the absence of a contract to the contrary, make such necessary repairs
of the property as he can pay for out of the rents and profits thereof after deducting
from such rents and profits the payments mentioned in clause (c) and the interest
on the principal money;
(e) he must not commit any act which is destructive or permanently injurious to the
property;
(f) where he has insured the whole or any part of the property against loss or damage
by fire, he must, in case of such loss or damage, apply any money which he
actually receives under the policy or so much thereof as may be necessary, in
reinstating the property, or, if the mortgagor so directs, in reduction or discharge
of the mortgage-money;
(g) he must keep clear, full and accurate accounts of all sums received and spent by
him as mortgagee, and, at any time during the continuance of the mortgage,
give the mortgagor, at his request and cost, true copies of such accounts and of
the vouchers by which they are supported;
(h) his receipts from the mortgaged property, or, where such property is personally
occupied by him, a fair occupation-rent in respect thereof, shall, after deducting
the expenses properly incurred for the managment of the property and the collection
of rents and profits and the other expenses mentioned in clauses (c) and (d), and
interest thereon, be debited against him in reduction of the amount (if any) from
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time to time due to him on account of interest and, so far as such receipts exceed
any interest due, in reduction or discharge of the mortgage-money; the surplus, if
any, shall be paid to the mortgagor;
(i) when the mortgagor tenders, or deposits in a manner hereinafter provided, the
amount for the time being due on the mortgage, the mortgage must,
notwithstanding the provisions in the other clauses of this section, account for his
receipts from the mortgaged property from the date of the tender or from the
earliest time when he could take such amount out of Court, as the case may be
and shall not be entitled to deduct any amount therefrom on account of any
expenses incurred after such date or time in connection with the mortgaged
property.
L LL LLoss occasioned by his default oss occasioned by his default oss occasioned by his default oss occasioned by his default oss occasioned by his default.- .- .- .- .-If the mortgagee fail to perform any of the duties
imposed upon him by this section, he may, when accounts are taken in pursuance of a
decree made under this Chapter, be debited with the loss, if any, occasioned by such
failure.
In this section the duties of the mortgagee in possession are classified under nine
heads, and the last paragraph provides that he may be debited in the mortgage account
with the loss occasioned by his failure to perform any of them. The position of the
mortgagee presents some analogy to that of a trustee as will be apparent from the
following liabilities:
a) to manage the property with ordinary prudence,
b) to collect rents and profits
c) to pay government revenue,
d) to carry necessary repairs under certain circumstances
e) not to commit any act of waste
f) to apply the insurance money in reinstating the property
g) to keep porper accounts
h) to apply the rents and profits in discharge of the interest after making certain
deductions; and
i) to account for gross receipts.
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S SS SS.77. R .77. R .77. R .77. R .77. Receipts in lieu of interest eceipts in lieu of interest eceipts in lieu of interest eceipts in lieu of interest eceipts in lieu of interest.- .- .- .- .- Nothing in section 76, clauses (b), (d), (g) and
(h), applies to cases where there is a contract between the mortgagee and the mortgagor
that the receipts from the mortgaged property shall, so long as the mortgagee is in
possession of the property, be taken in lieu of interest on the principal money, or in lieu
of such interest and defined portions of the principal.
This section provides that the obligation in clauses b,d,g,h of section 76 will not
apply where the contract is that of usufructuary mortgage and where the receipts from
the property are taken as wiping off the mortgage debt or interest. In such cases if the
mortgagee does not collect the rents and profits with diligence, it is the mortgagee and
not the mortgagor who suffers.
S SS SS.60. Right of mortgagor to redeem .60. Right of mortgagor to redeem .60. Right of mortgagor to redeem .60. Right of mortgagor to redeem .60. Right of mortgagor to redeem. .. .. -At any time after the principal money has
become due, the mortgagor has a right, on payment or tender, at a proper time and
place, of the mortgage-money, to require the mortgagee (a) to deliver to the mortgagor
the mortgage-deed and all documents relating to the mortgaged property which are in
the possession or power of the mortgagee, (b) where the mortgagee is in possession
thereof to the mortgagor, and (c) at the cost of the mortgagor either to re-transfer the
mortgaged property to him or to such third person as he may direct, or to execute and
(where the mortgage has been effected by a registered instrument) to have registered
an acknowledgment in writing that any right in derogation of his interest transferred to
the mortgagee has been extinguished:
Provided that the right conferred by this section has not been extinguished by act of
the parties or by [decree] of a Court.
The right conferred by this section is called a right to redeem and a suit to enforce
it is called a suit for redemption.
Nothing in this section shall be deemed to render invalid any provision to the effect
that, if the time fixed for payment of the principal money has been allowed to pass or
no such time has been fixed, the mortgagee shall be entitled to reasonable notice
before payment or tender of such money.
R RR RRedemption of portion of mortgaged property:- edemption of portion of mortgaged property:- edemption of portion of mortgaged property:- edemption of portion of mortgaged property:- edemption of portion of mortgaged property:-
Nothing in this section shall entitle a person interested in a share only of the
mortgaged property to redeem his own share only, on payment of a proportionate part
of the amount remaining due on the mortgage, except only where a mortgagee, or, if
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there are more mortgagees than one, all such mortgagees, has or have acquired, in
whole or in part, the share of a mortgagor.
Right of Redemption:-
The most important right possessed by the mortgagor is the right to redeem the
mortgage. Under this section, at any time after the principal money has become due,
the mortgagor has a right on payment or tender of the mortgage-money to require the
mortgagee to recovery the mortgage property to him. The right conferred by this section
has been called the right to redeem and a suit to enforce this right has been called a
suit for redemption or right of redemption. In English Law, the mortgagors right of
redemption is called the Equity of redemption. As the statutory right of redemption
contained in this section is derived from the English Law, it would be profitable to give
a short account of the equity of redemption under the Englis Law.
Under section 60 of the Transfer of Property Act, at any time after the principal
money has become due, the mortgagor has a right, on payment or sender, at a proper
timeand place, of the mortgage-money, to require the mortgagee to deliver to the
mortgagor the mortgage-deed and all documents relating to the mortgaged property
which are in the possession or power to the mortgagee. This remedy is avaliable to the
mortgagor only before the mortgagee has filed a suit for enforcement of the mortgage.
Subsequent to the filing of the suit, this remedy is not available.
Clog on Redemption:-
The right of redemption cannot be denied to the mortgagor even though he may by
express contract abandon his right to redeem the property. Equity in its insistence upon
the principle that a mortgage is intended merely to afford security to the lender has held
an agreement which prevents redemption as void.
Redemption involves two things:
a) re-transfer of the interest which had been originally transferred to the mortgagee,
and
b) delivery of the possession, Both these things are done by virtue of the terms of
mortgage, and in pursuance of an agreement between the parties. Thus, the re-
transfer of the interest is also by virtue of an agreement and redelivery of possession
is also in pursuance of such an agreement. It is, therefore, futile to say that when
a mortgagor redeems the land mortgaged by him, with possession and acquires
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back the interest as well as the possession which he had earlier transferred to the
mortgagee, he does not acquire back in interest or the possession by transfer or
by agreement.
Under the Indian Law, the right of redemption is a statutory right which cannot be
fettered by any condition which impedes or prevents redemption. Any such condition is
void as a clog on redemption. The Legislature has quite advisedly not used any such
words as in the absence of a contract to the contrary in section 60 with a view to
prevent the mortgagor from contracting himself out of his right of redemption at the
time of the mortgage. It is, therefore, manifest that the right cannot be clogged.
Condition of Sale in Default:-
The courts will ignore any contract the effect of which is to deprive the mortgagor of
his right to redeem the mortgage. Accordingly, if one of the terms of the mortgage is
that on the failure of the mortgagor to redeem the mortgage within the specified period,
the mortgagor will have no claim over the mortgaged property and the mortgage deed
will be deemed to be a deed of sale in favour of the mortgagee, it cannot be given
effect to. It plainly takes away altogether the mortgagors right to redeem the mortgage
after the specified period. This is not permissible for once a mortgage always a
mortgage and therefore always redeemable.
Stipulation barring Mortgagors Right of Redemption aftercCertain Period:-
If there is a stipulation which bars mortgagors right of redemption after certain
period, the stipulation is treated as a clog on the mortgagors equitable right of
redemption.
Condition Postponing Redemption in Case of Default:-
In Mohammad Sher v. Seth Swami Dayal (1992) 44 All. The mortgage was for a
term of five years with a condition that if the money was not paid, the mortgagee might
enter into possession for a period of twelve years during which the mortgagor could not
redeem. It was held that such acondition was a clog because it hindered an existing
right to redeem.
R RR RRestraint on Alienation:- estraint on Alienation:- estraint on Alienation:- estraint on Alienation:- estraint on Alienation:-
In Ram Saran v. Amrit (1980) 3 All. 369 FB it was held that a stipulation that the
mortgagor shall not alienate the mortgaged property or shall not take loan on the
security of the mortgaged property has been held to be a clog.
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Redemption Restricted to Mortgagor:-
An agreement that redemption should be available to the mortgagor and not to his
heirs has been held as a clog.
Under the proviso to section 60 of the Transfer of Property Act, it is open to the
Parties to extinguish a mortgage by mutual agreement before the expiry of the term
mentioned therein. But the tenant who is lawfully inducted on the property under the
terms of the mortgage cannot be evicted by the mortgagor or redemption of the mortgage
before the expiry of the period mentioned therein. In such a case the mortgage can
give symbolic possession to the mortgagor and the tenants thereafter, continues to be
a tenant under the mortgagor until he is evicted by the mortgagor under the provisions
of the Transfer of Property Act. (Thakur Madhaviji v. Lalji A.I.R. 1972 Guj. 37).
Exercise of the Right of Redemption:-
i) The mortgagors right of redemption is exercised- by paying or tendering mortgage-
money to the mortgagee outside the court, i.e., privately;
ii) by depositing the amount in the court; and
iii) by a suit for redemption, payment or tender
Before redemption can be claimed the mortgage money must have been: Paid, or
ii) tendered and the payment or tender must have been made at the proper time and
place. Payment may be made on the mortgagee himself or his authorised agent.
When, there are several mortgagees, the payment should be made to all of them
jointly.
A tender means an unconditional offer to pay the money under such circumstances
that the mortgagee may receive the money there.
Deposit:- Deposit:- Deposit:- Deposit:- Deposit:-
The second mode of redeeming a mortgagee is by depositing the whole amount
due in court when the mortgage-money becomes due.
Suit:- Suit:- Suit:- Suit:- Suit:-
This is the third mode of redeeming of the mortgaged property. Ordinarily, a suit
for redemption is a suit to enforce the right to redeem. The forms of decree enforcing
redemption are enacted in Order 34, Rules 7 and 8 of the Code of Civil Procedure,
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1908. The suit, like deposit or tender, can only be instituted after the principal money
has become due.
Mortgagors Right on Redemption:-
The mortgagors right of redemption are-
a) Delivery of the mortgage-deed and documents of title relating to the mortgaged
property,
b) Possession, and
c) Reconveyance and acknowledgement.
Extinguishment of Right of Redemption:-
The mortgagors right of redemption is extinguished: a) by foreclosure b) when the
mortgagee has exercised power of sale and c) when it becomes barred under Limitation
Act, 1963.
Clog on Redemption:-
A mortgage being a security for the debt, the right of redemption continues although
the mortgagor fails to pay the debt at the due date. Any provision inserted to prevent,
evade or hamper redemption is void.
60A 60A 60A 60A 60A. Obligation to transfer to third party instead of re . Obligation to transfer to third party instead of re . Obligation to transfer to third party instead of re . Obligation to transfer to third party instead of re . Obligation to transfer to third party instead of re- transference to mortgagor - transference to mortgagor - transference to mortgagor - transference to mortgagor - transference to mortgagor. .. ..-
(1) Where a mortgagor is entitled to redemption, then, on the fulfillment of any conditions
on the fulfillment of which he would be entitled to require a re-transfer, he may require
the mortgagee, instead of retransferring the property, to assign the mortgage-debt and
transfer the mortgaged property to such third person as the mortgagor may direct; and
the mortgagee shall be bound to assign and transfer accordingly.
(2) The rights conferred by this section belong to and may be enforced by the
mortgagor or by any encumbrancer notwithstanding an intermediate encumbrance;
but the requisition of any encumbrancer shall prevail over a requisition of the mortgagor
and, as between encumbrancers; the requisition of a prior encumbrancer shall prevail
over that of a subsequent encumbrancer.
(3) The provisions of this section do not apply in the case of a mortgagee who is or
has been in possession.
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S SS SS.60-B .60-B .60-B .60-B .60-B. Right to inspection and production of documents . Right to inspection and production of documents . Right to inspection and production of documents . Right to inspection and production of documents . Right to inspection and production of documents- - - - - A mortgagor, as long as
his right of redemption subsists, shall be entitled at all reasonable times, at his request
and at his own cost, and on payment of the mortgagees costs and expenses in this
behalf, to inspect and make copies or abstracts of, or extracts from, documents of title
relating to the mortgaged property which are in the custody or power of the mortgagee.
S SS SS. 61. Right to redeem separately or simultaneously . 61. Right to redeem separately or simultaneously . 61. Right to redeem separately or simultaneously . 61. Right to redeem separately or simultaneously . 61. Right to redeem separately or simultaneously. .. ..- -- --A mortgagor who has executed
two or more mortgages in favour of the same mortgagee shall, in the absence of a
contract to the contrary, when the principal money of any two or more of the mortgages
has become due, be entitled to redeem any one such mortgage separately, or any two
or more of such mortgages together.
Where the mortgagor has executed several mortgages in favour of the same
mortgagee over the same property he is in the absence of contract to the contrary
entitled to redeem any of them without at the same time redeeming the others.
Meaning of Consolidation:-
The term consolidation means the right of the mortgagee who holds several
mortgages executed by the same mortgagor to require the simultaneous redemption of
all the mortgages. The mortagee has this right in certain circumstances, but when it is
exercised the mortgagor cannot redeem the mortgage without at the same time
redeeming the others.
Illustrations
1. A, the owner of farms Z and Y, mortgages Z to B for Rs.1,000/- and afterwards
mortgages Y to B for Rs. 1,000/- . A may institute a suit for the redemption of the
mortgage of Z alone, B, the mortgagee, cannot compel A to redeem both Z and
Y together.
2. A, the owner of far Z, mortgages Z to B for Rs.5,000/-. Later, A mortgages Z
again to B for Rs.3,000/-. When the principal money becomes due, A may
redeem either the prior mortgages of Rs.5, 000/- or latter mortgage of Rs.3,000/
- or both.
It should be noted that this section applies, in the absence of contract to the
contrary so that the mortgagor and the mortgagee may agree among themselves that
a mortgagor of two properties shall not redeem one property without redeeming the
other property. But such agreement must expressly stated in the deed.
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62. Right of usufructuary mortgagor to recover possession. 62. Right of usufructuary mortgagor to recover possession. 62. Right of usufructuary mortgagor to recover possession. 62. Right of usufructuary mortgagor to recover possession. 62. Right of usufructuary mortgagor to recover possession.-In the case of a
usufructuary mortgage, the mortgagor has a right to recover possession of the property
together with the mortgage-deed and all documents relating to the mortgaged property
which are in the possession or power of the mortgagee,
(a) where the mortgagee is authorized to pay himself the mortgage-money from the
rents and profits of the property,when such money is paid;
(b) where the mortgagee is authorized to pay himself from such rents and profits or
any part thereof a part only of the mortgage-money, when the term, if any,
prescribed for the payment of the mortgage-money has expired and the mortgagor
pays or tenders to the mortgagee the mortgage-money or the balance thereofor
deposits it in Court as hereinafter provided.
This section would be read along with section 60 which lays down that a mortgagor
who wants to redeem must pay the mortgage money. In case of a usufructuary mortgage,
special provision is made in this section as to when the mortgagor can recover possession
of the mortgaged property. Under the terms of the section, in cases where the mortgagee
is authorised to pay himself out of the rents and profits of the property, the mortgagor
can recover possession only when such money is realised. He cannot pay cash and
recover possession. If, on the other hand, the mortgage-deed provides for the payment
only of interest or part of the mortgage money out of the income, a term may be fixed
for the payment of the principal or the balance of the mortgage-money out of the
income, a term may be fixed for the payment of the principal or the balance of the
mortgage-money as the case may be. In such a case, the mortgagor can recover
possession on the expirty of the term and on the payment or tender to the mortgagee of
the mortgage-money or the balance thereof.
63. A 63. A 63. A 63. A 63. Accession to mortgaged property ccession to mortgaged property ccession to mortgaged property ccession to mortgaged property ccession to mortgaged property.- .- .- .- .-Where mortgaged property in possession of
the mortgagee has, during the continuance of the mortgage, received any accession,
the mortgagor, upon redemption, shall, in the absence of a contract to the contrary, be
entitled as against the mortgagee to such accession.
Accession acquired by virtue of transferred ownership.-Where such accession has
been acquired at the expense of the mortgagee, and is capable of separate possession
or enjoyment without detriment to the principal property, the mortgagor desiring to take
the accession must pay to the mortgagee the expense of acquiring it. If such separate
possession or enjoyment is not possible, the accession must be delivered with the property;
the mortgagor being liable, in the case of an acquisition necessary to preserve the
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property from destruction, forfeiture or sale, or made with his assent, to pay the proper
cost thereof, as an addition to the principal money, with interest at the same rate as is
payable on the principal, or, where no such rate is fixed, at the rate of nine per cent. per
annum.
In the case last mentioned the profits, if any, arising from the accession shall be
credited to the mortgagor.
Where the mortgage is usufructuary and the accession has been acquired at the
expense of the mortgagee, the profits, if any, arising from the accession shall, in the
absence of a contract to the contrary, be set off against interest, if any, payable on the
money so expended.
Accession to the Mortgaged Property:-
The term accession primarily denotes physical accretions or additions whether
brought about by natural or artificial means. The general rule is that where mortgaged
property in possession of the mortgagee has received any accession, the mortgagor,
upon redemption, is entitled to such accession.
63A 63A 63A 63A 63A. Improvements to mortgaged property . Improvements to mortgaged property . Improvements to mortgaged property . Improvements to mortgaged property . Improvements to mortgaged property. .. ..-(1) Where mortgaged property in
possession of the mortgagee has, during the continuance of the mortgage, been
improved, the mortgagor, upon redemption, shall, in the absence of a contract to the
contrary, be entitled to the improvement; and the mortgagor shall not, save only in
cases provided for in sub-section (2), be liable to pay the cost thereof.
(2) Where any such improvement was effected at the cost of the mortgagee and
was necessary to preserve the property from destruction or deterioration or was necessary
to prevent the security from becoming insufficient, or was made in compliance with the
lawful order of any public servant or public authority, the mortgagor shall, in the absence
of a contract to the contrary, be liable to pay the proper cost thereof as an addition to
the principal money with interest at the same rate as is payable on the principal, or,
where no such rate is fixed, at the rate of nine per cent. per annum, and the profits, if
any, accruing by reason of the improvement shall be credited to the mortgagor.
Improvements to Mortgaged Property:-
The object is to prevent the mortgagee from spending large sums of money and
then charging the mortgagor for it and in consequence make it almost impossible for
him to redeem.
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67. Right to foreclosure or sale. 67. Right to foreclosure or sale. 67. Right to foreclosure or sale. 67. Right to foreclosure or sale. 67. Right to foreclosure or sale.-In the absence of a contract to the contrary, the
mortgagee has, at any time after the mortgage-money has become due to him, and
before a decree has been made for the redemption of the mortgaged property, or the
mortgage-money has been paid or deposited as hereinafter provided, a right to obtain
from the court a decree that the mortgagor shall be absolutely debarred of his right to
redeem the property, or a decree that the property be sold.
A suit to obtain a decree that a mortgagor shall be absolutely debarred of his right
to redeem the mortgaged property is called a suit for foreclosure.
Nothing in this section shall be deemed
(a) to authorize any mortgagee other than a mortgagee by conditional sale or a
mortgagee under an anomalous mortgage by the terms of which he is entitled to
foreclose, to institute a suit for foreclosure, or an usufructuary mortgagee as such
or a mortgagee by conditional sale as such to institute a suit for sale; or
(b) to authorize a mortgagor who holds the mortgagees rights as his trustee or legal
representative, and who may sue for a sale of the property, to institute a suit for
foreclosure; or
(c) to authorize the mortgagee of a railway, canal or other work in the maintenance
of which the public are interested, to institute a suit for foreclosure or sale; or
(d) to authorize a person interested in part only of the mortgage-money to institute a
suit relating only to a corresponding part of the mortgaged property, unless the
mortgagees have, with the consent of the mortgagor, severed their interests under
the mortgage.
The Mortgagees Remedies:-
Whatever form the mortgage takes, the mortgagee is never really considered in
any sense owner of the mortgaged property. He has only a security over the property,
and this security consists of nothing more than the aggregate of the various rights. He
has to enforce the security if the mortgagor defaults to pay the mortgage-debt. Those
rights are, firstly, against the mortgaged property, and, secondly, against the mortgagee
personally. This section refers to the remedy against the property mortgaged, while
section 68 provides for the personal remedy of the mortgagee. Under certain conditions,
the mortgagee is given power under section 69-A to have a receiver of the mortgaged
property appointed.
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Right to Foreclosure or Sale:-
This section is the counter part of section 60, and gives the mortgagee a right of
foreclosure or sale in default of redemption by the mortgagor. If the mortgagor has
paid or deposited the mortgaged money, there is no occasion for the exercise of the
right of foreclosure or sale. Again, if a decree for redemption is made, a suit for
foreclosure or sale would be in fructuous, especially as a redemption decree itself
provides for sale or foreclosure in default of payment.
There is, however, one fundamental point of difference between the mortgagors
right of redemption and the mortgagees right to foreclosure or sale. The difference is
that the right of redemption is not subject to a contract to the contrary while the right to
foreclosure or sale may be curtailed by agreement of the parties.
Right to Foreclosure or Sale:-
In the absence of a contract to contrary the mortgagee has, at any time after the
mortgage money has become due to him and before a decree has been made for the
redemption of the mortgaged property and the mortgage money has been paid or
deposited as hereinafter provided, a right to obtain from the court a decree that the
mortgagor shall be absolutely debarred of his right to redeem the property, or a decree
that the property be sold.
A suit to obtain a decree that a mortgagor shall be absolutely debarred of his right
to redeem the mortgage property is called a suit for foreclosure.
Section 67 specifies two remedies, viz., foreclosure and sale available to a mortgagee
under different forms of the mortgage.
S.59-A Reference to Mortgagors and Mortgagees to include Persons
Delivering Title from them:-
Unless otherwise expressly provide references in this chapter to mortgagors and
mortgagees shall be deemed to include references to persons deriving title from them
respectively.
According to the section 59-A, the term mortgagor includes persons succeeding
a mortgagor by inheritance or under a will or by sale or by court-sale. In vew of this
section the word mortgagor as used in section 69(1) ( c) includes also a subsequent
purchaser of the mortgaged property.
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For purposes of section 59-A the transfer may either be voluntary transfer or an
involuntary transfer, for example, court-sale.
Similarly, in view of this section, the word mortgagee in section 60 and 62 intended
to mean not only mortgage but all persons who derive title from him.
Right to Sell without the Intervention of Court (S.69)
69. P 69. P 69. P 69. P 69. Power of sale when valid ower of sale when valid ower of sale when valid ower of sale when valid ower of sale when valid.-A mortgagee, or any person acting on his behalf,
shall, subject to the provisions of this section, have power to sell or concur in selling the
mortgaged property, or any part thereof, in default of payment of the mortgage- money,
without the intervention of the Court, in the following cases and in no others, namely:-
(a) where the mortgage is an English mortgage, and neither the mortgagor nor the
mortgagee is a Hindu, Mohammadan or Buddhist or a member of any other
race, sect, tribe or class from time to time specified in this behalf by the State
Government, in the Official Gazette;
(b) where a power of sale without the intervention of the Court is expressly conferred
on the mortgagee by the mortgage-deed and the mortgagee is the Government;
(c) where a power of sale without the intervention of the
Court is expressly conferred on the mortgagee by the mortgage-deed and the
mortgaged property or any part thereof was, on the date of the execution of the mortgage-
deed, situated within the towns of Calcutta, Madras, Bombay, or in any other town or
area which the State Government may, by notification in the Official Gazette, specify in
this behalf.
No such power shall be exercised unless and until
[(a)] notice in writing requiring payment of the principal money has been served
on the mortgagor, or on one of several mortgagors, and default has been
made in payment of the principal money, or of part thereof, for three months
after such service; or
[(b)] some interest under the mortgage amounting at least to five hundred rupees
is in arrear and unpaid for three months after becoming due.
2) When a sale has been made in professed exercise of such a power, the title of
the purchaser shall not be impeachable on the ground that no case had arisen to
authorize the sale, or that due notice was not given, or that the power was otherwise
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improperly or irregularly exercised; but any person damnified by an unauthorized or
improper or irregular exercise of the power shall have his remedy in damages against
the person exercising the power.
3) The money which is received by the mortgagee, arising from the sale, after
discharge of prior incumbrances, if any, to which the sale is not made subject, or after
payment into Court under section 57 of a sum to meet any prior in cumbrance, shall,
in the absence of a contract to the contrary, be held by him in trust to be applied by
him, first, in payment of all costs, charges and expenses properly incurred by him as
incident to the sale or any attempted sale; and, secondly, in discharge of the mortgage-
money and costs and other money, if any, due under the mortgage; and the residue of
the money so received shall be paid to the person entitled to the mortgaged property,
or authorized to give receipts for the proceeds of the sale thereof.
A mortgagee has the power to sell, or concur in selling, the mortgaged property or
any part thereof in default of payment of the mortgage-money without the intervention
of the court in the following three cases, and in no others, namely:
1) Where the mortgage is an English mortgage, and neither the mortgagor nor the
mortgagee is a (i) Hindu (ii) Buddhist, or (iii) Mohammedan, or (iv) a member of
any other race, sect, tribe or class from time to time specified in this behalf by the
State Government in the Official Gazette.
2) Where the Government is the mortgagee, and a power of sale without the
intervention of court is expressly conferred by the mortgage-deed:
3) Where the mortgaged property is situated in Calcutta, Madras and Bombay, or
any other Gazetted town or area, provided the power of sale without the intervention
of court is expressly conferred by the mortgage-deed:
4) However this power can be exercised only-
i ) When the principal money (or part thereof) has remained unpaid for three
months after service of notice in writing requiring payment on the mortgagor
or one of several mortgagors, or
i i ) When the interest is not less than Rs. 500/- in amount is in arrears and
remains unpaid for 3 months.
The mortgagee himself cannot buy the property directly or through an agent, for a
man cannot sell to himself.
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Remedy for Improper Exercise of the Power of Sale:-
S SS SS. 69 (3): . 69 (3): . 69 (3): . 69 (3): . 69 (3): When a sale has been made in the professed exercise of such a power,
the title of the purchaser is not impeachable on the ground that no case had arisen to
authorize the sale, or that due notice was not given, or that the power was otherwise
improperly or irregularly exercised, but any one put to any loss by an unauthorized or
improper or irregular exercise of the power, has a remedy in damages against the
person exercising the power.
Sec.73 Right to Proceeds of Revenue Sale or Compensation on Acquisition: -
(1) Where the mortgaged property or any part thereof or any interest therein is sold
owing to failure to pay arrears of revenue or other charges of a public nature or
rent due in respect of such property, and such failure did not arise from any
default of the mortgagee, the mortgagee shall be entitled to claim payment of the
mortgage-money, in whole or in part, out of any surplus of the sale proceeds
remaining after payment of the arrears and of all charges and deductions directed
by law.
(2) Where the mortgaged property or any part thereof or any interest therein is acquired
under the Land Acquisition Act, 1894 (1of 1894), or any other enactment for the
time being in force providing for the compulsory acquisition of immoveable
property, the mortgagee shall be entitled to claim payment of the mortgage-
money, in whole or in part, out of the amount due to the mortgagor as
compensation.
(3) Such claims shall prevail against all other claims except those of prior
encumbrances, and may be enforced notwithstanding that the principal money
on the mortgage has not become due.
4) Where the mortgaged property is sold owing to failure to pay arrears of revenue
or public charges or rent due in respect of such property, and such failure did not
arise from any default of the mortgageethe mortgagee is entitled to claim
payment of the mortgage-money out of any surplus of the sale proceeds remaining
after payment of the arrears, charges, deductions etc.,
Where the mortgaged property is acquired under the Land Acquisition Act, 1894,
or any other like enactment, the mortgagee is entitled to claim payment of the
mortgage money, out of the amount due to the mortgagor as compensation.
Such claims shall prevail against all other claims except those of prior
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encumbrances, and may be enforced notwithstanding that the principal money
on the mortgage has not become due.
Mortgagees Right to Get Proceeds of Revenue Sales etc.:-
Section 73(1) provides that if the mortgaged property is sold due to non-payment
of government dues, the mortgagee is entitled to claim the amount of his mortgage-
money from the proceeds of such sale. The mortgaged property belongs to mortgagor
who is liable to pay all the outgoings such as revenue, rent and taxes or other charges
of the public nature. Where mortgagor defaults in payment of the government dues,
the property is sold by the authorities who recover the required dues from proceeds of
the sale. After payment of government dues, there may still remain the surplus of the
price on which property was sold. The mortgagee has right to claim his mortgage-debt
from out of this surplus amount. After payment of mortgagees debts, if there still
remains some money, it ultimately goes to the mortgagor whose property was sold.
Right to Compensation on Acquisition:-
Section 73(2) provides that where the mortgaged property is acquired under the
Land Acquisition Act, 1894 or any other enactment and compensation is paid, the
mortgagee can claim his debt from such compensation. Section 73(3) enacts that a
mortgagees claim of mortgage money (from out of the proceeds of revenue sale or
from compensation on acquisition) shall get priority over other claims on the property
except prior encumbrances, if any. Thus, mortgagees claim under this section shall
prevail over any unsecured money debt taken by mortgagor. Further, the mortgagee
under this section is entitled to enforce his claim even though the mortgage-money has
not become due. This is obvious, because neither sale in default of paymentof revenue
nor acquisition under an enactment takes into consideration the date on which the debt
becomes payable.
Charges
S SS SS.100. Charges.- .100. Charges.- .100. Charges.- .100. Charges.- .100. Charges.-Where immoveable property of one person is by act of parties or
operation of law made security for the payment of money to another, and the transaction
does not amount to a mortgage, the latter person is said to have a charge on the
property; and all the provisions hereinbefore contained which apply to a simple mortgage
shall, so far as may be, apply to such charge.
Nothing in this section applies to the charge of a trustee on the trust-property for
expenses properly incurred in the execution of his trust, and, save as otherwise expressly
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provided by any law for the time being in force, no charge shall be enforced against
any property in the hands of a person to whom such property has been transferred for
consideration and without notice of the charge.
S SS SS.101. No merger in case of subsequent encumbrance. .101. No merger in case of subsequent encumbrance. .101. No merger in case of subsequent encumbrance. .101. No merger in case of subsequent encumbrance. .101. No merger in case of subsequent encumbrance.-Any mortgagee of, or
person having a charge upon, immoveable property, or any transferee from such
mortgagee or charge holder, may purchase or otherwise acquire the rights in the property
of the mortgagor or owner, as the case may be, without thereby causing the mortgage
or charge to be merged as between himself and any subsequent mortgagee of, or
person having a subsequent charge upon, the same property; and no such subsequent
mortgagee or charge-holder shall be entitled to foreclose or sell such propertywithout
redeeming the prior mortgage or charge, or otherwise than subject thereto.
S SS SS.102. .102. .102. .102. .102. Service or tender on or to agent.- Service or tender on or to agent.- Service or tender on or to agent.- Service or tender on or to agent.- Service or tender on or to agent.-Where the person on or to whom any
notice or tender is to be served or made under this Chapter does not reside in the
district in which the mortgaged property or some part thereof is situate, service or
tender on or to an agent holding a general power-of-attorney from such person or
otherwise duly authorized to accept such service or tender shall be deemed sufficient.
Where no person or agent on whom such notice should be served can be found or
is known to the person required to serve the notice, the latter person may apply to any
Court in which a suit might be brought for redemption of the mortgaged property, and
such Court shall direct in what manner such notice shall be served, and any notice
served in compliance with such direction shall be deemed sufficient:
Provided that, in the case of a notice required by section 83, in the case of a
deposit, the application shall be made to the Court in which the deposit has been
made.
Where no person or agent to whom such tender should be made can be found or
is known to the person desiring to make the tender, the latter person may deposit in any
Court in which a suit might be brought for redemption of the mortgaged property the
amount sought to be tendered, and such deposit shall have the effect of a tender of
such amount.
S SS SS.103. Notice, etc., to or by person incompetent to contract.- .103. Notice, etc., to or by person incompetent to contract.- .103. Notice, etc., to or by person incompetent to contract.- .103. Notice, etc., to or by person incompetent to contract.- .103. Notice, etc., to or by person incompetent to contract.- Where, under the
provisions of this Chapter, a notice is to be served on or by, or a tender or deposit made
or accepted or taken out of Court by, any person incompetent to contact, such notice
may be served on or by, or tender or deposit made, accepted or taken by, the legal
curator of the property of such person; but where there is no such curator, and it is
requisite or desirable in the interests of such person that a notice should be served or a
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tender or deposit made under the provisions of this Chapter, application may be made
to any Court in which a suit might be brought for the redemption of the mortgage to
appoint a guardian ad litem for the purpose of serving or receiving service of such
notice, or making or accepting such tender, or making or taking out of Court such
deposit, and for the performance of all consequential acts which could or ought to be
done by such person if he were competent to contract ; and the provisions of Order
XXXII in the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908)] shall, so
far as may be, apply to such application and to the parties thereto and to the guardian
appointed there under.
S SS SS.104. P .104. P .104. P .104. P .104. Power to make rules.- ower to make rules.- ower to make rules.- ower to make rules.- ower to make rules.-The High Court may, from time to time, make rules
consistent with this Act for carrying out, in itself and in the Courts of Civil Judicature
subject to its superintendence, the provisions contained in this Chapter.
Definition Definition Definition Definition Definition: - Where immovable property of one person is a) by act of parties or
operation of law, b) made security for the payment of money to another and the
transaction does not amount to a mortgagethe latter person is said to have a charge
on the property.
All the provisions, which apply to a simple mortgage, apply to a charge. No charge
can be enforced against any property in the hands of a person to whom such property
is transferred for consideration and without notice of such charge.
Exception: Exception: Exception: Exception: Exception: - It does not apply to the charge of a trustee on the trust-property for
expenses properly incurred in the execution of his trust.
Requisites of Charge by Act of Parties:-
1) It does not contemplate any transfer of an interest in the immovable property.
2) The property should be specified.
3) It is not necessary to use any technical terms.
4) It must be created in favour of a particular person specifically named.
5) A charge is a security for the payment of money. A mortgage is a security for the
payment of debt.
6) A charge may be created upon the wealth or property of a person. A mortgage
must be executed in respect of a specified property.
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7) In charge there is no covenant to pay. In a mortgage there may be a covenant to
pay.
8) A charge may arise either by act of parties or by operation of law. A mortgage can
only be made by act of parties.
9) In charge there is no personal liability.
10) A charge created by operation of law does not require registration. On the other
hand mortgage can be affected only by a registered instrument.
11) A charge created by act of parties requires registration irrespective of the amount
involved.
12) A charge does not create right in rem. It is available only against a particular set
of persons, who are affected with notice of charge. A mortgage gives rise to a
right in rem.
13) A charge holder (by operation of law) cannot follow his security into whatsoever
hands it goes. A mortgage can follow his security into whatsoever hand it goes.
14) A charge on future property is valid and operates on such property when it comes
into existence.
15) A charge cannot be created on a future contingency.
Kinds of Charges:-
Charges are of two kinds. 1) Charges created by act of parties, and
2) Charges arising by operation of law.
1) Charges created by act of parties:- 1) Charges created by act of parties:- 1) Charges created by act of parties:- 1) Charges created by act of parties:- 1) Charges created by act of parties:- A charge is created by act of parties when
it takes place between two living persons. A charge by act of parties is constituted by an
agreement between two or more persons. Under such agreement some immovable
property is specified as security for repayment of a certain sum of money, without
transfer of any interest of that property. No particular mode of creating a charge has
been provided in this Act. Therefore, the general rule as laid down in section 9 may
apply under which a charge may also be created orally. But where the agreement
creating charge is in writing, it must be registered if the charge is valued Rs.100 or
upwards.
2) Charge arising by operation of law: 2) Charge arising by operation of law: 2) Charge arising by operation of law: 2) Charge arising by operation of law: 2) Charge arising by operation of law:- Where a charge is created without reference
to any agreement or stipulation between the parties, the charge is said to be created by
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law. Charge by operation of law results due to some legal obligation. In other words,
such charges arise under some provision of law irrespective of any agreement between
the paties.
Extinction of Charge:-
Charges are enforced like a simple mortgage. Like a simple mortgagee, the charge-
holder too can enforce his claim and recover the money by causing sale of the charged
property. Similarly, the charges are extinguished in the same manner as a simple
mortgage. Accordingly, the charges may be extinguished by i) act of parties ii) novation
and iii) merger.
S.101. Merger:-
This section lays down the rule that when a mortgagee or charge-holder acquires
the rights of mortgagor or owner of property, there is no merger if there is any subsisting
interest of third person. In other words the mortgagee or charge holder may acquire the
rights in property without thereby causing merger of such charge or mortgage between
himself and the subsequent mortgagee or charge holder.
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CHAPTER VI
OF LEASES OF IMMOVABLE PROPERTY
(Ss. 105-117)
Definition of Lease (S.105)
S SS SS.105. L .105. L .105. L .105. L .105. Lease defined.- ease defined.- ease defined.- ease defined.- ease defined.- A lease of immoveable property is a transfer
of a right to enjoy such property, made for a certain time, express or
implied, or in perpetuity, in consideration of a price paid or promised, or
of money, a share of crops, service or any other thing of value, to be
rendered periodically or on specified occasions to the transferor by the
transferee, who accepts the transfer on such terms.
Lessor, lessee, premium and rent defined.-The transferor is called
the lessor, the transferee is called the lessee, the price is called the
premium, and the money, share, service or other thing to be so rendered
is called the rent. Any class of such leases may be made by unregistered
instrument or by oral agreement without delivery of possession.
Section 105 defines lease. A lease of immovable property is a transfer
of a right to enjoy such property for a certain time (express or implied),
or in perpetuity, in consideration of (i) a price paid or promised, or (ii) of
money (iii) a share of crops (iv) service or (v) any other thing of value, to
be rendered periodically, or on specified occasions, to the transferor by
the transferee, who accepts the transfer on such terms.
As is evident from the definition, lease is not a transfer of ownership
in property; it is transfer of an interest in an immovable property. The
interest is the right to use or enjoy the immovable property. Since interest
in an immovable property is considered as property, lease is a transfer of
property. However, lease is a transfer of only a partial interest. It is not a
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transfer of absolute interest. Lease contemplates separation of right of possession from
the ownership. The interest which is transferred is the right of enjoyment of property for
fixed period on payment of some consideration in cash or kind. The transferor is called
lessor is usually called land lord and the lessee is known as tenant. Price is called
premium and the money, shares, service or other things so given is called the rent.
A lease of immovable property i) from year to year, or ii) for any term exceeding
one year, can be made only by a registered instrument.
In any other case i) either by a registered instrument, or ii) by oral agreement
accompanied by delivery of possession. Both the lessor and lessee must execute the
instrument.
S.106 Duration and Termination of Leases: -
A LEASE OF IMMOVABLE PROPERTY FOR AGRICULTURAL OR MANUFACTURING
PURPOSES SHALL BE DEEMED TO BE A LEASE FROM YEAR TO YEAR TERMINABLE,
ON THE PART OF EITHER LESSOR OR LESSEE, BY SIX MONTHS NOTICE, EXPIRING
WITH THE END OF A YEAR OF THE TENANCY.
A lease of immovable property for any other purpose shall be deemed to be a lease
from month to month terminable, on the part of either lessor or lessee, by fifteen days
notice expiring with the end of a month of the tenancy.
The above statutory presumptions as to duration arise only when there is no
agreement between the parties, or local usage to the contrary.
Requisites of Notice: -
Every notice under this section must be in writing, signed by or on behalf of the
persons giving it.
S SS SS. 107. L . 107. L . 107. L . 107. L . 107. Leases how made.- eases how made.- eases how made.- eases how made.- eases how made.-A lease of immoveable property from year to year, or
for any term exceeding one year, or reserving a yearly rent, can be made only by a
registered instrument.
All other leases of immoveable property may be made either by a registered
instrument or by oral agreement accompanied by delivery of possession.
Where a lease of immoveable property is made by a registered instrument, such
instrument or, where there are more instruments than one, each such instrument shall
be executed by both the lessor and the lessee:
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Provided that the State Government may, from time to time, by notification in the
Official Gazette, direct that leases of immoveable property, other than leases from year
to year, or for any term exceeding one year, or reserving a yearly rent, or any class of
such leases, may be made by unregistered instrument or by oral agreement without
delivery of possession.
S.107 provides for the modes of making leases. Like other transactions, certain
formalities are necessary alsofor completinga lease. This section provides for two
modes of creation of leases.
A. Leases which can be made only by registration-
a) Leases from year to year
b) Leases for a term exceeding one year
c) Permanent leases
B) Leases in which registration is optional-
a) Leases from month to month
b) Leases for a term of 11 months.
Effect of non-registration:- Effect of non-registration:- Effect of non-registration:- Effect of non-registration:- Effect of non-registration:-
Where a lease is compulsorily registerable but has not been registered, the leazse
is invalid.If the registration of a lease is necessary under section 107; the provision for
its renewal shall not affect the requirement of its registration when a registered lease is
further renewed. No valid lease would come into existence unless registration made.
S SS SS. 108. Rights and liabilities of lessor and lessee.- . 108. Rights and liabilities of lessor and lessee.- . 108. Rights and liabilities of lessor and lessee.- . 108. Rights and liabilities of lessor and lessee.- . 108. Rights and liabilities of lessor and lessee.-In the absence of a contract or
local usage to the contrary, the lessor and the lessee of immoveable property, as against
one another, respectively, possess the rights and are subject to the liabilities mentioned
in the rules next following, or such of them as are applicable to the property leased:
(A) Rights and Liabilities of the L (A) Rights and Liabilities of the L (A) Rights and Liabilities of the L (A) Rights and Liabilities of the L (A) Rights and Liabilities of the Lessor essor essor essor essor
(a) The lessor is bound to disclose to the lessee any material defect in the property,
with reference to its intended use, of which the former is and the latter is not
aware, and which the latter could not with ordinary care discover;
(b) the lessor is bound on the lessees request to put him in possession of the property;
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(c) the lessor shall be deemed to contract with the lessee that, if the latter pays the
rent reserved by the lease and performs the contracts binding on the lessee, he
may hold the property during the time limited by the lease without interruption.
The benefit of such contract shall be annexed to and go with the lessees interest as
such, and may be enforced by every person in whom that interest is for the whole or any
part thereof from time to time vested.
(B) Rights and Liabilities of the L (B) Rights and Liabilities of the L (B) Rights and Liabilities of the L (B) Rights and Liabilities of the L (B) Rights and Liabilities of the Lessee essee essee essee essee
(a) If during the continuance of the lease any accession is made to the property, such
accession (subject to the law relating to alluvion for the time being in force) shall
be deemed to be comprised in the lease;
(b) if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible
force, any material part of the property be wholly destroyed or rendered substantially
and permanently unfit for the purposes for which it was let, the lease shall, at the
option of the lessee, be void;
Provided that, if the injury be occasioned by the wrongful act or default of the
lessee, he shall not be entitled to avail himself of the benefit of this provision;
(c) if the lessor neglects to make, within a reasonable time after notice, any repairs
which he is bound to make to the property, the lessee may make the same himself,
and deduct the expense of such repairs with interest from the rent, or otherwise
recover it from the lessor;
(d) if the lessor neglects to make any payment which he is bound to make, and
which, if not made by him, is recoverable from the lessee or against the property,
the lessee may make such payment himself, and deduct it with interest from the
rent, or otherwise recover it from the lessor;
(e) the lessee may [even after the determination of the lease] remove, at any time
[whilst he is in possession of the property leased but not afterwards] all things
which he has attached to the earth: provided he leaves the property in the state in
which he received it;
(f) when a lease of uncertain duration determines by any means except the fault of
the lessee, he or his legal representative is entitled to all the crops planted or
sown by the lessee and growing upon the property when the lease determines,
and to free ingress and egress to gather and carry them;
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(g) the lessee may transfer absolutely or by way of mortgage or sub-lease the whole
or any part of his interest in the property, and any transferee of such interest or
part may again transfer it. The lessee shall not, by reason only of such transfer,
cease to be subject to any of the liabilities attaching to the lease;
nothing in this clause shall be deemed to authorize a tenant having an un-
transferable right of occupancy, the farmer of an estate in respect of which default
has been made in paying revenue, or the lessee of an estate under the management
of a Court of Wards, to assign his interest as such tenant, farmer or lessee:
(h) the lessee is bound to disclose to the lessor any fact as to the nature or extent of
the interest which the lessee is about to take, of which the lessee is, and the lessor
is not, aware, and which materially increases the value of such interest;
(i) the lessee is bound to pay or tender, at the proper time and place, the premium
or rent to the lessor or his agent in this behalf;
(j) the lessee is bound to keep, and on the termination of the lease to restore, the
property in as good condition as it was in at the time when he was put in possession,
subject only to the changes caused by reasonable wear and tear or irresistible
force, and to allow the lessor and his agents, at all reasonable times during the
term, to enter upon the property and inspect the condition thereof and give or
leave notice of any defect in such condition; and, when such defect has been
caused by any act or default on the part of the lessee, his servants or agents, he
is bound to make it good within three months after such notice has been given or
left;
(k) if the lessee becomes aware of any proceeding to recover the property or any part
thereof, or of any encroachment made upon, or any interference with, the lessors
rights concerning such property, he is bound to give, with reasonable diligence,
notice thereof to the lessor;
(l) the lessee may use the property and its products (if any) as a person of ordinary
prudence would use them if they were his own;
but he must not use, or permit another to use, the property for a purpose other
than that for which it was leased, or fell [or sell] timber, pull down or damage
buildings 1*[belonging to the lessor, or] work mines or quarries not open when
the lease was granted, or commit any other act which is destructive or permanently
injurious thereto;
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(m) he must not, without the lessors consent, erect on the property any permanent
structure, except for agricultural purposes;
(n) on the determination of the lease, the lessee is bound to put the lessor into
possession of the property.
S SS SS.109. Rights of lessors transferee. .109. Rights of lessors transferee. .109. Rights of lessors transferee. .109. Rights of lessors transferee. .109. Rights of lessors transferee.-If the lessor transfers the property leased, or
any part thereof, or any part of his interest therein, the transferee, in the absence of a
contract to the contrary, shall possess all the rights, and, if the lessee so elects, be
subject to all the liabilities of the lessor as to the property or part transferred so long as
he is the owner of it; but the lessor shall not, by reason only of such transfer, cease to be
subject to any of the liabilities imposed upon him by the lease, unless the lessee elects
to treat the transferee as the person liable to him;
Provided that the transferee is not entitled to arrears of rent due before the transfer,
and that, if the lessee, not having reason to believe that such transfer has been made,
pays rent to the lessor, the lessee shall not be liable to pay such rent over again to the
transferee.
The lessor, the transferee and the lessee may determine what proportion of the
premium or rent reserved by the lease is payable in respect of the part so transferred,
and, in case they disagree, such determination may be made by any Court having
jurisdiction to entertain a suit for the possession of the property leased.
S SS SS.110. Exclusion of day on which term commences. .110. Exclusion of day on which term commences. .110. Exclusion of day on which term commences. .110. Exclusion of day on which term commences. .110. Exclusion of day on which term commences.-Where the time limited by a
lease of immoveable property is expressed as commencing from a particular day, in
computing that time such day shall be excluded. Where no day of commencement is
named, the time so limited begins from the making of the lease.
Duration of lease for a year.-Where the time so limited is a year or a number of
years, in the absence of an express agreement to the contrary, the lease shall last
during the whole anniversary of the day from which such time commences.
S SS SS.111. Determination of lease.- .111. Determination of lease.- .111. Determination of lease.- .111. Determination of lease.- .111. Determination of lease.-A lease of immoveable property determines
(a) by efflux of the time limited thereby;
(b) where such time is limited conditionally on the happening of some eventby the
happening of such event;
(c) where the interest of the lessor in the property terminates on, or his power to
dispose of the same extends only to, the happening of any eventby the happening
of such event;
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(d) in case the interests of the lessee and the lessor in the whole of the property
become vested at the same time in one person in the same right;
(e) by express surrender; that is to say, in case the lessee yields up his interest under
the lease to the lessor, by mutual agreement between them;
(f) by implied surrender;
(g) by forfeiture; that is to say, (1) in case the lessee breaks an express condition
which provides that, on breach thereof, the lessor may re-enter or (2) in case the
lessee renounces his character as such by setting up a title in a third person or by
claiming title in himself; or (3) the lessee is adjudicated an insolvent and the lease
provides that the lessor may re-enter on the happening of such event]; and in
[any of these cases] the lessor or his transferee [gives notice in writing to the
lessee of] his intention to determine the lease;
(h) on the expiration of a notice to determine the lease, or to quit, or of intention to
quit, the property leased, duly given by one party to the other.
Illustration to clause (f)
A lessee accepts from his lessor a new lease of the property leased, to take effect
during the continuance of the existing lease.
This is an implied surrender of the former lease, and such lease determines
thereupon.
Forfeiture of a Lease (Ss.111, 112,114 &115): -
A lease determines by forfeiture in the following cases
i) Where the lessee commits a breach of an express condition which provides that
on breach thereof the lessor may re-enter, or ii) where the lessee renounces his
character as such by setting up a title in a third person or by claiming title in
himself, or
iii) Where the lessee is adjudged an insolvent and the lease provides that the lessor
may re-enter on the happening of such event.
In any of these cases mentioned above the lease does not determine immediately
on the happening of the contingency. It is obligatory on the lessor or his transferee to
give notice in writing to the lessee of his intention to determine the lease. Though the
notice need not be in accordance with section 106, it should contain any one of the
grounds mentioned above and the intention of the lessee to determine the lease.
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Expiration of notice to quit:- Expiration of notice to quit:- Expiration of notice to quit:- Expiration of notice to quit:- Expiration of notice to quit:-
The last mode in which a lease is terminated is when a notice to quit or to determine
the lease expires. Such notice is necessary only in cases of periodic tenancy such as a
tenancy from year to year or from month to month under section 106. Where the term
is fixed, the lease would determine by efflux of time under clause (a) of the section.
Where the tenancy is permanent no question of determining it arises. Where it is
tenancy at will, it is determinable at the will of either party by the tenant giving up
possession or by a demand for possession by the landlord or by the death of either
party. A tenancy at sufferance does not need any determination and the landlord can
straightway sue the tenant for eviction. The notice is therefore needed only where the
tenancy either expressly or by implication falls under section 106.Where the term is
fixed, the lease would determine by efflux of time under clause (a) of the section.
Where the tenancy is permanent no question of determining it arises. Where it is a
tenancy at will, it is determinable at the will of either party by the tenant giving up
possession or by a demand for possession by the land lord or by the death of either
party. A tenancy at sufferance does not need any determination and the landlord can
straightway sue the tenant for eviction. The notice is therefore needed only where the
tenancy either expressly or by implication falls under section 106.
A notice of determination of tenancy under the T.P.Act is a statutory requirement
and constitutes an important ingredient of the cause of action to file the suit, and the
parties themselves cannot contract out the provisions of the Act requiring notice of
determination. (1972) RCJ.49.
S SS SS. 112. W . 112. W . 112. W . 112. W . 112. Waiver of forfeiture.- aiver of forfeiture.- aiver of forfeiture.- aiver of forfeiture.- aiver of forfeiture.-A forfeiture under section 111, clause (g), is waived
by acceptance of rent which has become due since the forfeiture, or by distress for such
rent, or by any other act on the part of the lessor showing an intention to treat the lease
as subsisting:
Provided that the lessor is aware that the forfeiture has been incurred;
Provided also that, where rent is accepted after the institution of a suit to eject the
lessee on the ground of forfeiture, such acceptance is not a waiver.
S SS SS.113. W .113. W .113. W .113. W .113. Waiver of notice to quit.- aiver of notice to quit.- aiver of notice to quit.- aiver of notice to quit.- aiver of notice to quit.-A notice given under section 111, clause (h), is
waived, with the express or implied consent of the person to whom it is given, by any act
on the part of the person giving it showing an intention to treat the lease as subsisting.
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(a) A, the lessor, gives B, the lessee, notice to quit the property leased. The notice
expires. B tenders, and A accepts, rent which has become due in respect of the
property since the expiration of the notice. The notice is waived.
(b) A, the lessor, gives B, the lessee, notice to quit the property leased. The notice
expires, and B remains in possession. A gives to B as lessee a second notice to
quit. The first notice is waived.
Termination of Leases - (Ss.111-113)
A lease of immovable property determines in the following eight cases:-
1) By efflux of the time limited thereby
A lease is created for a certain time, naturally determines on the last day of the
term without any formality such as notice on either side. Such a lease does not
terminate if any of the parties dies during the term, the reason being that the
interest transferred in a lease is a heritable interest.
The lessee cannot dispute the title of the lessor as a ground for refusing to give up
possession at the expiry of the lease, for if he has been let into possession by the
lessor, he cannot deny the title under which he entered without first surrendering
possession. If the lessee does not surrender possession, the estoppels constitutes
even after the termination of the tenancy.
Where the lease is for a definite term, it expires by efflux of time. Hence, service of
a notice under section 106 is not necessary for determination of the lease.
2) Where such time is limited conditionally on the happening of some event-by the
happening of such event .
Contingent term:-
If the term of a lease is conditional on the happening of a certain event, the lease
determines when the event happens. Similarly a lease for life determines on the
death of the lessee and a lease for the duration of war determines when peace is
declared.
3) Where the interest of the lessor in the property terminates on, or his power to
dispose of the same extends only to, the happening of any eventby the happening
of such event.
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By termination of lessors interest:-
This clause operates where the lessor has only a limited interest or power to grant
a lease and the lease is determined with that interest. For instance, a lease by a
Hindu widow would come to an end on her death unless it is justified by legal
necessity. Similarly, a lease granted by mortgagee in possession determines on
redemption.
4) Merger
Where two estates merge into one or unite, it is called merger. In case of a lease,
merger occurs when the lease-hold and reversion are acquired by one and the
greater one. The lease hold is the lesser estate for it is carved out of the estate of
the owner, which is the reversion. The lesser estate is merged in the greater one.
The principle is that the same person can not be both a landlord and a tenant.
But if there be an intervening estate, there can be no merger. The interest of the
lessor and the lessee in the whole of the property should become vested at the
same time in one person in the same right i.e., to say there must be union of the
entire interest of the lessor and the lessee.
5) By express surrender
Surrender is the counter part of the merger. Under merger the tenant may acquire
the reversion, whereas under surrender the landlord acquires the leasehold.
Surrender consists in the yielding up of the term of the lease accompanied by
delivery of possession. Delivery of possession is essential unless there is an
agreement to surrender at some time in future. By surrender the relationship of
the parties to the lease thereafter comes to an end and the under lessee becomes
a lessee directly under the lessor with all incidents of his sub-lease and such
relationship comes into existence under the operation of the statute on surrender
of the head lease and by devolution on assignment by the lessee of his interest in
the lessor.
Surrender properly is a yielding up an estate for life or years to him that has an
immediate estate in reversion ore remainder, wherein the estate for life or years
may drown by mutual agreement between them. Thus, if after expirty of lease for
fixed period lessee delivers possession to lessor, it is not a case of surrender but
expiry of term of lease.
6) By implied surrender
Implied surrender or surrender by operation of law occurs-
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i) By the creation of a new relationship, or
ii) By relinquishment of possession.
New Relationship:-
When the lessee accepts a new lease, that it itself means a surrender of old lease,
for the new lease could not be granted unless the old one was surrendered. Such
surrender can also be implied from the consent of the parties or from such facts as the
relinquishment of possession by the lessee and taking over possession by the lessor.
The surrender has been put on the ground of estoppel and surrender by operation of
law has been said to be an act done by or to the owner of a particular estate, the
validity of which he is estopped from disputing and which could have been alone if the
particular estate continued to exist.
Relinquishment of Possession:-
Relinquishment of possession operates as an implied surrender, if there is i)an yielding
up by the lessee, and ii) an acceptance of possession by the lessor. There must be a
taking of possession, not necessarily a physical taking but something amounting to a
virtual taking of possession. Whether this has occurred is a question of fact. Thus
where the lessor says he will give up his claim for rent if the lessee gives up possession
in the middle of the quarter and the lessee then gives the keys in the lessor who accepts
them; the lease is terminated by surrender.
7) By forfeiture
A lease determines by forfeiture in the following cases:-
i) Where the lessee commits a breach of an express condition which provides that
on breach thereof the lessor may re-enter, or
ii) Where the lessee renounces his characters such by setting up a title and a third
person or by claiming title in himself, or
iii) Where the lessee is adjudged an insolvent and the lease provides that the lessor
may re-enter on the happening on such event.
In any of these cases mentioned above the lease does not determine immediately
on the happening of the contingency. It is obligatory on the lessor or his transferee to
give notice in writing to the lessee of his intention to determine the lease. Though the
notice need not be in accordance with section 106, it should contain any one of the
ground mentioned above and the intention of the lessee to determine the lease.
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8) On the expiration of a notice to determine the lease, or to quit the property
leased, duly given by one party to the other.
The last mode in which a lease is terminated is when a notice to quit or to determine
the lease expires. Such notice is necessary only in cases of periodic tenancy such
as a tenancy from year to year or from month to month under section 106.
S SS SS. 114. R . 114. R . 114. R . 114. R . 114. Relief against forfeiture for non-payment of rent. elief against forfeiture for non-payment of rent. elief against forfeiture for non-payment of rent. elief against forfeiture for non-payment of rent. elief against forfeiture for non-payment of rent.-Where a lease of
immoveable property has determined by forfeiture for non-payment of rent, and the
lessor sues to eject the lessee, if, at the hearing of the suit, the lessee pays or tenders to
the lessor the rent in arrear, together with interest thereon and his full costs of the suit,
or gives such security as the Court thinks sufficient for making such payment within
fifteen days, the Court may, in lieu of making a decree for ejectment, pass an order
relieving the lessee against the forfeiture; and thereupon the lessee shall hold the property
leased as if the forfeiture had not occurred.
S SS SS. 114A . 114A . 114A . 114A . 114A. R . R . R . R . Relief against forfeiture in certain other cases. elief against forfeiture in certain other cases. elief against forfeiture in certain other cases. elief against forfeiture in certain other cases. elief against forfeiture in certain other cases.-Where a lease of
immoveable property has determined by forfeiture for a breach of an express condition
which provides that on breach thereof the lessor may re-enter, no suit for ejectment
shall lie unless and until the lessor has served on the lessee a notice in writing
(a) specifying the particular breach complained of; and
(b) if the breach is capable of remedy, requiring the lessee to remedy the breach;
Nothing in this section shall apply to an express condition against the assigning,
under-letting, parting with the possession, or disposing, of the property leased, or to an
express condition relating to forfeiture in case of non-payment of rent.
S SS SS. 115. Effect of surrender and forfeiture on under . 115. Effect of surrender and forfeiture on under . 115. Effect of surrender and forfeiture on under . 115. Effect of surrender and forfeiture on under . 115. Effect of surrender and forfeiture on under-leases.- -leases.- -leases.- -leases.- -leases.-T TT TThe surrender, express
or implied, of a lease of immoveable property does not prejudice an under-lease of the
property or any part thereof previously granted by the lessee, on terms and conditions
substantially the same (except as regards the amount of rent) as those of the original
lease; but, unless the surrender is made for the purpose of obtaining a new lease, the
rent payable by, and the contracts binding on, the under-lessee shall be respectively
payable to and enforceable by the lessor.
The forfeiture of such a lease annuls all such under-leases, except where such
forfeiture has been procured by the lessor in fraud of the under-lessees, or relief against
the forfeiture is granted under section 114.
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Relief against Forfeiture for Non-payment of Rent:-
Where a lease of immovable property has determined by forfeiture for non-payment
of rent and the lessor sues to eject the lessee, if at the hearing of the suit, the lessee pays
or tenders the lessor the rent in arrear, together with interest thereon and his full costs of
the suit, or give such security as the court thinks sufficient for making such payment
within fifteen days, the court may, in liew of making a decree for ejectment, pass an
order relieving the lessee against the forfeiture and thereupon the lessee shall hold the
property leased as if the forfeiture had not occurred S.114.
Conditions on which the relief is given are (1) the lessee must pay all rent in arrear
with interest and costs of the suit, or (2) if he does not agree to give security for payment
within 15 days.
The relief as given on the equitable grounds 1) the equity looks to the essence of
the transaction and that a condition of forfeiture in simply a security for the rent and 2)
that a condition of forfeiture in default of payment is a penalty.
Relief against Forfeiture In Certain other Cases:-
Where a lease of immovable property has determined by forfeiture for a breach of
an express condition which provides that on breach thereof the lessor may re-enter, no
suit for rejecting shall lie unless and until the lessor has served on the lessee a notice in
writing
a) specifying the particular breach complained of, and
b) if the breach is capable of remedy, requiring the lessee to remedy the breach, and
the lessee fails, within a reasonable time from the date of the service of the notice
to remedy the breach, if it is capable of remedy.
Nothing in this section shall apply to an express condition against the assigning,
under letting, parting with the possession or disposing of the property leased, or
to an express condition relating to forfeiture in case of non-payment of rent.
(S.114-A).
This section is general and is designed to cover all cases in which notice is required
under Sec. 111(G).
S SS SS.116. Effect of holding over .116. Effect of holding over .116. Effect of holding over .116. Effect of holding over .116. Effect of holding over.- .- .- .- .-If a lessee or under-lessee of property remains in
possession thereof after the determination of the lease granted to the lessee, and the
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lessor or his legal representative accepts rent from the lessee or under-lessee, or otherwise
assents to his continuing in possession, the lease is, in the absence of an agreement to
the contrary, renewed from year to year, or from month to month, according to the
purpose for which the property is leased, as specified in section 106.
(a) A lets a house to B for five years. B underlets the house to C at a monthly rent
of Rs. 100. The five years expire, but C continues in possession of the house and
pays the rent to A. Cs lease is renewed from month to month.
(b) A lets a farm to B for the life of C. C dies, but B continues in possession with As
assent. Bs lease is renewed from year to year.
Holding Over:-
On the determination of the lease, the lessee is bound to surrender possession to
the lessor, and on default he may be ejected without notice. If there is no earlier assent
on the lessors part to the continuance of the lessees possession after the determination
of the lease, the lessee is simply a tenant-at-sufferance. A tenant-at-sufferance is on
better than a trespasser and he can be ejected at any time without notice.
The section deals with the holding over of a lease and its effect. If after determination
of the lease, the lessee continues in possession with the assent of the lessor to his
continuation, the lease stands renewed from year to year or month to month unless
there is an agreement to the contrary. Acceptance of rent by the landlord after the
expiry of the lease is treated to be an assent. By this section, the possession of a tenant
after cessation of the tenancy is protected.
The act of holding over after the expiry of the term does not create a tenancy of any
kind. If a tenant remains in possession after the determination of the lease, the common
law rule is that he is a tenant on sufferance. A distinction should be drawn between a
tenant continuing in possession after the determination of the term with the consent of
the landlord and a tenant doing so without his consent. The former is a tenant at
sufferance in English Law and the latter a tenant holding over or a tenant at will. In view
of the concluding words of section 116 of the T.P Act, a lessee holding over is in a
better position than a tenant at will. The assent of the land lord to the continuance of
possession after the determination of the tenancy at will create a new tenancy.
T TT TTenant A enant A enant A enant A enant At Sufferance: t Sufferance: t Sufferance: t Sufferance: t Sufferance:- A tenant may retain and continue to be in possession of the
leased property after the termination of the lease or on its determination by efflux of
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time. In such retention of possession is without the consent of the landlord, a tenant is
commonly known as a tenant at sufferance. A tenant in possession with the consent
of landlord is a tenant by holding over or a tenant at will.
S SS SS.117. Exemption of leases for agricultural purposes.- .117. Exemption of leases for agricultural purposes.- .117. Exemption of leases for agricultural purposes.- .117. Exemption of leases for agricultural purposes.- .117. Exemption of leases for agricultural purposes.-None of the provisions of
this Chapter apply to leases for agricultural purposes, except in so far as the State
Government may by notification published in the Official Gazette declare all or any of
such provisions to be so applicable [in the case of all Such notification shall not take
effect until the expiry of six months from the date of its publication.]
Exemption of Leases for Agricultural Purposes
Leases for agricultural purposes are exempted from the operation of this chapter
presumably because the intention of the legislature is to retain in force the special
provisions in the various Rent Acts in respect of agricultural leases, passed prior to the
T.P Act in respect of such leases.
A lease for agricultural purposes is not necessary to be made by a written instrument.
It may be effected by an oral agreement, and when so effected, no registration is
required, but if the transaction is reduced to writing, then, in the case of a lease from
year to year or for any term exceeding a year or reserving a yearly rent, registration
would be required under section 17 of Registration Act, and, if un registered, the lease
will be inadmissible in evidence under section 49 of the Registration Act and other
evidence of its terms will be precluded under section 91 of the Evidence Act.
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CHAPTER VII
OF GIFTS (Sections. 122-129)
S SS SS.122. Gift .122. Gift .122. Gift .122. Gift .122. Gift defined.- defined.- defined.- defined.- defined.-Gift is the transfer of certain existing
moveable or immoveable property made voluntarily and without
consideration, by one person, called the donor, to another, called the
donee, and accepted by or on behalf of the donee.
Acceptance when to be made- Such acceptance must be made
during the lifetime of the donor and while he is still capable of giving. If
the donee dies before acceptance, the gift is void.
S SS SS.123. T .123. T .123. T .123. T .123. Transfer how effected. ransfer how effected. ransfer how effected. ransfer how effected. ransfer how effected.-For the purpose of making a gift of
immoveable property, the transfer must be effected by a registered
instrument signed by or on behalf of the donor, and attested by at least
two witnesses.
For the purpose of making a gift of moveable property, the transfer
may be effected either by a registered instrument signed as aforesaid or
by delivery.
Such delivery may be made in the same way as goods sold may be
delivered.
S SS SS.124. Gift of existing and future property .124. Gift of existing and future property .124. Gift of existing and future property .124. Gift of existing and future property .124. Gift of existing and future property. .. ..-A gift comprising both
existing and future property is void as to the latter.
S SS SS.125. Gift to several, of whom one does not accept. .125. Gift to several, of whom one does not accept. .125. Gift to several, of whom one does not accept. .125. Gift to several, of whom one does not accept. .125. Gift to several, of whom one does not accept.-A gift of a
thing to two or more donees, of whom one does not accept it, is void as
to the interest which he would have taken had he accepted.
S SS SS.126. When gift may be suspended or revoked. .126. When gift may be suspended or revoked. .126. When gift may be suspended or revoked. .126. When gift may be suspended or revoked. .126. When gift may be suspended or revoked.- The donor and
done may agree that on the happening of any specified event which
does not depend on the will of the donor a gift shall be suspended or
revoked;
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but a gift which the parties agree shall be revocable wholly or in part, at the mere
will of the donor, is void wholly or in part, as the case may be.
A gift may also be revoked in any of the cases (save want or failure of consideration)
in which, if it were a contract, it might be rescinded.
Save as aforesaid, a gift cannot be revoked.
Nothing contained in this section shall be deemed to affect the rights of transferees
for consideration without notice.
(a) A gives a field to B, reserving to himself, with Bs assent, the right to take back the
field in case B and his descendants die before A. B dies without descendants in As
lifetime. A may take back the field.
(b) A gives a lakh of rupees to B, reserving to himself, with Bs assent, the right to take
back at pleasure Rs. 10,000 out of the lakh.
The gift holds good as to Rs. 90,000, but is void as to Rs. 10,000 which continue
to belong to A.
(S (S (S (S (S.122 & 123) Definition of Gift and gift how effected: - .122 & 123) Definition of Gift and gift how effected: - .122 & 123) Definition of Gift and gift how effected: - .122 & 123) Definition of Gift and gift how effected: - .122 & 123) Definition of Gift and gift how effected: - Gift is the transfer of
ownership in an existing movable or immovable porperty without any consideration.
The essecne of gift is a voluntary and gratutious transfer of ownership in a property in
favour of another person. Gift may be either a gift inter vivos or gift testamentary. A gift
inter vivos takes place between living persons. Testamentary gift is termed as will and
takes place only after the death of the treasnferor or testator. Gifts by testaments (by
will) are outside the scope of this Act. The Transfer of Property Act lays down the law
relating to gifts inter vivos only.
A gift is undoubtedly a transfer which does not contain any element of consideration
in any shape or for. In fact, where there is any equivalent of benefit measured in terms
of money in respect of a gift, the transaction ceases to be a gift and assumes a different
colour.
Section 122 of the Act, thus, clearly postulates that a gift must have two essential
characteristics
a) that it must be made voluntarily, and
b) that it should be without consideration.
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This is apart from the other ingredients like acceptance, etc.
Requisites of a Valid Gift: -
1) There should be a donor and a done.
2) The subject of the gift must be certain and existing and capable of transfer.
3) The gift should be made voluntarily and without consideration. There should be a
transfer on the part of the donor.
4) There should be an acceptance, by or on behalf of the donee during his life time.
5) The acceptance must be at the time when the donor is alive and capable of
giving.
6) Therefore it necessarily follows that the donor and the donee must both be living.
7) When the property is immovable, there must be a registered instrument properly
attested.
8) In case of movable property, there must be either a registered instrument properly
attested or delivery of possession.
9) The section lays stress on the acceptance of the gift.
10) There can be no gift of future property.
11) Registration is compulsory in the case of a gift of immovable property whatever
the value of the property be.
12) The gift becomes irrevocable once the deed of gift is delivered to the donee, even
before its registration.
13) Once the deed is executed and the gift is accepted during the lifetime of the
donor, the deed of gift may even be registered after the death of the donor.
14) An unregistered deed of gift cannot be used under the doctrine of part-performance,
as the doctrine is applicable to transfers for consideration.
S SS SS.124. Gift of Existing and F .124. Gift of Existing and F .124. Gift of Existing and F .124. Gift of Existing and F .124. Gift of Existing and Future P uture P uture P uture P uture Property:- roperty:- roperty:- roperty:- roperty:- A gift comprising both existing and
future property is void as to the latter.
A gift comprising both existing and future property is void so far as future property
is concerned. There can be no gift of future property. A gift of future property is a mere
promise which cannot be enforced and is therefore void.
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S SS SS.125. Gift to Several, of whom one does not A .125. Gift to Several, of whom one does not A .125. Gift to Several, of whom one does not A .125. Gift to Several, of whom one does not A .125. Gift to Several, of whom one does not Accept:- ccept:- ccept:- ccept:- ccept:- 125. Gift to several, of
whom one does not accept.-A gift of a thing to two or more donees, of which one does
not accept it, is void as to the interest which he would have taken had he accepted.
A gift of a thing to two or more donees, of which one does not accept it, is void as
to the interest which he would have taken had he accepted.
Gift Void as to Donees:-
Where a gift made to several persons and one of them does not take it, it becomes
void as to the interest which he would have taken had he accepted.
Void Gifts: -
1) Gift made for an unlawful purpose S.6
2) Gift depending on a condition, the fulfillment of which is impossible, or forbidden
by law
3) Where the donee dies before acceptance S.122
4) Gift by a person incompetent to contract S.7
5) A gift comprising existing and future property is void as the latter S.124
A gift of a thing to two or more donees, of which one does not accept it, is void
as to the interest, which he would have taken, had he accepted. S.125.
S SS SS. 127. Onerous gifts . 127. Onerous gifts . 127. Onerous gifts . 127. Onerous gifts . 127. Onerous gifts.-Where a gift is in the form of a single transfer to the same
person of several things of which one is, and the others are not, burdened by an
obligation, the donee can take nothing by the gift unless he accepts it fully.
Where a gift is in the form of two or more separate and independent transfers to the
same person of several things, the donee is at liberty to accept one of them and refuse
the others, although the former may be beneficial and the latter onerous.
Onerous gift to disqualified person.-A donee not competent to contract and
accepting property burdened by any obligation is not bound by his acceptance. But if,
after becoming competent to contract and being aware of the obligation, he retains the
property given, he becomes so bound.
(a) A has shares in X, a prosperous joint stock company, and also shares in Y, a joint
stock company in difficulties. Heavy calls are expected in respect of the shares in
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Y. A gives B all his shares in joint stock companies. B refuses to accept the shares
in Y. He cannot take the shares in X.
b) A, having a lease for a term of years of a house at a rent which he and his
representatives are bound to pay during the term, and which is more than the
house can be let for, gives to B the lease, and also, as a separate and independent
transaction, a sum of money. B refuses to accept the lease. He does not by this
refusal forfeit the money.
Comment:- Comment:- Comment:- Comment:- Comment:-
1) Where a gift is in the form of a single transfer to the same person of several
things, of which one is, and the others are not, burdened by an obligationthe
donee can take nothing by the gift unless he accepts it fully.
2) Where a gift is in the form of two or more separate and independent transfers to
the same person of several things-the donee is at liberty to accept one of them
and refuse the others, although the former may be beneficial and the latter onerous.
S SS SS. 128. Universal donee. . 128. Universal donee. . 128. Universal donee. . 128. Universal donee. . 128. Universal donee.-Subject to the provisions of section 127, where a gift
consists of the donors whole property, the donee is personally liable for all the debts
due by and liabilities of the donor at the time of the gift to the extent of the property
comprised therein.
A person, to whom all the properties of another person are given in gift, is called a
universal donee. In order that a person may be universal donee, all the properties, both
movables and immovables of the donor must be given to him. Under this section such
universal donee is personally for all the debts and liabilities of the donor at the time of
the gift to the extent of the property comprised therein.
S SS SS. 129. Saving of donations mortis causa and Muhammadan law . 129. Saving of donations mortis causa and Muhammadan law . 129. Saving of donations mortis causa and Muhammadan law . 129. Saving of donations mortis causa and Muhammadan law . 129. Saving of donations mortis causa and Muhammadan law.- .- .- .- .-Nothing in this
Chapter relates to gifts of moveable property made in contemplation of death, or shall
be deemed to affect any rule of Muhammadan law.
The section exempts gifts of movable property made in contemplation of death
from the operation of this Chapter. Such gifts are called a monatio mortis causa and
they are governed by section 191 of the Indian Succession Act, 1925. This section also
exempts gifts made by Mohammadans from the operation of the provisions contained
in this Chapter in so far as they are inconsistent with the principles of Mohammadan
Law. For instance, under Mohammadan Law, a gift of an immovable property may be
made orally by a simple delivery of possession. Thus, an assignment of land by a
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Mohammadan bridegroom in favour of his bride at the time of marriage in lieu of
mehar does not require any writing. Similarly, the rules relating to revocation of a gift
are different from those enacted in section 126.
S.126 Revocation of Gifts: -
126. When gift may be suspended or revoked.- 126. When gift may be suspended or revoked.- 126. When gift may be suspended or revoked.- 126. When gift may be suspended or revoked.- 126. When gift may be suspended or revoked.-The donor and done may agree
that on the happening of any specified event which does not depend on the will of the
donor a gift shall be suspended or revoked;
but a gift which the parties agree shall be revocable wholly or in part, at the mere
will of the donor, is void wholly or in part, as the case may be.
A gift may also be revoked in any of the cases (save want or failure of consideration)
in which, if it were a contract, it might be rescinded. Save as aforesaid, a gift cannot be
revoked.
Nothing contained in this section shall be deemed to affect the rights of transferees
for consideration without notice.
(a) A gives a field to B, reserving to himself, with Bs assent, the right to take back the
field in case B and his descendants die before A. B dies without descendants in As
lifetime. A may take back the field.
(b) A gives a lakh of rupees to B, reserving to himself, with Bs assent, the right to take
back at pleasure Rs. 10,000 out of the lakh. The gift holds good as to Rs. 90,000,
but is void as to Rs. 10,000 which continue to belong to A.
A Gift Once made is irrevocable, Except in thefollowing Two Cases: -
1) When the donor and the donee have agreed that on the happening of a specified
event, the gift should be Suspended or revoked.
2) When the donors consent is not voluntary.
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CHAPTER VIII
OF TRANSFER OF ACTIONABLE CLAIMS
(Ss. 3 & 130-138)
S.30. Transfer of actionable claim.-
(1) The transfer of an actionable claim whether with or without
consideration shall be effected only by the execution of an
instrument in writing signed by the transferor or his duly authorized
agent, shall be complete and effectual upon the execution of
such instrument, and thereupon all the rights and remedies of the
transferor, whether by way of damages or otherwise, shall vest in
the transferee, whether such notice of the transfer as is hereinafter
provided be given or not:
Provided that every dealing with the debt or other actionable claim
by the debtor or other person from or against whom the transferor
would, but for such instrument of transfer as aforesaid, have been
entitled to recover or enforce such debt or other actionable claim,
shall (save where the debtor or other person is a party to the transfer
or has received express notice thereof as hereinafter provided) be
valid as against such transfer.
2) The transferee of an actionable claim may, upon the execution of
such instrument of transfer as aforesaid, sue or institute proceedings
for the same in his own name without obtaining the transferors
consent to such suit or proceedings and without making him a
party thereto.
Exception Exception Exception Exception Exception.Nothing in this section applies to the transfer of a
marine or fire policy of insurance or affects the provisions of section
38 of the Insurance Act, 1938 (4 of 1938)].
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(i) A owes money to B, who transfers the debt to C. B then demands the debt from A,
who, not having received notice of the transfer, as prescribed in section 131, pays
B. The payment is valid, and C cannot sue A for the debt.
(ii) A effects a policy on his own life with an Insurance Company and assigns it to a
Bank for securing the payment of an existing or future debt. If A dies, the Bank is
entitled to receive the amount of the policy and to sue on it without the concurrence
of As executor, subject to the proviso in sub-section (1) of section 130 and to the
provisions of section 132.
The definition of actionable claim is contained in section 3. According to the
definition, an actionable claim means: i) any unsecured debt, or ii) any beneficial
interest in movable property, no in possession, actual or constructive, of the claimant.
An actionable claim or chose in action as it is called in English Law does not
concern itself with immovable property. It is a claim relating to a simple debt for which
there is no security of movable or immovable property.
Beneficial Interest:-
A beneficial interest in movable property is also an actionable claim. The right to
claim the benefit of an executory contract constitutes a beneficial interest in movable
property. After a breach of a contract for the sale of goods, nothing is left but a right to
sue for damages. The right to sue for damages is not a beneficial interest in the
contract but a mere right to sue for non-performance of the contract.
Mode of Assignment:-
Section 130 prescribes the mode of assigning an actionable claim. The assignment
may be by way of sale, mortgage, gift, or exchange. In any of these cases, it must be
effected by an instrument in writing signed by the transferor or his duly authorised
agent. It is not necessary that the assignmentshould be made by a separate document.
An endorsement on the back of a document comprising the actionableclaim is enough.
EFfect of Assignment:-
The assignment takes effect from the date of the execution of the writing and its
effect is to vest all the rights and remedies of the transferor in the transferee. The
transferee may sue for the actionable claim in his own name. After the assignment, the
OF TRANSFER OF ACTIONABLE CLAIMS (Ss. 3 & 130-138)
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assignee is the only person who is entitled to recover the claim. The assignment has
also the effect of subjecting the assignee to all the liabilities and equities to which the
transferor was subject in respect thereof at the date of the transfer.
Notice of Assignment:-
Although a notice of assignment to the debtor is not necessary to perfect the title to
the assignee, but until the debtor receives notice of the assignment in accordance with
law, his dealings with the original creditor will be protected. The assignee, therefore, in
his own interest must give notice of the assignment in the debtor as early as possible.
Once he does this, the debtor becomes liable to pay the debt to him alone.
The notice must be in writing and it must state the name and address of the transferee.
There is no time limit for giving notice. (S.131).
Liability of Assignee-
The question of liability of an assignee had arisen in this case. A plot was allotted
to allottee for the establishment of an industrial writ within specified time limit by the
Industrial Development Corporation. Allottee had transferred the plot without the consent
of Industrial Corporation. It was held that transferee cannot compel the corporation to
treat him as an allottee. He has no locus standi to challenge the order of resumption
passed the corporation. (Indu Kakkar v. Haryana Industrial Development Corporation
and others A.I.R. 2005 AP 345).
S SS SS.131. .131. .131. .131. .131. Notice to be in writing Notice to be in writing Notice to be in writing Notice to be in writing Notice to be in writing, signed. , signed. , signed. , signed. , signed.-Every notice of transfer of an actionable
claim shall be in writing, signed by the transferor or his agent duly authorized in this
behalf, or, in case the transferor refuses to sign, by the transferee or his agent, and shall
state the name and address of the transferee.
Essentials of Notice:-
The requirement of a valid notice of transfer of an actionable claim is as under:-
a) it shall be in writing
b) it shall state the following
i) name of the transferee
ii) address of the transferee
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c) it shall be signed by:
i) the transferor or his agent and on his refusal to sign, by
ii) the transferee or his agent.
S SS SS.132. Liability of transferee of actionable claim. .132. Liability of transferee of actionable claim. .132. Liability of transferee of actionable claim. .132. Liability of transferee of actionable claim. .132. Liability of transferee of actionable claim.-The transferee of an actionable
claim shall take it subject to all the liabilities and equities to which the transferor was
subject in respect thereof at the date of the transfer.
(i) A transfers to C a debt due to him by B, a being then indebted to B. C sues B for
the debt due by B to A. In such suit B is entitled to set off the debt due by A to him;
although C was unaware of it at the date of such transfer.
(ii) A executed a bond in favour of B under circumstances entitling the former to have
it delivered up and cancelled. B assigns the bond to C for value and without
notice of such circumstances. C cannot enforce the bond against A.
Liability of Assignee:-
The assignment has the effect of subjecting the assignee to all the liabilities and
equities to which the transferor was subject in respect thereof at the date of the transfer.
For instance, a debtor has a right to set off any counter-claim against the assignee
which he could have done against the assignor.
S SS SS.133. W .133. W .133. W .133. W .133. Warranty of solvency of debtor arranty of solvency of debtor arranty of solvency of debtor arranty of solvency of debtor arranty of solvency of debtor.-Where the transferor of a debt warrants the
solvency of the debtor, the warranty, in the absence of a contract to the contrary, applies
only to his solvency at the time of the transfer, and is limited, where the transfer is made
for consideration, to the amount or value of such consideration.
Warranty of Solvency of Debtor:-
The assignor is not bound to give any warranty as to the solvency of the debtor, but
if the assignor gives such warranty to the assignee, it means that the debtor is solvent at
the date of the transfer. Further, the liability to the transferor as regards the solvency of
the debtor is only limited to the amount of the consideration by him.
S SS SS.134. Mortgaged debt.- .134. Mortgaged debt.- .134. Mortgaged debt.- .134. Mortgaged debt.- .134. Mortgaged debt.-Where a debt is transferred for the purpose of securing an
existing or future debt, the debt so transferred, if received by the transferor or recovered
by the transferee, is applicable, first, in payment of the costs of such recovery; secondly,
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in or towards satisfaction of the amount for the time being secured by the transfer; and
the residue, if any, belongs to the transferor or other person entitled to receive the
same.
Mortgage Debt:-
A transfer of an actionable claim can be made not only by way of sale but also by
way of mortgage. Where a debt is transferred for the purpose of securing an existing or
future debt, the debt so transferred, if received by the transferor, or recovered by the
transferee, should first be applied in payment of the costs of such realisation, secondly,
towards satisfaction of the amount secured by the transfer and the remainder, if any, to
belong to the transferor.
S SS SS.135. Assignment of rights under policy of insurance against fire.- .135. Assignment of rights under policy of insurance against fire.- .135. Assignment of rights under policy of insurance against fire.- .135. Assignment of rights under policy of insurance against fire.- .135. Assignment of rights under policy of insurance against fire.-Every assignee,
by endorsement or other writing, of a policy of insurance against fire, in whom the
property in the subject insured shall be absolutely vested at the date of the assignment,
shall have transferred and vested in him all rights of suit as if the contract contained in
the policy had been made with himself.
The general rules for assignment of actionable claims are inapplicable to the
assignment of rights under the insurance policies of fire or marine. This is due to the
fact that such rights cannot be assigned without transfer of the property insured. Mere
transfer of such policy cannot entitle the assignee to get ownership of the property
insured. The assignment of rights would be meaningless if the assignment is made
apart form the property insured. Accordingly, section 135 enacts that every assignee,
of a policy of insurance against fire, in whom the property insured shall be absolutely
vested at the date of assignment, shall have transferred and vested in him all rights of
suit as if the contract contained in the policy had been made with himself. The assignment
may have been made either by endorsement or other writing. It is significant to note
that these provisions are applicable only to a policy of insurance against fire. These
provisions do not apply to assignment of rights under policy of marine insurance.
S SS SS.136. Incapacity of officers connected with Courts of Justice. .136. Incapacity of officers connected with Courts of Justice. .136. Incapacity of officers connected with Courts of Justice. .136. Incapacity of officers connected with Courts of Justice. .136. Incapacity of officers connected with Courts of Justice.-No Judge, legal
practitioner or officer connected with any Court of Justice shall buy or traffic in, or
stipulate for, or agree to receive any share of, or interest in, any actionable claim, and
no Court of Justice shall enforce, at his instance, or at the instance of any person
claiming by or through him, any actionable claim so dealt with by him as aforesaid.
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Who cannot be Assignees of Actionable Claims:-
Section 136 enacts that certain persons, specified therein, cannot be assignees of
actionable claims. It may be noted that transfer of actionable claims is a transfer of
property. As such, transferor and transferee both must be competent persons and the
property must also be transferable within the meaning of section 6 of this Act.
Section 136 specifies the person who is legally disqualified to be transferee for the
transfer of actionable claims. According to this section no judge, legal practitioner or
officer connected with any court of justice shall buy or traffic in or, stipulate for or agree
to receive any share or interest in any actionable claim. It further provides that no
Court of Justice shall enforce at his instance or at the instance of any person claiming
by or through him, any actionable claim, so dealt with by him.
S SS SS.137. Saving of negotiable instruments, etc. .137. Saving of negotiable instruments, etc. .137. Saving of negotiable instruments, etc. .137. Saving of negotiable instruments, etc. .137. Saving of negotiable instruments, etc.-Nothing in the foregoing sections of
this Chapter applies to stocks, shares or debentures, or to instruments which are for the
time being, by law or custom, negotiable, or to any mercantile document of title to
goods.
Explanation. Explanation. Explanation. Explanation. Explanation.The expression mercantile document of title to goods includes a
bill of lading, dock-warrant, ware housekeepers certificate, railway receipt, warrant or
order for the delivery of goods, and any other document used in the ordinary course of
business as proof of the possession or control of goods, or authorizing or purporting to
authorize, either by endorsement or by delivery, the possessor of the document to transfer
or receive goods thereby represented.
Under section 137 documents which are in the nature of negotiable instruments
are exempted from the operation of the provisions of this Chapter. Negotiable instruments
are regulated by the Negotiable Instruments Act.
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Dr.Vijender Kumar
Associate Professor of Law
PART - III
HINDU LAW
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Following TEN Chapters viz. Hindu Joint Family; Coparcenary; Debt; Hindu
Undivided Family; Alienation; Partition; Notional Partition; Succession; Gift and Will
are on Hindu Law which comes within the preview of Business Laws-I. As a compulsory
course, the IRS probationers are required to pass this course. The Hindu Law module
contains 24 marks as a part [Part C] of the Business Laws-I module. This module needs
about 20 hours teaching. Though necessary information are given in the following
chapters but there is further scope to enhance your knowledge on the subject for which
you are required to read other sources too.
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CHAPTER - I
HINDU JOINT FAMILY
Introduction:
In tracing society backwards to its cradle it would appear that one of
earliest units is the patriarchal family, which may be defined as a group
of natural or adoptive descendants, held together by subjection to the
eldest living ascendant, father, grand-father, and great-grandfather
1
. A
Hindu Joint Family consists of a common ancestor and all his lineal
male descendants up to any generations together with the wife or wives
(or widows) and unmarried daughters of the common ancestor and of
the lineal male descendants.
2
It has to be clearly understood that the existence of the common
ancestor is necessary for bringing a joint family into existence; for its
continuance common ancestor is not a necessity. The death of the
common ancestor does not mean that the joint family will come to an
end. Upper links are removed and lower ones are added and in this
manner, so long as the line does not become extinct, the joint family
continues and can continue indefinitely, almost till perpetuity.
The Hindu Joint Family carries with itself various other important
concepts of the Hindu Jurisprudence. The Hindu Law confers status and
rights to the members of the Hindu Joint family. The concept of
coparcenary, joint family property etc. revolves around the concept of
the Hindu joint family. Existence of a Hindu Joint Family is quite important
for the execution and development of these rights in the family.
1
Alladi Kuppuswami (ed.), Maynes Hindu Law and Usage, 14
th
ed. 1996, p. 597.
2
Paras Diwan and Peeyushi Diwan, Modern Hindu Law, 15 ed. 2003, p. 259.
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Difference between Hindu Undivided Family and Hindu Joint Family:
Though the Supreme Court has observed that the expressions Hindu Undivided
Family and Hindu Joint Family are synonymous, there are some basic differences
between the two:
3
(1) The basic presumption under Hindu Law is that every Hindu family is presumed to
be joint Hindu family until contrary is proved. There is no such assumption under
the taxation laws for a Hindu family. On the other hand, this is the main point of
contention;
(2) Under Hindu law though there is presumption that every Hindu family is a joint
family, though there is no such presumption that it owns joint family property. The
concept of a Hindu Undivided Family without owing any property is meaningless
as far as its assessment is concerned;
(3) Under Hindu Law, a son in the womb of his mother in many aspects is treated as
equal to a son in existence. He can also restrict the rights of a sole surviving
coparcener to alienate the property, yet for the purpose of revenue laws, such a
son is not taken into cognizance till he is actually born alive; and
(4) The very purpose for which the expression Hindu family or HUF is understood by
these two legal branches, viz. the revenue authorities and Hindu Law, are different.
The importance of the difference lies in the fact that for the purpose of super tax
a person is allowed a larger exemption if he is taxed as the manager of a joint
Hindu family than, if he is taxed as an individual.
4
If the money is spent for the
maintenance of joint family member that can be shown as an expense for the
joint family. Thus, this remains the focal point of inquiry whenever there is an
examination of the character of the family for revenue purposes. Under the Hindu
Law there cannot be a joint family consisting only of a mother and a daughter
and the mother will not be a Karta of this Hindu family; yet for the purpose of
income tax she can be assessed as the head/manager of the Hindu Undivided
family.
5
3
Poonam Pradhan Saxena, Family Law Lectures: Family Law II, 1
st
ed. 2004, p. 92.
4
CIT, Bombay v. Gomedalli Lakshmi Narayan, AIR 1935 Bom 412.
5
Sushila Devi v. Income Tax Officer, AIR 1959 Cal 697.
HINDU JOINT FAMILY
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Mitakshara and Dayabhaga Schools of Hindu Law:
There are two systems of inheritance amongst the Hindus in India, namely, Mitakshara
system put forth by Vijnaneswara and Dayabhaga system of Jimutavahana. Dayabhaga
School prevails in Bengal and Mitakshara in other parts of India. One of the main
differences between these two principal schools of Hindu Law relates to the law on
inheritance. The right to inherit under Mitakshara is governed sometimes by consanguinity
or by religious efficacy; the guiding principle is not defined properly, whereas under
Dayabhaga School it arises out of spiritual or religious efficacy, that is, the capacity for
conferring spiritual benefit on the manes of paternal and maternal ancestors.
Another distinguishing feature relates to certain incidents of the joint family.
Mitakshara recognises both survivorship and succession whereas Dayabhaga only
recognises succession. The two schools differ radically on the question of partition.
Presumption of Jointness:
The joint and undivided family is the normal condition of the Hindu society. An
undivided Hindu family is ordinarily joint not only in estate but in food and worship.
6
May be in one generation, it is broken it is brought to an end by partition, but again in
the next generation it comes into existence automatically, and there is no way in which
one can escape from it. It is in this sense that we say that in Hindu Law there is a
presumption that every family is a joint Hindu family.
7
The presumption is that the members of a Hindu family are living in a state of
jointness, unless contrary is proved. The presumption is stronger among the nearer
relations, the remoter we go, the weaker is the presumption.
8
Merely because members
lived and worked at different places but owned a joint family house in common it
cannot be said that they did not form a joint Hindu Family.
9
If it is shown that partition
has taken place earlier, presumption stands rebutted.
10
But the burden of proof that
partition has taken place is on the person who asserts partition.
11
6
Ranganath Mishra (rev.), Maynes Treatise on Hindu Law & Usage, 15 ed. 2003,
p. 663,
7
Supra n. 1 at p. 259.
8
Indranarayan v. Roopnarayan, AIR 1971 SC 1962.
9
Kethaperumal v. Rajendra, AIR 1959 Mad 409.
10
Shankar v. Vittairao, AIR 1989 SC 879.
11
Jaai Kishore v. Govind Singh, AIR 1920 Pat. 128.
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No Presumption that Joint Family Holds Joint Property:
There is no presumption that a family, because it is Joint, possesses joint property.
12
Under the Mitakshara Law, existence of joint property is not condition precedent to the
existence of joint family, though it will be a rare case where a joint family possesses no
property. It will have at least household utensils and articles which its members use in
common.
Once the existence of the joint family is not in dispute, necessarily the property held
by the family is assumed the character of the coparcenary property and every member
of the family would be entitled by birth to a share in the coparcenary property unless the
contrary is proved.
13
Its Members:
They could be unlimited, and there is no limit to the remoteness of their descent
from the common ancestor, and also to the distance of their relationship from its members.
It is not a corporation and thus, has no legal entity distinct and separate from its
members. When we speak of a Hindu Joint Family we include only those persons who,
by virtue of relationship, have the right to enjoy and hold the joint property, to restrain
the acts of each other in respect of it, to burden it with their debts, and at their pleasure
to enforce its partition.
14
Coparcenary:
Coparcenary is a narrow body of persons with in a Hindu Joint Family, and consists
of father, son, sons son and sons sons son
15
. Like Hindj Joint Family, to begin with, it
consists of father and his three male lineal descendants, in its continuance the existence
of the father son relationship is not necessary.
Thus, a coparcenary can consist of grand-father and grand-son, of brothers, of
uncle and nephew and so on. The rule is that so long as one is not removed by more
that four degrees from the last holder of the property, howsoever remove one may be
from the original holder, one will be a coparcener. But the son of one of the great-
12
Deepa v. Massa Singh, 1984 SC 1171.
13
Sher Singh v. Gamdoor Singh, 1997 (2) HLR 81 (SC).
14
Narendranath (N V) v. Commr. of Wealth Tax, AIR 1970 SC 14.
15
Paras Diwan and Peeyushi Diwan, Modern Hindu Law, 15 ed. 2003, p. 262.
HINDU JOINT FAMILY
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grandsons would not offer the cake to him, and is out of the coparcenary, so long as
the common ancestor is alive.
Now let us take an example:
It is necessary first to understand the meaning of the term last holder. Last holder
means the senior most living lineal male ancestor. Now, the following diagram represents
the eight generations.
A
B
C
D
E
F
G
H
In the above illustration A is the last holder. It is evident that the coparcenary consists
of ABCD. If A dies than BCDE and if B then CDEF and if C also dies then DEFG
constitutes the coparcenary. Now if D also dies then EFGH constitutes the coparcenary.
Now presume that B dies before A then the coparcenary will consist of ACD as A is
the last holder and E continues to be removed from the last holder, by fives degrees.
Now also if C dies than also E will not become a coparcener. Now what happen if D
dies before A?
If D dies before A than, it will be the disaster to E, F and G as A will continue to be
the last holder and EFG will continue to be removed by more than four degrees. At this
stage A alone remains the coparcener and coparcenary comes to an end: EFGH will
never become coparceners of this coparcenary.
A Coparcener is purely a creature of law; it cannot created by act of parties, save
in so far that by adoption a stranger may be introduced as a member thereof.
16
16
S A Desai, Mulla Principles of Hindu Law, 19 ed. 2005, Vol. I, p. 270; Bhagwan Dayal v. Reoti
Devi, AIR 1962 SC 287.
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Incidents of Coparcenership:
A coparcener has an interest by birth in the joint family property, though until partition
takes place, this is an unpredictable and fluctuating interest which may be enlarged by
death and diminished by births in the family; every coparcener has the right to be in
joint possession and enjoyment of joint family property-both these are expressed by
saying that there is a community of interest and the unity of possession.
17
In the light of the Supreme Court decision
18
the incidents of the coparcenary
are:
1. Is the property in which the male issue of the coparceners acquires an interest by
birth?
2. Devolves by survivorship, not by succession.
Unpredictable and Fluctuating Interest:
The most remarkable feature of interest by birth is that the interest which a coparcener
acquires by birth is not a specified or a fixed interest. The interest fluctuated with the
births and the deaths in the family. Deaths may enlarge the beneficial interest of the
survivors just as births may diminish their interests by increasing the number of claimants.
Each coparcener has the right to claim a partition. But until he elects to do so, the joint
family property continues to devolve up on the members of the family for the time being
by survivorship and, not by succession.
19
Community of Interest and Unity of Possession:
The nature of ownership of the Mitakshara coparceners in the joint family property
is communal ownership. The moment a person is born is the family, he acquires an
interest in the sense that he has a right of common use of all properties and the right of
common enjoyment, because of virtue of being born a son, and he becomes the
member of the community.
Another aspect of the joint family is that there is unity of possession. This means that
all the coparceners have a right of common enjoyment or common use of property. If
17
Venugopala v. Union of India, 1969 SC 1094.
18
State Bank of India v. Gbamandi Ram, AIR 1969 SC 1330.
19
Mst. Kashmira v. Dy. Director, 1975 All 458 - 460.
HINDU JOINT FAMILY
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one of the coparcener is in possession of the joint family property, through him other
coparceners are also deemed to be in possession of property unless the contrary is
proved. Thus, he has the right of joint possession and not of the exclusive possession.
Right of Maintenance:
Every coparcener and every other member of the joint family has the right of
maintenance out of the joint family property. The right of maintenance subsists through
the life of the member so long as the family remains Joint. Female members and other
male members who do not get a share on partition, either because they have no right,
such as unmarried daughter, or they are disqualified from getting a share, such as idiot
or lunatic coparcener, are entitled to maintenance even after partition.
CLASSIFICATION OF PROPERTY
Unobstructed and Obstructed Heritage:
The Mitakshara School classifies the property mainly under two heads: first
Apratibandha Daya or unobstructed heritage and Sapratibandha Daya or obstructed
heritage. All properties inherited by the Hindu male from a direct male ancestor, not
exceeding three degrees higher to him are called Apratibandha Daya. In this property
his son, sons son, sons sons son acquire an interest by birth. Therefore, it is called as
unobstructed heritage. On the other hand, when a person inherits property from any
other relation, such as maternal or paternal uncle or brother, nephew, etc., then it is
known as Sapratibandha Daya and his son, sons son and sons sons son, or for that
matter, any other person does not acquire an interest by birth.
Joint Family Property and Self-Acquired Property:
Secondly the property is classified into:
(a) Joint Family property or Coparcenary property; and
(b) Separate property or self-acquired property.
Joint Family Property:
In joint family property, the property flows from different sources and from which all
members of the joint family draw out to fulfill their multifarious needs. Its sources are:
1. 1. 1. 1. 1. Ancestral property: Ancestral property: Ancestral property: Ancestral property: Ancestral property: Any property inherited from any ancestor or ancestress may
be called ancestral property. Inherited property may be classified under the following Inherited property may be classified under the following Inherited property may be classified under the following Inherited property may be classified under the following Inherited property may be classified under the following
heads: heads: heads: heads: heads:
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(a) P PP PProperty inherited from paternal ancestor roperty inherited from paternal ancestor roperty inherited from paternal ancestor roperty inherited from paternal ancestor roperty inherited from paternal ancestor: The essential feature of ancestral
property according to the Mitakshara Law is that the sons, grandsons, and
great-grand sons of the person who inherits it, acquire an interest, and rights
attached to such property at the moment of their birth. The natural or adopted
son of that son will take interest in it and be entitled to it by survivorship, as
joint family property.
20
(b) P PP PProperty inherited from maternal grandfather roperty inherited from maternal grandfather roperty inherited from maternal grandfather roperty inherited from maternal grandfather roperty inherited from maternal grandfather: In an earlier decision, the
Privy Council held
21
that such property would be joint property but in latter
decision their lordship held
22
, a maternal uncle is not an ancestor, and it has
accordingly been held that property inherited from a maternal uncle is not
ancestral property
23
.
(c) P PP PProperty inherited from collaterals roperty inherited from collaterals roperty inherited from collaterals roperty inherited from collaterals roperty inherited from collaterals: Property inherited by a person from any
other relation is his separate property, and his male issues do not take any
interest in it by birth. Thus, property inherited by a person from collaterals,
such as brother, uncle, etc, or property inherited by him from a female, e.g.,
his mother, is his separate property.
24
(d) Share allotted on partition Share allotted on partition Share allotted on partition Share allotted on partition Share allotted on partition: The share, which a coparcener obtains on partition
of ancestral property, is ancestral property as regards his male issue. They
take an interest in it by birth, whether they are in existence at the time of the
partition or are born subsequently
25
.
(e) Character of property after severance of status Character of property after severance of status Character of property after severance of status Character of property after severance of status Character of property after severance of status: Whenever a coparcener
expresses his intention to partition, severance of status takes place. In a
Supreme Court in Bhagwati P. Sulakhe v. . . . . Digamber Gopal Sulakhe Justice A.
N. Sen observed: the character of any Joint Family property does not change
with severance of status of the joint family and a joint family property continues
to retain its joint family character so long as the joint family property is in
existence and is not partitioned among the co-shares.
20
Valliammai v. Nagappa Chattier, AIR 1967 SC 1153.
21
Janarethhe v. Pralhad, AIR 1978 Bom 229.
22
Muhammad Husain Kahan v. Babu Kishya, (1997) All 655.
23
Karrupai v. Sankarnarayanan, (1904) 27 Mad 300.
24
Dharam Singh v. Sadhu Singh, AIR 1997 P & H 198.
25
Adurmoni v. Chaudhary, (1878) 3 Cal 18.
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(f) P PP PProperty received in gift roperty received in gift roperty received in gift roperty received in gift roperty received in gift: Under this head, the gift of the following properties
may be considered: (1) gift of his self-acquired property by the father to son
AND (2) Gift of joint family property by father-Karta or by Karta.
(g) Gift by father of self acquired property: Gift by father of self acquired property: Gift by father of self acquired property: Gift by father of self acquired property: Gift by father of self acquired property: This question was considered by the
Supreme Court in Arunachala Mundaliar v. . . . . Muruganatha
26
. The Supreme
Court held that it is open to the father to indicate whether the property
should be held by the son as coparcenary property or as self-acquired property.
A gift of property made by a father to his son on the occasion of the sons
marriage is not the ancestral property in the hands of the son, and it is his
separate property.
27
Separate or Self-Acquired Property:
A member of the Hindu Joint Family or a coparcener can, under Hindu Law, make
a separate acquisition of the property.
(i) P PP PProperty inherited from maternal ancestors roperty inherited from maternal ancestors roperty inherited from maternal ancestors roperty inherited from maternal ancestors roperty inherited from maternal ancestors - In the case of Md. Hussain v.
Kishwanandan, it was held that the property inherited from maternal ancestors is
not a coparcener property. It is only the self acquired property of the acquirer.
(ii) P PP PProperty received by gift from maternal ancestor roperty received by gift from maternal ancestor roperty received by gift from maternal ancestor roperty received by gift from maternal ancestor roperty received by gift from maternal ancestor- There was considerable
divergence of judicial opinions as to the nature of property acquired by a person
under the will of the father or by way of gift from his father (or paternal ancestor).
The question has been dealt by the Supreme Court in Arunachal Mudaliar v. .. ..
Muruganatha Mudaliar
28
; it was held that it is open to the father to indicate
whether the property should be held by the son as coparcenary property or as
self-acquired property.
(iii) Gains of learnings Gains of learnings Gains of learnings Gains of learnings Gains of learnings - According to Mitakshara, property acquired by means of
learning would be self-acquired property provided that learning was obtained
with out detriment to the ancestral property.
KARTA
In the Hindu Joint Family, the Karta or the manager occupies a very important
position. He is a person with limited powers, but, with in the ambit of his sphere, he
possesses such vast powers as are possessed by none else.
26
AIR 1953 SC 495.
27
Adhar Chandra v. Nobin Chandra, (1907) 12 CWN 103.
28
AIR 1953 SC 495.
HINDU JOINT FAMILY
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Who can be a Karta?
(i) Senior most male member - Senior most male member - Senior most male member - Senior most male member - Senior most male member - It is a presumption of the Hindu Law that ordinarily
the senior most male member is the Karta of the joint family.
29
So long as the
father is alive, he is the Karta. After his death it passes to the senior most male
member, who may be the uncle, if coparcener consists of uncles and nephews.
(ii) Junior male member - Junior male member - Junior male member - Junior male member - Junior male member - In the presence of the senior male member, a junior
member cannot be the Karta. But if all the coparceners agree, a junior male
member can be a Karta
30
.
(iii) More than one K More than one K More than one K More than one K More than one Karta - arta - arta - arta - arta - With the consent of the other members there can be more
than one managing member
31
. There cannot be two Kartas but more than one
person can look after the affairs of the family.
(iv) F FF FFemale members as K emale members as K emale members as K emale members as K emale members as Karta - arta - arta - arta - arta - The Supreme Court in Commissioner of Income Tax
v. Seth Govind Ram
32
, after reviewing the authorities, took the view that the mother
or any other female could not be the Karta of the joint family and therefore
cannot alienate joint family property
33
. This is in accordance with the texts of the
Hindu Law. According to the Hindu Sages, only a coparcener can be a Karta;
since females cannot be the coparceners, they cannot be the Karta of the joint
family.
Position of Karta:
The position of the Karta or manager is sui generic; the relation between him and
the other members of his family is not that of principal and agent or of partners. It is
more like that of a trustee and cestui que trust. But in the absence of proof of direct
misappropriation, or fraudulent and improper conversions of the moneys to the personal
use of the manager, he is liable to account only to what he has received and not to
what he ought to or might have received if the money had been profitably dealt with.
29
Shreeama v. Krihnavnanamanama, AIR 1957 AP 434.
30
Narendrakumar v. Commissioner of Income Tax, AIR 1976 SC 1953.
31
Union of India v. Sree Ram, AIR 1965 SC 1531.
32
AIR 1966 SC 2.
33
Kanji v. Parmanand, AIR 1991 MP 208.
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Kartas Liabilities:
Kartas liability is numerous and multifarious. The Karta of the joint family is
responsible to maintain all members of the family, coparceners and others. He is also
responsible for the marriage of all unmarried members. This responsibility is particularly
emphasized in respect of daughters. He is entitled to act on behalf of the family with the
consent of the other members and even in spite of their dissent. He has to pay the taxes
and other dues on behalf of the family and he can be sued for all this dealings on
behalf of the family with outsiders.
Powers of Karta:
When we enumerate the powers of Karta, the real importance of his legal position
comes into clear relief. His powers are vast and limitations are few.
(i) P PP PPowers of management - owers of management - owers of management - owers of management - owers of management - As the head of the family, Kartas powers of management
are almost absolute. He may manage the family affairs and family property and
business the way he likes. The Karta has no obligation to save or economies, no
obligation to invest funds, or to invest them properly as would be the case with an
agent or trustee.
34
(ii) Right to income Right to income Right to income Right to income Right to income - It is the natural consequence of the joint family system that the
whole of the income of the joint family property, whosoever may collect them, a
coparcener, agent or a servant, must be handed over to the Karta.
(iv) Right to representation - Right to representation - Right to representation - Right to representation - Right to representation - The Karta of the joint family represents the family in all
matters, legal, social and religious. The Karta can enter into any transaction on
behalf of the family, and it will be ordinarily binding on the joint family.
35
He also
represents the family in suits and other legal proceedings.
36
(v) P PP PPower of compromise - ower of compromise - ower of compromise - ower of compromise - ower of compromise - The Karta has power to compromise all the disputes
relating to the family property or their management. He can also compromise
family debts and other transactions. However, if his act of compromise is not
bona fide, it can be challenged in the partition.
34
Bhowani v. Jagannath, (1909) 13 CWN 309, 313; Alladi Kuppuswami (ed.), Maynes Hindu Law
and Usage, 14
th
ed. 1996, p. 721.
35
Radhakrishnadas v. Kuluram, AIR 1967 SC 574.
36
Baskari v. Bhashram, (1908) 31 Mad 318.
HINDU JOINT FAMILY
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37
Batal v. Chabilal, AIR 1974 Pat. 147.
Dayabhaga Joint Hindu Family:
The joint family is one of the areas where Mitakshara and Dayabhaga differ from
each other fundamentally.
(i) Sons have no right by birth Sons have no right by birth Sons have no right by birth Sons have no right by birth Sons have no right by birth - Strictly speaking under the Dayabhaga School there
is no joint family between the father and son. Sons have no right by birth. Similarly,
the sons have no right of survivorship. Under the Dayabhaga School all properties,
self acquired as well as coparcenary, devolve by succession.
(ii) Coparcenary Coparcenary Coparcenary Coparcenary Coparcenary - - - - - Under Dayabhaga School, apparently a joint Hindu family may
come into existence the same way as under the Mitakshara School. But the fact of
the matter is that the there is no joint family under Dayabhaga School in the sense
in which it exists under Mitakshara School. Similarly there is no coparcenary
consisting of father, son, sons son and sons son son. A Dayabhaga coparcenary
comes into existence for the first time on the death of the father: when sons inherit
their fathers property, they constitute a coparcenary. On the death of the father
the succession is per stripes, i.e., branch of each of his son takes an equal share.
This means that the share on succession belongs to each branch. When an heir
takes property by succession, his male or female descendants have no right in it
and the heirs take it absolutely. But if the son is dead leaving behind a son, then
that son (or sons), by representation take the same share which their father would
have taken and if a son dies leaving behind the widow or daughter, then she will
succeed and become a coparcener. Thus, under Dayabhaga School a female
can also be a coparcener.
(iii) Each coparcener takes a defined share Each coparcener takes a defined share Each coparcener takes a defined share Each coparcener takes a defined share Each coparcener takes a defined share - Unlike Mitakshara coparcener, a
Dayabhaga coparcener takes a specified and fixed share on the death of his
ancestor. It is not fluctuating and uncertain interest.
(iv) Unity of possession Unity of possession Unity of possession Unity of possession Unity of possession - Although in Dayabhaga coparcenary there is no community
of interest, yet there is unity of possession. Each coparcener is in possession of the
entire property, even if he has no actual possession, as possession of one is
possession of all. No one can claim any exclusive possession of property unless
agreed upon by coparcener.
37
(v) Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Doctrine of survivorship not applicable - Under Dayabhaga School all properties
devolve by succession. Therefore, if a coparcener dies, his share does not devolve
HINDU JOINT FAMILY
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by survivorship to other coparceners but devolves by inheritance to his heirs. The
doctrine of survivorship is not recognized under Dayabhaga School.
(vi) Joint family property and separate property - Joint family property and separate property - Joint family property and separate property - Joint family property and separate property - Joint family property and separate property - Under Dayabhaga School, the
Apratibandha Aaya or unobstructed property is not recognized. All property under
Dayabhaga School is the obstructed property. On the other hand, the division of
property into joint family property and self-acquired property is recognized.
(vii) K KK KKarta arta arta arta arta - The Kartas power and the liabilities are same as that of Mitakshara Karta.
The main difference between Mitakshara and Dayabhaga Kartas power is that
the latter must render the full accounts at all time whenever required to do so by
coparceners, while the former is required to render accounts only on partition.
Impact of the Hindu Succession (Amendment) Act, 2005:
The concept of the joint family is under question as female members (daughters) of
the coparceners are conferred the status of a coparcener. A new concept of dual status
and membership has came into picture as the married female is conferred a status of
member in her husbands family as well a status of coparcener is given to her in the
family of her birth.
1) It makes the daughters coparceners in a Hindu Joint Family governed by the
Mitakshara Law and gives them coparcenary rights.
2) She will be entitled to dispose of the property which she gets as a coparcener by
her will or other testamentary disposition.
3) After the commencement of this Act the devolution of the interest of a member of
Hindu Joint Family after his death will be done according to the testamentary or
intestate succession and not by survivorship.
4) The share of the daughter will be protected during the notional partition and she
will be given equal share as given to the son.
5) The share of the predeceased son or daughter will be given to his or her son or
daughter. The share of the predeceased child of a predeceased son or daughter
will be given to the child of such predeceased child.
HINDU JOINT FAMILY
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CHAPTER - II
COPARCENARY
Introduction:
In the Smritis and commentaries, we come across the words
kutumba
38
or avibhakta-kutumba
39
which mean joint family. A joint
family consists of all males lineally descended from a common male
ancestor and includes their wives and unmarried daughters. A daughter
on marriage ceases to be a member of her fathers family and becomes
a member of her husbands family.
A Hindu family is presumed to be joint until the contrary is proved.
But when one of the coparceners separates himself from the other
members of the joint family and has his share if the joint family partitioned
off from him, there is no presumption that the rest of the coparceners
continued to be joint.
40
Under the Mitakshara, a Hindu coparcenary is a much narrower
concept than the joint family. It comprises only those males who take by
birth an interest in the joint or coparcenary property, that is, a person
himself and his sons, sons sons and sons sons son from the time being
a coparcenary.
41
These persons can enforce a partition whenever they
like. The essence of a coparcenary under Mitakshara School of Hindu
Law is community of interest and possession.
38
Nar, dattapradanika 6, Yaj. II. 175.
39
Yaj. II. 45.
40
Minor Balasubramania Reddi v. Narayana Reddiar, A.I.R 1965 Mad. 409.
41
N.V. Narendranath v. Commissioner of Wealth Tax, Andhra Pradesh, A.I.R 1937 PC 36.
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A coparcenary is a pure creation of law. It cannot be created by the act of parties,
except by way of adoption and in the case of a re-union, a sub-branch could be a
corporate unit, holding and disposing off family properties, subject to the limitations
laid down by the law.
42
In order to be able to claim a partition, it does not matter how
remote from the common ancestor a person is, provided he is not more than four
degrees removed from the last male owner who has himself taken an interest by birth
43
The reason as to why coparcenership is so limited is to be found in the tenet of Hindu
religion that only male descendents up to three degrees can offer spiritual ministration
to an ancestor. Only males can be coparceners.
44
Coparcenary under Mitakshara School of Hindu Law:
Under Mitakshara School, coparcenary encompasses unity of ownership, that is,
the whole body of coparceners is the owner and no individual member can say, while
the family is undivided, that he has a definite share, as his interest is always fluctuating,
being liable to be enlarged by deaths and diminished by births in the family. There is
also unity of possession and enjoyment, that is, all are entitled to possession and
enjoyment of the family property and the possession of one is ordinarily possession on
behalf of all.
Further, while the family is joint and some coparceners have many children and
others have few or none or some are absent, they cannot complaint at the time of
partition about some coparceners having exhausted the whole income and cannot ask
for an account of the past income and expenditure
45
. Moreover the joint family property
devolves by survivorship, that is, on the death of a coparcener his interest lapses and
goes to the other coparceners, subject to this that if the deceased has left a son,
grandson, or a great-grandson, the latter represents and occupies the place of the
deceased coparcener when a partition takes place.
A female cannot be a coparcener (even if she be the wife or the mother). Another
characteristic is that each coparcener has a right to enforce a partition. The affairs of
42
P.N. Venkatasubramania Iyer v. P.S. Easwara Iyer, A.I.R 1966 Mad. 266; Sudarsanam Maistri v.
Narasimhalu, (1902) ILR 25 Mad. 149; Bhagwan Dayal v. Reoti Devi, A.I.R 1962 SC 287.
43
Moro v. Ganesh, 10 Bom. H.C.R. p. 444, pp. 461-468 (In this case, Mr. Justice Nanabhai Haridas
very lucidly explains by several diagrams the limits of coparcenary and what persons are entitled to
demand a partitions and from whom.
44
Sunil Kumar v. Ram Prakash, AIR 1988 SC 576.
45
Kat. (888).
COPARCENARY
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the family are managed by the father and if he be very old or dead, by the senior
brother or member or by any other member with the consent of the senior member
46
.
He has special powers of disposition (by mortgage, sale or gifts) of family property
(maintenance, education and marriages of members and other dependents) and
particularly for religious purposes (sraddhas and the like).
47
The father has the same powers as the manager and certain other special powers
which no other coparcener has. The father can separate his sons from himself and also
among themselves if he so declares, even if they do not desire to separate
48
, while an
ordinary coparcener can only separate himself from the family.
The father can make within reasonable limits gifts of ancestral movable property
without the consent of his sons for performing indispensable duty and for the purposes
laid down by the texts, such as gifts through affection (to wife, daughter, son or the like),
the support of the family and relief from distress. The father can make a gift of even
immoveable property within reasonable limits for pious purposes only (such as to family
idol or to an idol in a temple at the time of obsequies).
49
The father can sell or mortgage
the joint family property to pay off an antecedent debt contracted by him for his own
personal benefit, provided it is not illegal or immoral.
On the other hand, no coparcener (except the manager or father) can dispose of
his undivided interest by gift, sale, or mortgage according to the strict theory of the
Mitakshara except with the consent of the other coparceners. The right to object to
alienations made without legal necessity is another characteristic of the Hindu Joint
Family under the Mitakshara.
Whether kinsmen are joint or separate they are alike as regards immovable property,
since a single one among them has no power in any case to make a gift, sale or
mortgage of it.
50
.
46
Nar., Dayabhaga 5 and Sankha. The manager is called the Karta in modern times though the Smritis
and digests works like kutumbin.(Yaj. II 45), grhin, grahapati, prabhu (Kat. 543) and not Karta.
47
S.A. Desai, (rev.), Mulla, Hindu Law, 19
th
ed., Vol. II, p. 495
48
Yaj. II. 114
49
Ramalinga v. Sivachidambara, AIR 1942 Mad. 440; Gangi Reddy v. Tammi Reddy, 54 I.A. 136,140;
Sri Thakurji v. Nanda, AIR 1943 All. 560 (for the validity of gifts of small immoveable property by the
Karta for religious purposes.). But in Jinnappa v. Chimmava, AIR 1959 Bom. 459 a gift of a small
portion of joint family immoveable property by the father to his daughter on the ground that she
looked after him in his old age was set aside at the suit of his grandsons.
50
Br. (S.B.E. 33p. 384 verse 93).
COPARCENARY
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But in modern times the Courts in Bombay, Madras and the Central Provisions have
loosened their strict rule by holding that a coparcener may sell, mortgage or alienate
for value his undivided interest in a coparcenary property without the consent of the
other coparceners
51
and the Courts have allowed the undivided interest of a coparcener
in the joint family property to be attached at the instance of the creditor for the individual
debts of a coparcener. This is one of the serious departures from ancient and medieval
Hindu Law made by the Courts on the ground of equity. One more right of all the
members of the joint Hindu family is the right to be maintained from the income and
property of the joint family. Such matters as the remedies of the purchaser or mortgagee
from an individual coparcener are here left out of consideration as appropriate only in
a treatise on modern Hindu Law.
Rights of an adopted son:
An adopted son, if adopted by a coparcener in a joint family or by a sole surviving
coparcener, becomes under the Mitakshara Law a member of the coparcenary from
the moment of his adoption and has the same rights to demand a partition as an
ausura son has. Under the Dayabhaga even an ausura son cannot claim a partition
during his fathers lifetime. Therefore, under Dayabhaga School, even an adopted son
is in no better position
52
.
Rights of an illegitimate son:
An illegitimate son has in certain circumstances rights of partition in the property of
his putative father. An illegitimate son may be a son of a concubine who is a dasi
53
or
the son of a woman who is not a dasi.
54
The following propositions have been deduced from various texts like the history of
Dharmasastras, Srutis, Smritis, Mitakshara Law, Dayabhaga Law.
The illegitimate son of a Sudra even under Mitakshara does not acquire by birth
any interest in the estate held by the father and so cannot enforce a partition in his
fathers lifetime, which may even be equal to an illegitimate son.
51
Vasudeva v. Venkatesh, 10. Bom, H.C.R. p. 139 which were approved by the Full Bench in Fakirappa
v. Chanapa, 10 Bom. H.C.R p. 162, and Vitla Butten v. Yamenamma, 8 Mad. H.C.R. 6.
52
If after a person adopts, he has an ausura son, the adopted sons share becomes reduced according
to most commentators.
53
Who is in exclusive and continuous living.
54
The first is called a dasiputra (occurs in the story of Kavasa Ailusa and in the Aitareya and the
Sankhayana Brahmanas. And the second is hardly ever dealt with in the Dharmasastra texts.
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On the fathers death of an illegitimate son of a deceased Sudra becomes a
coparcener along with the legitimate sons takes only one-half of what he would have
taken if he were a legitimate son, that is if there be one legitimate and one illegitimate
son, the former three-fourth.
If no partition takes place and the legitimate son or sons all die without partition,
the illegitimate son would take the whole as the last survivor of the coparcenary.
The next situation is where there be no legitimate sons, grandsons, or great-grandsons
of the Sudra father, the illegitimate son takes the whole estate.
As the text of Yajnavalkya refers only to a son, an illegitimate daughter is not entitled
to any inheritance.
If the Sudra father be joint with his collaterals such as brothers, uncles or nephews,
the illegitimate son cannot demand a partition of the joint family property though he is
entitled to maintenance as a member of the family provided the father left no separate
estate.
An absent coparcener stood on the same footing as a minor. In modern times, he
would be subject to the Law of Limitations
55
Coparcenary under Dayabhaga School of Hindu Law:
The concept of coparcenary under Dayabhaga system is totally different from that
of Mitakshara. Under the Dayabhaga, sons do not acquire any interest by birth in
ancestral property, but the sons rights arise for the first time on the fathers death and
the sons take as heirs and not by survivorship
56
. There is hence, no coparcenary in the
sense of the Mitakshara between a father and his sons, as regards ancestral property.
The father has an absolute power to dispose of all kinds of ancestral property,
whether moveable or immoveable, by sale, mortgage, gift, or otherwise in the same
way as he can dispose of his separate property. The son has no right to demand
partition during his fathers lifetime. A coparcenary starts on the fathers death between
his sons or grandsons, that is, between brothers, uncles or nephews, or between cousins.
If a coparcener dies without a male issue, there is no right of survivorship in the other
55
Articles 127 and 144 of the Indian Limitation Act of 1908.
56
Dayabhaga, Chapter I, ss. 11-31, 38, 44, 50, Chapter II, s. 8.
COPARCENARY
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coparceners but the deceased members daughter or widow may succeed to his share
and thus even females may become members of a coparcenary under Dayabhaga.
57
Each coparcener takes a defined share under the Dayabhaga (not an indefinite
one as under the Mitakshara). Any coparcener under the Dayabhaga can sell, mortgage,
or dispose off by gift or will his share
58
.
Under Dayabhaga School, the father is the absolute owner of property. He can
manage his property the way he likes
59
since sons, according to Dayabhaga School, do
not acquire ancestral property, they cannot claim any partition or property from their
father.
Every coparcener is entitled to a share on partition. For instance, if A and his sons
B and C, who are members of a joint family, come to a partition and take one third of
each of the family property and six months later As wife gives birth to a son D, then the
partition has to be reopened and D will get one-fourth of the family property that will
remain after meeting all proper charges since the first partition and taking into account
all accretion during the interval. The same rule applies to a partition among brothers,
when the widow of a predeceased brother gives birth to a posthumous son conceived
before the partition but born after it.
A Comparative Study of the Coparcenary: under the Mitakshara and the
Dayabhaga Schools of Hindu Law:
When we do a comparative study of the Mitakshara and the Dayabhaga Schools
with regard to coparcenary, the main line of difference is embedded in the very meaning
of coparcenary. Under Mitakshara Law, the foundation of a coparcenary is first laid on
the birth of a son. The birth of a son marks the beginning of a coparcenary. Thus, if a
Hindu family governed by Mitakshara Law has a son born to them, the father and son
immediately become coparceners.
60
According to Dayabhaga School, the foundation of a coparcenary is that which is
laid on the death of the father. So long as the father is alive, there is no coparcenary in
57
P.V. Kane, History of Dharmasastra, 3
rd
ed., Vol. III, p. 657.
58
Dayabhaga II 28-31.
59
Dayabhaga, Chapter I, ss. 11-31, 38-44, 50. Chapter II, S. 8; Makhan Lall v. Sushama Rani AIR
1953 Cal 164, 57 CWN 81.
60
B.M. Gandhi, Hindu Law, 2
nd
ed. 2003, p. 456.
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the strict sense of the word between him and his male issue. It is only on his death,
leaving two or more male issues, that a coparcenary is first formed.
Right of Sons:
Mitakshara L Mitakshara L Mitakshara L Mitakshara L Mitakshara Law aw aw aw aw: According to Mitakshara Law, each son acquires at his birth an
equal interest with his father in all ancestral property held by the father, and on the
death of the father, the son takes the property, not as his heir, but by survivorship.
Dayabhaga L Dayabhaga L Dayabhaga L Dayabhaga L Dayabhaga Law aw aw aw aw: According to Dayabhaga, sons do not acquire any interest by
birth in the ancestral property held by the father. Their rights arise for the first time on
the death of the father. On the death of the father, they take the property of the father,
as is left by him, whether separate or ancestral, as heirs and not survivorship.
Position of Women:
Under Mitakshara, no woman can be a coparcener along with male coparceners.
However, this is not so under Dayabhaga School. Under Dayabhaga, coparcenary
consists of both males and females.
The effect of Womens Right to Property Act, 1937, was not to abolish or disrupt the
Dayabhaga family. However, the share of a coparcener in the coparcenary property (as
in the case of his separate property) will be devolved on his widow and along with his
male issue, and if he did not leave any male issue, his property devolved on his widow,
his daughter, and other heirs as before.
61
Coparcenary Property under the Dayabhaga School of Hindu Law:
Under the Dayabhaga School, coparcenary consists of ancestral property or of
joint acquisitions, or of property thrown into the common stock, and accretions to such
property
62
. The essence of a coparcenary under Dayabhaga Law is unity of possession.
It is not unity of ownership. The ownership of coparcenary property is not in the whole
body of coparceners. Every coparcenary takes a definite share in the property, and he
is the owner of that share. That share is defined immediately when inheritance falls in.
It does not fluctuate with the birth and death in the family. So long as there is unity of
61
A.G.Gupte, Hindu Law, 2
nd
ed. 2003, p.456.
62
Sreemutty Soorjemooney Dossee v. Denobundee (1856) 6 MLA 526; Partha Talukdar v. Nina Hardinge
AIR 1993 Cal 118. (self-acquired property thrown into the common stock by father is coparcenary
property).
COPARCENARY
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possession, no coparcener can say that a particular share in the property belongs to
him. That he can say only after partition.
63
Partition, thus according to Dayabhaga Law, consists in splitting up of joint possession
and assigning specific portions for the property to the several coparceners. Since a
coparcener under Dayabhaga Law share takes a defined share in the property, a
purchaser of a Court sale of his share is entitled to be put into the physical possession
of his share
64
.
Since every coparcener takes a definite share in the coparcenary property, it follows
that a coparcener governed by that law, can alienate his share by sale or mortgage, or
dispose it off by gift or will, in the same manner as he can dispose of his separate
property.
65
On his death intestate, his share will go to his heirs.
The right of a coparcener under Dayabhaga to dispose of his property by will, is
recognized in effect by Section 30 of the Hindu Succession Act, 1956.
66
The power of a manager under Dayabhaga is the same as that of Mitakshara
Law.
67
He cannot contract a debt for a joint family purpose, and a decree passes
against him for such a debt as manager will bind the other members, though they are
not parties to the suit.
68
He can also mortgage the family property for the purposes of a
family business.
69
63
Mayne, Hindu Law and Usage, 14
th
ed., 1998, p. 657.
64
Koonwar Bijoy v. Shama Soonduree, (1865) 2 WR (Mis) 30; Eshan Chunder v. Nund Coomar,
(1867) 8 WB 239.
65
Kounla v. Ram Huree, (1827) 4 Beng Sel R 196 ; Anunchand v. Kisben, (1805) 1 Beng Sel R 115.
66
It has been held that where the share of a coparcener governed by Dayabhaga law is sold in
execution of a decree passed against him, the purchaser is put into joint possession with the other
coparceners as seen in the case of Ranjanikant v. Ram Nath, (1884) 10 Cal 224. Similarly, it has
been held that a coparcener may lease out his share, and put in lease in possession as has been
seen in the case of Ram Debul v. Mitterjeet, (1872) 17 WR 322, and Macdonald v. Lalla Shih,
(1873) 21 WR 17.
67
Balakrishma v. Muthaswami, (1909) 32 Mad. 271, 274, 3 IC 878.
68
Dwarka Nath v.Bungshi, (1905) 9 CWN 879.
69
Bemola v. Mohun, (1880) 5 Cal 792. In a suit on a mortgage by the two managing members of the
family for a debt due by the family, the other members will not be liable until the remedy on the
mortgage is exhausted. After the mortgaged properties are brought to sale, the other members are
liable as seen in the case of Sukhadakanta Bhattachariya v. Jogineekanta Bhattachariya, (1933) 60
Cal 1197, 149 IC 878, A.I.R 1934 Cal. 73.
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Since every coparcener under the Dayabhaga Law takes a defined share of the
coparcenary property, he is entitled to make use of the portion of the coparcenary
property in the occupation that he likes.
70
He may lease out his share, and put out his
lessee in possession.
71
However, he must not do any act which is injurious to the
coparcenary property
72
, or which amounts to an infringement of the rights of the other
coparceners. Thus, he cannot enter into possession of a specific portion of joint
agricultural land without the consent of the other coparceners, and claim to cultivate it
for his own benefit
73
. If he is in occupation of a specific portion of such land by consent,
he may cultivate it in a proper course of cultivation, and appropriate the income for his
sole use
74
Like Mitakshara Law, Dayabhaga Law also allows every adult coparcener the right
to call for a partition of the coparcenary property
75
.
Under Dayabhaga Law, there is no presumption that property purchased by a father
in the name of his fathers lifetime and of which the son has been in possession since its
purchase, is joint family property. The burden of proof in such a case is on the person
who denies the ownership of the son
76
.
Thus, coparcenary property may consist of ancestral property, joint acquisitions,
and property thrown into a common stock and accretions to such property. However, if
the facts clearly establish that the property in dispute is the undivided property of joint
owners, and if any of the incidents of coparcenary property as mentioned above are
absent, the property cannot be characterized as coparcenary property. However, it
would be the undivided property of co-owners or joint owners.
Coparcenary and the Hindu Succession Act, 1956:
The Hindu Succession Act, 1956, has brought about some radical changes in the
law of succession without abolishing the joint family and the joint family property. It
does not interfere with the special rights of those who are members of a Mitakshara
70
Ehsan Chunder v. Nund Coomar, (1867) 8 WR 239.
71
Ram Debul v. Mitterjeet, (1872) 17 WR 322
72
Gopee Kishen v. Hem Chunder, (1870) 13 WR 322.
73
Stalkarti v. Gopal, (1873) 20 WR 168.
74
Robert Watson & Co. v. Ramchand, (1891) 10, 21, 17 IA 110, 120.
75
Sreemutty Soorjeemooney Dossee v. Denobundoo, (1856) 6 MLA 526-539.
76
Sarada v. Mahananda, (1904) 31 Cal. 448.
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coparcenary. It is however, essential to note that Section 6 of the enactment recognizes
the rights upon the death of the coparcener of certain of his preferential heirs to claim
an interest in the property that would have been allotted to him if there had been a
partition immediately before his death.
Section 6 of the Hindu Succession Act, 1956 states that when a male Hindu dies
after the commencement of the Act, having at the time of his death, an interest in a
Mitakshara coparcenary property, his interest in the property shall devolve by survivorship
upon the surviving members of the coparcenary and not in accordance with this Act.
Provided that, if the deceased had left surviving a female relative specified in
Class-I of the Schedule, or a male relative, specified in that class who claims, through
such female relative, the interest of the deceased in Mitakshara coparcenary property
shall devolve by testamentary or intestate succession, as the case may be, under this
Act and not by survivorship.
This Section means that the interest of a Hindu Mitakshara coparcener shall be
deemed to be the share in the property that would have been allotted to him if a
partition of the property would have taken place immediately before his death, irrespective
of whether he was entitled to claim partition or not.
Nothing contained in the proviso to this Section shall be construed as enabling a
person who has separated himself from the coparcenary before the death of the deceased
or any of his heirs to claim on intestacy a share in the interest referred to therein.
This provision of the Act deals with the question of coparcener in a Mitakshara
coparcenary dying (after the coming into operation of the Act) without making any
testamentary disposition of his undivided share in the joint family property.
Under the old law, a devise by the coparcener in Mitakshara family of his undivided
interest was wholly invalid.
Section 8 states, the property of a male Hindu dying intestate shall devolve according
to the provisions of this Chapter-
a) firstly, upon the heirs being the relatives specified in Class-I of the Schedule,
b) secondly, if there is no heir of Class-I then upon the heirs, being the relatives
specified in Class-II of the Schedule,
c) thirdly, if there is no heir of any of the two classes, then upon the agnates of the
deceased, and
COPARCENARY
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d) lastly, if there is no agnate then upon the cognates of the deceased.
This Section propounds a new and definite scheme of succession and lays down
certain rules of succession to the property of a male Hindu who dies intestate after the
commencement of the Act. The rules are pivotal and have to be read along with the
Schedule.
Section 30 in Chapter-III of the Hindu Succession Act, 1956 deals with testamentary
succession for Hindus. Section 30 states, Any Hindu may dispose of by will or other
testamentary disposition any property which is capable of being so disposed of by him
or by her
77
in accordance with the provisions of the Indian Succession Act 1925, or any
other law for the time-being in force and applicable to Hindus.
78
The interest of a male Hindu in a Mitakshara coparcenary property to the interest
of a member of a tarwad, kutumba in the property, notwithstanding anything in this
Act or in any other law for the time being in force, be deemed to be property capable
of being disposed of by him or by her within the meaning of this section.
It is interesting to note that the present day law has brought about some radical
changes in the law of succession without abolishing the joint family and the joint family
property. It does not interfere with the special rights of those who are members of a
Mitakshara coparcenary. It is however essential to note that Section 6 of the enactment
recognizes the rights upon the death of the coparcener of certain of his preferential
heirs to claim an interest in the property that would have been allotted to him if there
had been a partition immediately before his death.
77
inserted by the Hindu Succession (Amendment) Act, 2005.
78
Part of this section was omitted by the Repealing and Amending Act 58 of 1960 and the sub-section
(2) was omitted by the Act 78 of 1956.
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237
CHAPTER - III
DEBT
Introduction:
The law of inheritance consists of those rules and regulations which
affect the devolution of the property on the death of the person. In the
Hindu society the practice of joint family is prevalent. It is the fundamental
conception that a Hindu Joint Family consists of a common ancestor his
male lineal descendents up to any degree or generation his wife, their
wives or widows and his unmarried daughters or daughters of lineal
male descendents. As long as there is no division of the family, it functions
as a corporate unit.
79
The family traces its origin from the common
ancestor and this taken from the ancient patriarchal system where father
is the head or the Karta of the family. After the father the eldest male
member becomes the head or takes his position. Under the early Hindu
Law, the rights of the son were recognized and they were given equal
share with the father in the ancestral property as coparceners.
A debt may be contracted by an individual for his own private purpose
or for the welfare of the joint property. A Hindu may possess certain
property which may be his own or may be an undivided property with
coparceners. The separate property of a Hindu whether it is separate or
not is liable for the payment of debts both in his lifetime and after his
death. The undivided property is not liable to pay off his debts after his
death. It is only liable if during his lifetime the property was divided or is
attached to him otherwise he cannot pay his debts from the undivided
property. There is an exception to this rule that if the father or the paternal
grandfather or paternal great grandfather dies leaving his private debts.
These debts can be paid from the entire joint family property, including
79
S A Desai, (rev.), Mulla, Principles of Hindu Law, Vol. II, 20
th
ed. 2007, p.291.
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the sons undivided interest; he is liable to the payment of debts after his death even if
such interest is not attached to his property, the debt can only be paid if it is not immoral
in nature
80
. This is because a Hindu male is under a pious obligation to pay the private
debts of his father, grandfather and great grandfather provided that they are not immoral
in nature. It is not a personal liability this means that the son is not liable for private
property of his own to pay the debts of the ancestors. The liability is for the undivided
interest in the joint family property. It is the moral obligation to save the father from the
penalties which would arise from the non payment of debts. When the debt cerates no
such religious obligation the son is not bound to repay the debt and there is no religious
obligation when the debt is immoral or illegal.
The law of debts illustrates the principal which constantly occurs in Hindu
Jurisprudence is that the moral obligation of a person is more than the legal rights.
According to the Dharmasastras the liability to pay debts arises out of three different
sources. It is a religious obligation of a son to pay the debts of his ancestors.
81
The first ground for liability arises in case of a debtor and his sons and grandsons.
According to the Hindu Law the repayment of debts is not merely a legal obligation but
is also a moral obligation, if it is not paid it would continue to the next world
82
. The duty
of reliving the debtor from such evils the payment falls on his male descendants, to the
second generation.
Liability of Son to pay Fathers Debt according to the Dharmasastras:
According to the Hindu Law as stated in the Dharmasastras there are three forms of
debts which a person has to pay First, to release the religious duty of discharging the
debtor from the sin of his debts; Secondly, the moral duty of paying a debt contracted
by one whose assets have passed into the possession of another and lastly, the legal
duty of paying a debt contracted by one person as an agent, express or implied, to
another person who have an authority conferred by Hindu Law who act on behalf of
another person. According to Manu when the son has paid the three debts can obtain
the final liberation
83
. And that person who seeks it without paying the debts sinks
downwards. He can obtain final liberation only if he has studied Vedas according to the
80
S A Desai, (rev.), Mulla, Principles of Hindu Law, Vol. I, 19
th
ed. 2005, p. 510.
81
Ranganatha Mishra (rev.), Maynes, Hindu Law and Usage, 15
th
ed. 2003, rep. 2005, p.749.
82
ibid.
83
ibid.
DEBT
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rule have begotten a son and have offered sacrifices according to his ability and
according to the prescribed rules then only he can direct himself to the attainment of
liberation. Twice-born men who obtain liberation without performing the above stated
essential conditions sink downwards. A son delivers his father from hell called as put;
therefore he is called as puttra or the deliverer from hell. It is not essential that the sons
son will only save you from the put but a daughters son can also save you from the put.
The sources of Hindu Jurisprudence states that the desire for son was not only for
the spiritual purposes but also to liberate or secure guarantee for the discharge of his
secular liability. The most important liability is to pay off ones debt. The non-payment
of debtor not only affects the next life of the debtor but makes his life miserable.
According to Narada, the grandsons shall pay the debt of their grandfather, which
have been legitimately inherited by the son has not been paid by them; the obligation
ceases with the fourth descendent.
84
The debt of a father should be paid first then the
debt contracted by the person himself, as it was observed by the Privy Council in the
case of Chockaligam v. Official Assignee of Madras
85
. In this case, after the death of
the Hindu father, his property was devolved to his sons, two of whom were subsequently
declared as insolvents. A creditor of their father claimed in their insolvency proceedings
a priority of the payment of his debts in preference to the claims of the creditors of the
sons. It was held that the claim must prevail in respect of the separate estate of the
father, but it was rejected with regard to the joint family assets. It was observed by the
Lordships in the decision that there can be no doubt that in many respects, the Hindu
Law is administered by the doctrines of old Hindu Law.
According to the text given by Narada there is a description of the debts it talks
about which debt must be paid, which other debts must not be paid; by whom should
it be paid and in what from they must be paid; and all the rules of gift and receipt
comprise the title to recover debts. If the father is dead, it is incumbent on the sons to
pay his debt and each according to his share of inheritance in the property if they are
given their respective shares. If they are not divided in their respective interests the debt
must be discharged by that son who becomes the manager or the head of the family. If
the debt has been legitimately inherited by the sons, and left unpaid such debt of the
grandfather should be paid by the grandsons, it does not include liability for the fourth
generation.
84
Ranganatha Mishra (rev.), Mayne, Hindu Law and Usage, 15
th
ed. 2003, rep. 2005, p. 749.
85
ILR (1943) Mad. 603; Ranganatha Mishra (rev.), Maynes, Hindu Law and Usage, 15
th
ed. 2003,
rep. 2005, p. 750.
DEBT
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As regards the liability of the ancestor Narada states:
Three deceased ancestor must be worshipped, three must be reverenced before
the rest. These three ancestors of a man can claim the discharge of their two fold debt
from the fourth in descent.
86
According to Jolly who refers Ashayas commentary on Naradasmriti and gives his
opinion as the three deceased ancestors that is the father, the grandfather and the
great grandfather may claim discharge of their liabilities from the person who is fourth
in descent. A case was brought before the Court of Patna where there was merchant of
the Brahman class his name was Sridhana. He had a wealth of about 10,000 drammas
which was obtained through great labor; he lent his whole wealth to a trader named
Devadhara. He obtained this money with a condition that would pay an interest of 2%
should be paid to Sridhana. The interest was duly paid to him at the end of the first
month. Devdhara died in the second month and his son died due to an attack of
cholera now his grand son was the person who was alive and his name was Mahidhara.
He was addicted to bad habits so his estate was taken care by his cousins and his
maternal uncles. Smartadurdhara was a cunning Brahman who advised them not to
pay Sridhana a single penny as he said that he can prove by the law books that the
dont have any rights to ask for money. At the end of the second month Sridhara asked
Mahidhara to pay 200 drammas, as the amount of interest paid to his grandfather but
they refused to pay. Sridhana was angry so he went to the court. Mahidhara and his
uncle have lost the case as Smartadurdhara was not able to prove his point
87
.
This case illustrates the obligation of a son is independent obligation based on
religious texts. The fact of acquisition of property does not affect the obligation as it is
independent of receipt of property. The liability to pay does not die with the debtor; the
son has to pay the debt. If any person fails to pay the debt, it will grow and till 100
krores.
88
The person is born again in the house of the creditor and serves him as a slave
to give away the debt by serving him.
According to Brihaspati the debt which was contracted by the grand father should
be paid first then the debt contracted by the father if any and then the debt of the man
86
Narada, 1,2,4,5, SBE Vol. 33, pp. 43-44.
87
Ibid.
88
Vijender Kumar, Basis and Nature of Pious Obligation of Son to pay Fathers Debt vis--vis Statutory
Modifications in Hindu Law, JILI, Vol. 36:3, 1994, pp. 343-344.
DEBT
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himself must be paid off. The debt paid for the grand father must be paid without
interest but the debt of a great grandfather need not pay the debt. According to the
views of Narada and Manu the debts of three ancestors are paid and they are worshipped
and their liabilities should be discharged. According to Katyayana a debt which was
contracted by the grandfather and was not paid by the father should be discharged by
the grandson but he had to pay only the amount taken in debt not the interest. The debt
contracted by the father should be cleared at the time of partition.
In view of Mitakshara the son and the grandson are liable where they inherit any
property from their ancestors or not. The son is liable to pay the debts of the father in his
lifetime if he is not able to pay off his debts due to illness or old age. The sons duty to
pay the debt of the father and the grandfather is of religious nature and it is independent
whether they acquire the property or not from them. The texts of Hindu Law illustrate
various views which have been given by the Hindu sages some of them are discussed.
According to Brihaspasti he who, having received a sum lent or the like does not
repay it to the owner will be born hereafter in his creditors house, a slave, a servant, a
woman, or a quadruple. Therefore we can understand it from here that it is a very
essential task to fulfill our ancestors debts so that they a relieved from been born again
in any of this form in their creditors home.
Narada says when a devotee, or a man who maintained a sacrificial fire, dies
without having discharged his debt, the whole merit of his devotions, or of his perpetual
fire belongs to his creditors. Therefore, Narada is trying to explain that if a devotee or
a man, who has maintained some type of sacrifices all his life, will all be cancelled if he
does not fulfill his debt which he has taken. If the debtor wants to be relieved from all
these evils he should fill all his debts or his male descendents should perform this duty
to save them. The repayment of the debts of the ancestors is called as pious obligation
of the son, sons son or sons sons son.
Kinds of Debt:
The Debt ordinarily means liquidated or ascertained money as distinguished from
unliquidated damages for breach of contract or for a tort.
89
If a decree has been
obtained against the father for damages for breach of contract or for a tort, the judgment
debt constitutes a debt within the meaning of this section.
89
S A Desai (rev.), Mulla, Principles of Hindu Law, 19
th
ed. 2005, Vol. I, p 553.
DEBT
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242
Avyavaharika Debt:
The debt which has been contracted for some civil purpose consists with the
prescriptive usage of good men must be paid by sons and the rest; but if it be the
reverse, it need not be discharged.
90
The term is commonly used to describe the debts
of father which were immoral or illegal in nature. It includes debts which are due to
spirituous liquor, due to lust, debts which have been contracted due to gambling, those
of unpaid fines, unpaid tolls. The debts which arise due to anything which has been idly
promised or promises which are made without consideration or any such thing which is
promised under the influence of any person.
91
The debts which arise out of surety,
commercial debts and debts which are not vyavaharika are all avyavaharika. The Payment
of damages awarded under a decree obtained against the father for defamation, assault,
false imprisonment or for malicious prosecution
92
, instances where money borrowed to
pay for the criminal offence
93
, to pay the expenses for the marriage of the granddaughter
of his permanently kept concubine,
94
to fight the litigation against the son himself, to
defeat the legitimate rights of the sons
95
.
Time Barred Debt:
According to the modern Hindu Law no person is liable to pay his or her time
barred debt. Therefore, the sons are not liable to pay the time barred debt of their
father or grandfather. But a promissory note if executed by the father for alienation
made for discharge by the father will be binding on the son; it was laid down in the case
of Gujhdhar v. Jagannath. .. ..
96
Time barred debt does not come under the avayaharika
debts.
If the debt contracted by the father is tainted with immorality, the mortgagee is not
entitled to proceed against the sons interest at all. The mortgagee is entitled to a
decree with limited interest in the mortgaged property and this is observed in parts of
90
Ranganath Mishra (rev.), Mayne, Hindu Law and Usage, 15
th
ed. 2003, rep. 2005,
p 752.
91
Ibid. at 751.
92
Kamalammal v. Senthil, AIR 2003 Mad. 337.
93
Garuda Sanyasayya v. Nerella Murthenna, AIR 1919 Mad 943.
94
Lakshmanasawami v. Raghavacharulu, AIR 1943 Mad. 292.
95
M Veraghaviah v. M Chini Veeriah, AIR 1975 A P 350.
96
AIR 1924 All 551 (FB); Paras Diwan, Family Law, 7
th
ed. 2005, p 413.
DEBT
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243
Bombay and Madras. In Uttar Pradesh a mortgage of a fathers own undivided interest
in the property without the consent of the son does not bind his interests
97
. The mortgagee
is not entitled to a mortgage decree limited even to his interest.
Commercial Debts:
According to Gautama commercial debts are those debts which are incurred by
the usual course of carrying on a business or trade but mostly for those sums which are
borrowed for the speculation of hazardous ventures. Partnership in trade was one of the
specific titles of law and Gautama refers trade as an additional occupation for the
Vaisya community. It is impossible therefore to believe that commercial debts in the
ordinary sense were regarded by Gautama as improper and no other Smriti refers to it.
When a father incurs a debt in connection with the buying and selling of shares,
which results in a loss is not an immoral debt but a commercial one.
98
If a money
decree is passed against the father for such debt, then the son cannot resist the
execution.
99
Antecedent Debt:
According to Lord Dunedin antecedent debt is Antecedent in fact as well as in
time
100
. This debt is not a part of transaction. It was held in the case of Brij Narayan v.
Mangala.
101
There are two essential conditions required for the antecedent debts
(a) the debt must be prior in time; and
(b) the debt must be prior in fact.
The first condition means that keeping the time in mind the debt should precede
the alienation as both cannot be made simultaneously. Thus, we can take an example,
suppose the debts are alienated on 04.07.07 and the properties are alienated on
09.07.07., the debt is prior in time.
102
97
Paras Diwan, Family Law, 7
th
ed. 2005, p 413.
98
Gulalchand v. Vadilal, AIR 1950 Kutch 78; S A Desai (rev.), Mulla, Principles of Hindu Law, 20
th
ed. 2007, Vol II, p. 297.
99
Chotka Singh v. . . . . Hasan, (1930) 5 luck 184; S A Desai (rev.), Mulla, Principles of Hindu Law, 20
th
ed. 2007, Vol. II, p.297.
100
ibid at p. 415.
101
AIR 1924 PC 59; Paras Diwan, Family Law, 7
th
ed. 2005, p 415.
102
Paras Diwan, Family Law, 7
th
ed. 2005, p 415.
DEBT
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244
According to the second condition debt and alienation are independent of and
they are separate transactions. In the case of Pathak v. Pathak
103
it was observed by the
Gujarat High Court that if a father sells any properties to discharge a mortgage debt
which is not avyavaharika, though not justified for legal necessity or benefit, the son
can get the sale set aside provided he meets the liabilities which arise accordingly.
In the case of Brij Narain v. Mangal Prasad
104
there was one Sita Ram who on 4
th
March 1908 granted a mortgage deed for Rs 11,000 in favour of Raja Narain Brij Rai
and Jagdish Narain Rai. The mortgage was secured on ancestral property, of which
Sita Ram was at that time manager, the other members of the joint family being his two
sons who were minors. In 1912 the mortgagees brought a suit on the mortgage and
obtained a decree ex parte. In 1913 the present suit was raised by the mother on
behalf of her two minor sons (the elder one till then had become major) to have it
declared that the mortgage was not binding on them and that the decree granted was,
so far as they were concerned as null and void. The mortgage in suit bears to have
been executed in order to pay off two prior mortgages on the same property of date 12
December 1905, and 19 June 1907, respectively
105
.
The Privy Council examined the long line of cases and laid down the following
propositions of law on the basis of the existing authorities:
(i) The managing coparcener of a joint undivided estate cannot alienate or burden
the estate quo manager except the purposes of necessity.
(ii) If he is the father and the reversionaries are the sons he may, be incurring debt, so
long as it is not for an immoral purpose, lay the estate open to be taken in
execution proceeding upon a decree for payment of that debt
106
.
(iii) If he purports to burden the estate by mortgage, then unless that mortgage is to
discharge an antecedent debt, it would not bind the estate.
(iv) Antecedent debt means antecedent in fact as well as in time, that is to say, the
debt must be truly independent and not part of the transaction impeached.
(v) There is no rule that this result is affected by the question whether the father, who
contracted the debt or burdens the estate, is alive or dead.
107
103
AIR 1969 Guj 192; Paras Diwan, Family Law, 7
th
ed. 2005, p 415.
104
AIR 1924 PC 59.
105
AIR 1924 PC 59.
106
ibid.
107
ibid.
DEBT
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245
Pious Obligation Doctrine and the Hindu Succession Act, 1956:
The Hindu Succession Act created far reaching affects on the nature and constitution
of the joint Hindu family. It limited the liability of the son to the extent of joint estate of
the father and the son. After the commencement of the Act the creditor has no right to
sue the son, grandson or great grandson of the debtor for the debts which were contracted
by the father, grandfather or great grandfather. Where the son, sons son, sons sons
son are joint with their father, and he in his capacity as Karta contracts any debts for the
welfare of the family
108
. In this case sons as a member of the joint family are responsible
to pay off the debts contracted to the extent of their interest in the coparcenary property.
If the debts are contracted by the father for his personal benefits then sons (it includes
son, grandson and great grandson) are liable to pay the debts provided that they were
not incurred for immoral or illegal purposes. The liability to pay off debts arises out of
an obligation which is religious in nature which has been placed upon the son under
the Mitakshara Law to discharge the fathers debts which are not immoral in nature.
This was held in the case of Hunnoman Persaud v. Musumat Babooee
109
.
In the case where the father was not the Karta or the manager of the joint family, or
where the joint family consists of other coparceners alone with the father and sons, it
does not affect the liability of the sons to pay off the debts.
110
The doctrine of pious
obligation extends to all the debts which are incurred in the life time except those debts
which are immoral or illegal in character, this is not confined only to antecedent debts
of the father
111
.
Abolished Avyavaharika Debt:
According to the Section 6 of the Act the interest of the coparcener who died
intestate shall not devolve by survivorship but under the provisions of the law which is
laid down. Therefore, the joint family is partitioned immediately before the death of the
coparcener. Suppose a father dies intestate and indebted and his interest which is to be
devolved by succession to the heir which is enumerated in Class-I of the schedule shall
be liable for the payment of the debt of the deceased and the liability of the heirs will be
108
S A Desai (rev.), Mulla, Principles of Hindu Law, 20
th
ed. 2007, Vol. I, p.507.
109
(1856) 6 MIA 393; ibid.
110
Chootey Lal v. Ganpat Rai, (1935) 57 All 176; S A Desai (rev.), Mulla, Principles of Hindu Law,
Vol. I, 20
th
ed. 2007, p. 508.
111
S A Desai (rev.), Mulla, Principles of Hindu Law, Vol. I, 20
th
ed. 2007, p. 508.
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absolute including that of the son with respect to the share which he gets as an heir of
Class-I of the Schedule.
112
Neither the son nor anyone else can ask for an exemption
from the liability to pay the debt of the deceased on the ground of that the debt was
immoral, illegal or avyavaharika. Thus the pious obligation which has been based on
religious sanction is changed into legal obligation
113
.
The Madras High Court in its landmark judgment of Additional Commissioner of
Income-Tax v. P. L. Karuppan Chettiar
114
, gave decision following the Dayabhaga doctrine
where it was held that property inherited by son from his divided father even after
assuming that the ancestral property in the hands of the father would be his separate
and individual property and not of his joint family consisting of his wife, sons or
daughters.
115
This decision wiped out the concept of ancestral property in the Mitakshara
School.
In the case of Shrivallabi v. Modani
116
the Madhya Pradesh High Court while
interpreting the principle laid in section 8 observed it would be taken as a self contained
provision laying the method of devolution of property of a Hindu.
117
They also gave
their decision that the court should confine itself to the language used in the new
codifying Act.
In another case of Commissioner of Income-Tax v. Mukung Girji
118
the Andhra
Pradesh High Court observed that the properties which were devolved upon the son in
1958, by inheritance, the property was deemed to be of the son not his joint family
property. And therefore they cannot sue or ask for partition of such property.
The Supreme Court in the case of Commissioner of Wealth-Tax v. Chandersen
119
where there was partition of a joint family business between the father and the son only.
After that they continued the business with the same name of the partnership firm. The
son formed a joint family with his own sons. The father died and amount standing to the
112
Ibid at p. 510.
113
Ibid
114
AIR 1979 Mad. 1.
115
Ibid at p.35.
116
(1983) 138 ITR 637 (M P).
117
Ibid at p. 35.
118
(1983) 144 ITR 18 (A P).
119
AIR 1986 SC 1753
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credit of the deceased father in the amount of the firm developed on his son. The
wealth tax authorities while assessing the wealth tax in respect of the family of the son,
i.e., the assessee, including the amount in computing wealth. Held, that the son inherited
the property as an individual and not as a Karta of his own family. Therefore he cannot
be included in computing the assessees wealth.
The Supreme Court in it opinion stated that it is not possible when in the schedule
which indicates heirs in Class-I and only includes son and does not include sons son
but includes the son of a predeceased son, when son inherits the property in the situation
contemplated by Section 8 he takes it as Karta of his own undivided family. It would be
difficult to hold the property which devolved on a Hindu under the Section 8 of the
Hindu Succession Act would be Hindu Undivided Family property vis--vis son and
female heirs with respect to whom no such concept could be applied or contemplated.
It may be mentioned that heirs in Class-I of the Schedule under Section 8 of the Act
included widow, mother, and daughter of predeceased son.
The Hindu Succession (Amendment) Act, 2005:
The Hindu Succession Act 1956 was amended in the year 2005 and this amendment
made the daughter a coparcener by birth. She has the same rights in the coparcenary
property as she would have had if she had been a son. There were many changes
made by the amendment in the Hindu Succession Act, 1956. The basic change was
made in Section 6 which now makes the daughter a coparcener by birth, and she
would have the same rights and liabilities as that of a son. Any reference to Hindu
Mitakshara coparceners shall be deemed to include a reference to a daughter of a
coparcener also. She is entitled to an equal share or same share as that allotted to her
brother. She would hold property which she is entitled to as a coparcener; she can
dispose off her property either by will or any other form of testamentary disposition.
These changes gives the daughter equal rights and makes her independent.
There is some change in the payment of Debts of the coparcener which are made
by the Amendment Act, 2005. No Court shall recognize any right to proceed against a
son, grandson or great-grandson for the recovery of any debt due from his father,
grandfather or great-grandfather solely on the ground of the pious obligation under
the Hindu Law, of such son, grandson or great-grandson to discharge any such debt.
The doctrine of pious obligation of a son, grandson or great grandson has been abolished
by the Hindu Succession (Amendment) Act, 2005. Since the provision is prospective in
nature, the creditor has the right to proceed against the heirs for the debts contracted
before the commencement of the amendment.
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After the Amended Act there has been no judgment provided as regards this law
but the law for debts remains the same. The payment of debts was an obligation of the
son to pay off the fathers debts but it has been abolished. Therefore, now it depends
on the son to pay the debts of the father or grandfather for the debts which were
contracted after the amendment. If the creditor sues or claims the payment of debts
which were contracted by the father or grandfather or great grandfather, then the son
have to pay as per Section 6(4) (a)
120
and if any alienation was made by the father or
grandfather then the son would have the same liability and is considered as his pious
obligation to fulfill the required conditions of alienation, this as given in Section 6(4)(b).
121
In the case of A. Chidananda v. Smt. Lalitha V. Naik,
122
where the property of the
plaintiff (deceased) which was in question was sold in the name of the third defendant
either for the discharge of the antecedent debts or for other necessities. The third
defendant was not the manager of the family. There was an appeal made against the
sale of the property which was dismissed by the Karnataka High Court.
It can be concluded that the Hindu Undivided Family is a family where there is a
common ancestor with all his lineal male descendents their wives, widows, their unmarried
daughters and the daughters of the male lineal descendents. Any person from this joint
family can contract a debt which can be for private purpose or for the welfare of the
family. Any Hindu can possess a certain amount of property which can be either his
personally acquired property or the property acquired from his ancestors. A debt
contracted must be paid in the life time of the person or should be paid by his lineal
descendents as it is essential because it relieves the person who has contracted debt
from the liability to pay the debt. In early days it was considered as the pious obligation
of the son, grandson or the great grandson to pay the debt of the father, grandfather or
the great grandfather.
The son under the Hindu Succession Act, 1956 had a pious obligation to pay off
the debts which were contracted by the father, grandfather and the great grandfather in
120
Section: 6(4)(a): the right of any creditor to proceed against the son, grandson or great grandson,
as the case may be. ; S A Desai (rev.), Mulla, Principles of Hindu Law, 20
th
ed. 2007, Vol. II,
p. 322.
121
Section: 6(4)(b): any alienation made in respect of or in satisfaction of, any such debt, and any such
right or alienation shall be enforceable under the rule of pious obligation in the same manner and
to the same extent as it would have been enforceable as if the Hindu Succession (Amendment) Act,
2005 had not been enacted; S A Desai (rev.), Mulla Principles of Hindu Law, 20
th
ed. 2007, Vol.
II, p. 322.
122
AIR 2006 Kant. 128.
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their life time. The son was liable to pay off the debts whether the family consisted of the
coparceners or not. It was under the ancient law to relieve the father from the burden of
the debt or else he would take a rebirth in the family of the debtor and serve as a
servant and serve him. The liability of the father to pay the debts lasts till the debts are
not paid. The liability ceases as soon as the debts are paid.
The Hindu Succession (Amendment) Act, 2005 abolishes the doctrine of pious
obligation and therefore, it is not the sons pious obligation to pay off the debts which
were contracted by his father in his life time. This has been rebutted in the Act itself
where the creditor has been given the right to ask for the payment of the debts which
were incurred before the commencement of the (Amendment) Act, 2005. Therefore,
the debts which would be contracted after the commencement of the Hindu Succession
Amendment Act, 2005 for these debts the son will not be liable for the payment of the
debt.
Therefore, we can conclude that in early times the son was responsible for the debts
as it was considered as his pious obligation to pay all the debts of his father, grandfather
and great grandfather. Now the High Courts and Supreme Court after a series of
decisions and according to the Sections 6 and 8 of the Hindu Succession Act had
changes the law and now the son is not liable to pay the debts of the father but the
creditor has the right to sue the son to pay for the debts of his father, etc. He can only
pay the debts out of the joint family property and now it is not considered as pious
obligation to fulfill the debts. There is no obligation for him to pay off the debts out of
his self acquired property.
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CHAPTER - IV
HINDU UNDIVIDED FAMILY - [HUF]
Introduction:
The Hindu Joint Family is still a fascinating institution, though some
think that it has lost its utility, relevance and dynamism. The numbers of
cases that fill the cause list of revenue in Civil Courts indicate that the
joint family has not yet lost its drive or utility, despite the fact that the
corporate sector is having a predominant share in business and industry.
The structure of the joint family has become somewhat more complicated
than it originally was. It seems this has happened because joint family
has become dearer to both tax collectors and evaders than to an ordinary
Hindu. The ease with which a Hindu can convert his separate property
into joint family property and the equal ease with which he can abrogate
the joint family and recreate it attract the tax collectors and evaders
alike. Blending separate property with joint family property, partition,
total or partial, reunion, business combinations which can be created
within and outside the joint family are some of the aspects of the Hindu
Joint Family system which are so easy to handle by an individual Hindu
that has, paradoxically, made the Hindu Joint Family system complicated,
complex and a haven of lawyers.
Hindu Joint Family:
When a Mitakshara Hindu male succeeds to the property of his
father, fathers father or fathers fathers father he takes it as ancestral
property and if he has a son, sons son and sons sons son, he constitutes
a joint Hindu family. Property inherited from any ancestor or ancestress
other than father, fathers father and fathers fathers father is not ancestral
property. Ancestral property is one of the species of the property of the
Hindu joint family.
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Under Mitakshara Law, when a Hindu male inherits property from his father, fathers
father or fathers fathers father, two situations may arise. First, if he already has a son
or sons son or sons sons son, he will constitute a joint family with this son, sons son
and sons sons son. If he does not have a son, sons son or sons sons son, it will be his
separate property, but the moment he gets a son or sons son or sons sons son, it will
become joint family property, as son, grandson and great grandson acquire an interest
in it by birth. The fact of the matter is that where joint family does not exist, it comes into
existence for the first time on the death of the father, when sons inherit his separate
property and constitute a joint Hindu family with their sons, sons son and sons sons
son. Once joint family comes into existence it continues to exist till a partition takes
place or the line becomes extinct. For instance, when P, a Hindu constituting a nuclear
family, dies leaving behind a son, this son on inheriting his fathers separate property,
cannot obviously constitute a joint family since there cannot be a family consisting of a
single person, but the moment he gets a son, whether natural or adopted, he constitutes
a Hindu Joint Family. If P dies leaving a son or sons son or sons sons son, joint family
comes into existence the moment he dies.
123
On the other hand, when a Dayabhaga Hindu dies and his sons inherit his property,
they together constitute a joint family. When one of them dies leaving behind a son,
daughter or widow, he or she succeeds to his share in the joint family property and
becomes coparcener with the other surviving sons. Under the Dayabhaga Law, females
can also be coparceners. But there cannot be coparcenary constituting females alone.
Under the Dayabhaga School, a son does not acquire any interest in any property by
birth; but when the father dies, the sons succeeding him constitute a coparcenary and
coparcenary limit is the same as under the Mitakshara School. Thus, if, for instance,
three brothers succeed to the property of their father and one of them dies leaving
behind a son, he becomes a coparcener, if he also dies, his son becomes a coparcener.
If he also die, his son becomes coparcener, but if this son dies leaving behind a son; he
cannot become a coparcener since he is beyond the coparcenary limit of three
descendants. But for the purpose of taxation laws, the Dayabhaga coparcenary is as
much an HUF (Hindu Undivided Family) as the Mitakshara joint family. In fact, for tax
purposes the concept of coparcenary is not of much significance. The tax laws are
concerned with the HUF and not with coparcenary.
124
123
Paras Diwan and Peeyushi Diwan, Indian Personal Laws: Joint Family System, Debts, Gifts,
Maintenance, Damdupat, Benami Transactions and Pre-Emption, Vol. V, 1
st
ed. 1993, p. viii.
124
Ibid., p. viii.
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Hindu Undivided Family: Concept and Constitution:
Hindu Undivided Family HUF is a legal expression which has been employed in
taxation laws. It has a definite connotation and embodies the meaning ascribed to the
expression Hindu Joint Family
125
. Section 2(31) of the Income Tax Act
126
includes a
HUF as a separate taxable entity. The reason for not defining the Hindu Undivided
Family in the Income-Tax Act or other allied statutes evidently is that the expression has
a well-known connotation under the Hindu Law and being aware of it, the Legislature
did not want to define the expression in the Act.
127
Therefore, the expression Hindu
Undivided Family must be construed in the sense in which it is understood under the
Hindu Law.
128
The expression has its roots in the Hindu Law and for all tax purposes, is
equated to a Hindu Joint Family. The relation of a Hindu Undivided Family does not
arise from contract but arise from status
129
.
Constitution of HUF:
A HUF consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughters. A daughter ceases to be a member of
her fathers family on marriage, and becomes a member of her husbands family. A
Hindu Undivided Family may consist of a male Hindu, his wife and his unmarried
daughter
130
. An unmarried male Hindu on partition does not by himself alone constitute
a Hindu undivided family
131
. It may consist of a single male member and widows of
deceased male members, and apparently the Income Tax Act does not indicate that a
Hindu Undivided Family as an assessable entity must consist of at least two male
members. The Supreme Court, in N.V. Narendra Nath v. CWT
132
, and Surjit Lal Chhabda
125
Commissioner of Wealth Tax v. Smt. Champa Kumari Singhi, (1972) 83 ITR 720 (SC).
126
Section 2(31) defines person and included a HUF therein. Section 4 seeks to charge income-tax in
respect of the total income of previous year of every person.
127
Acharya Shuklendra, Hindu Undivided Family: Taxation and Tax Planning, 1
st
ed. 2000, Rep.
2003, p 16.
128
Surjit Lal Chhabda v. CIT, (1975) 101 ITR 776 (SC); CIT v. Gomedalli Lakshminarayan, (1935) 3 ITR
367 (Bom); CIT v. Arun Kumar Jhunjhunwala & Sons, (1997) 223 ITR 45 (Gau).
129
Vinod K. Singhania and Monica Singhania, Taxman Students Guide to Income Tax, 27
th
ed.,
2002, p 656.
130
Gowli Buddana v. CIT, (1966) 60 ITR 293 (SC).
131
Attorney General of Ceylon v. A.R. Arunachalam Chettiar, (1957) A.C. 540 (PC).
132
N.V. Narendra Nath v. CWT, (1969) 74 ITR 190 (SC).
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v. CIT
133
, has concurred with the same view. A family consisting of a single individual is
a contradiction in terms of Section 2(31) of the Income Tax Act. In C. Krishna Prasad v.
CIT
134
, it was held that a family signifies a group and it was essential, therefore, that
there should be a plurality of persons. A single person, whether male or female, cannot
be treated as a HUF for the purpose of the Income Tax Act.
As regards to female members constituting a HUF, in Anant Bhikkappa Patil v.
Shankar Ramchandra Patil
135
, it was held that the Hindu Joint Family cannot be at an
end while there is still a potential mother if that mother in the way of nature or in the
way of law brings in a new male member. It is well established that a Hindu Joint Family
continues to exist even though at a particular time there may be no male coparcener
provided of course there is a potential mother in the family. The theory of relation
back is relevant in the scenario wherein adoption is made for this purpose.
The presumption is always that the members of a Hindu family are living in a state
of union. This was laid down in Surjit Lal Chhabda v. CIT
136
by the Supreme Court,
which held that the joint and undivided family is the normal condition of Hindu society
and it is presumed to be in a state of union, unless the contrary is established. There
can be a scenario, wherein a HUF exists within an HUF.
A Hindu Undivided Family may not possess property by inheritance. This was laid
down in P.N. Srinivasa Rao v. CIT
137
. It is not necessary at any point of time that a joint
Hindu family must have connection with ancestral property. A Hindu Joint Family, which
does not own any property, may be joint.
138
By the enactment of the Kerala Hindu Joint
Family System (Abolition) Act, 1975, the property held by an individual member of a
Hindu Undivided Family on or after December 1, 1976, has lost its character of ancestral
property and that character could not be revived as no undivided family could come
into existence.
133
(1975) 101 ITR 776 (SC).
134
C. Krishna Prasad v. CIT, (1974) 97 ITR 493 (SC).
135
AIR 1943 PC 196.
136
Surjit Lal Chhabda v. CIT, (1975) 101 ITR 776 (SC).
137
(1998) 232 ITR 730 (Ker).
138
Janakiram v. Nagamony, (1926) 49 Mad 98.
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Property of Hindu Undivided Family:
In Surjit Lal Chhabda
139
, the Supreme Court pointed out that a joint Hindu family
under the Dayabhaga is, like a Mitakshara family, normally joint in food, worship and
estate. The following can be generally recognized as joint family/coparcenary property:
(i) ancestral property;
(ii) property allotted at a partition;
(iii) property jointly acquired by coparceners;
(iv) property acquired with the aid of coparcenary property;
(v) separate property of a coparcener thrown into family hotchpots and
treated as coparcenary property; and
(vi) separate property of a coparcener blended with coparcenary property.
140
Any gift that is given specifically to an HUF can be treated as HUF property. The
assets received on the partition of a larger HUF of which the coparcener was a member
is also perceived as HUF property.
The Judicial Committee points out that the expression ancestral property must be
confined to property descending to the father from his male ancestor in the male line
and it is only in that property that the son acquires by birth an interest jointly with and
equal to that of his father
141
. However, all property which a son inherits as a Class-I heir
from his fathers property would become his separate property. This is stipulated in
Section 8 of the Hindu Succession Act, 1956. This has also been upheld by the Supreme
Court in CWT v. Chandra Sen
142
.
In N.V. Narendranath v. CWT
143
, the Supreme Court dealt with the question that if
after partition, whether the ancestral property ceases to be of the nature of ancestral
property and becomes self acquired property in the hands of the sons. It came to the
conclusion that, it is only by analyzing the nature of the rights of the members of the
139
(1975) 101 ITR 776 (SC).
140
CIT v. Dr. (Mrs.) Sita Bhateja, (1973) 91 ITR 193 (Mys.).
141
Md. Hussain Khan v. Babu Kishya, (1937) 64 IA 250.
142
(1986) 161 ITR 370 (SC); See also CIT v. Karuppan Chettiar, (1992) 197 ITR 646 (SC); CIT v. Lun
Karan Goyal, (1993) 203 ITR 67 (Raj).
143
N.V. Narendra Nath v. CWT, (1969) 74 ITR 190 (SC).
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undivided family, both those in being and those yet to be born, that it can be determined
whether the family property can be described as ancestral property. Hence in the absence
of a male issue, the dividing coparcener may treat the property as his own property, that
upon the birth or adoption of a son to him, it would assume the character of coparcenary
property. When a coparcener having a wife and two minor daughters and no son
receives his share of property in partition, such property belongs to the Hindu Undivided
Family of himself, his wife and minor daughters and cannot be assessed as his individual
property.
In CIT v. Radhe Shyam Agarwal
144
, it was laid down that on a partition of a bigger
Hindu undivided family, the property coming into the hands of the assessee becomes
his separate property although it continues to be joint vis--vis his wife and children
and he continues a Hindu Undivided Family with them and in the absence of children,
with his wife alone. But if on partition separate shares are allotted not only to the
children but also to the wife, then the existence of the Hindu Undivided Family comes to
an end.
As pointed out by a Division Bench of the Madras High Court in CIT v. K.S. Subbaih
Pillai (HUF)
145
, it is one of the fundamental principles of Hindu Law that property acquired
by the Karta or a coparcener with the aid or assistance of joint family assets is impressed
with the character of joint family property. To constitute self-acquired property in the
hands of the Karta or a coparcener, it should not have been acquired with the assistance
or aid of joint family property. The same was upheld by Allahabad High Court in
Mangal Singh v. Harkesh
146
. The presumption of joint family remains, and if any member
of the family claims any portion of the property as his own then the burden lies upon
him to show that it was acquired by him in circumstances which would constitute it his
separate property.
A coparcener can blend his self-acquired or separate property with the family
property. However, for this it should be voluntary thrown by the owner into the common
stock with the intention of abandoning his separate claim therein. It is his right under
the Hindu Law on the exercise of which the property assumes the character of the
coparcenary property
147
. A coparcener of an HUF can throw his interest in a partnership
144
(1998) 230 ITR 22 (Pat).
145
(1984) 147 ITR 87 (Mad).
146
AIR 1958 All 42.
147
Damodar Krishanji Nirgude v. CIT, (1962) 46 ITR 1252.
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into the common hotchpots of the HUF and in that event the share income from the
firm should be brought to tax only in the assessment of the HUF and not in the assessment
of individual coparcener. One important element in this regard is the clear intention.
There must be a clear intention to abandon all his individual rights in respect of that
property and make it the property of the joint family, and no longer a separate property
of himself. It should be noted here that the doctrine of throwing into the common stock
is a doctrine peculiar to the Mitakshara School of Hindu Law
148
. This is so since in
Dayabhaga School; there is no existence of joint family property in the first place. This
act of blending however should not be mistaken with a transfer of property since both
are different acts
149
. The intention manifested may be in any form such as a statement
in a deposition, an affidavit, execution of a document as a declaratory deed or by
course of conduct. Another important thing to note here is that a Hindu female, since
not a coparcener, cannot blend her separate property even if she is an absolute owner
thereof with the joint family property
150
.
Tax Treatment of HUF:
Hindu Undivided Family (HUF) is treated as a separate taxable entity for the purpose
of income-tax assessment. The statutory provisions relating to HUF are the Income Tax
Act, the Wealth Tax Act, and the Gift Tax Act. Apart from these statutory provisions, the
Hindu Law has to be applied in all matters relating to Hindu Undivided Family. All the
income that arises on the utilization of the HUFs assets and on the investment of its
funds is regarded as the HUFs income that is assessed separately and chargeable to
tax. This income should have been earned using HUF property or funds or property
only; if it arises on account of the personal investments of any member, it will generally
be regarded as the individual income of the member. The individual and the HUF are
totally different units for tax purposes and the same person can be taxed separately as
an individual, as well as for and on behalf of the HUF.
Tax Implications on Partition:
Partition, is defined in Section 171, Explanation (a) as-
148
Mallasappa Bandappa Desai v. Desai Mallappa, AIR 1961 SC 1268.
149
Goli Eswariah v. CGT, AIR 1970 SC 1722.
150
Pushpa Devi v. CIT, AIR 1977 SC 2230.
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(i) where the property admits of a physical division, a physical division of the property,
but a physical division of the income without a physical division of the property
producing the income shall not be deemed to be a partition; or
(ii) where the property does not admit of a physical division, then such division as the
property admits of, but a mere severance of status shall not be deemed to be a
partition
151
.
An HUF will be continued to be assessed as such until one or more coparceners
claim partition
152
. Such claim must be made before the relevant assessment is completed.
The Assessing Officer, on receiving such claim, conducts an enquiry to check if an
actual partition has occurred or not, and if so, what the date of partition is
153
. For tax
purposes, income of the family from the first day of the previous year till the date of
partition is assessed as income of Hindu undivided family
154
and after the partition;
such income derived from the partitioned property is treated as individual incomes
according to the share received by each member.
155
A total partition happens when the entire joint family property is divided among all
coparceners. Partial partition is defined as a partition which is partial as regards the
persons constituting the Hindu undivided family, or the properties belonging to the
Hindu undivided family, or both
156
. Thus, a joint family may make a division and
severance of interest in respect of a part of the joint estate while retaining their status as
a joint family. By virtue of Section 171(9) of Income Tax Act, 1961, a partial partition of
HUFs effected after December 31, 1978 are not to be recognized for tax purposes.
Some important cases have been discussed below which would give a fair picture
of the law as it exists in the present. All of them either lay down or upheld important
judicial principals concerning taxation and property of HUF:
151
Section 171, Explanation (a), The Income-Tax, 1961
152
Section 171 (1), The Income-Tax Act, 1961
153
Section 171 (2),(3), The Income-Tax Act, 1961
154
Section 171 (4)(a), (5)The Income-Tax Act, 1961
155
Section 171 (6), The Income-Tax Act, 1961
156
Section 171, Explanation (b), The Income-Tax Act, 1961
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258
Commissioner of Income Tax v. Dharan Prakash HUF
157
This case laid down the principle that a Karta of an HUF can give effect to partial
partition of joint family properties between himself and his minor sons. The assessment
year was 1977-78, which was prior to the introduction of the Finance (No. 2) Bill,
1980
158
which declared all partial partition occurring after 31 December, 1978, as
null and void. Partial partition was thus recognised. The assessee HUF claimed that
during assessment year 1977-78, a partial partition had taken place between the
Karta, his wife and his minor son. The Income Tax Officer (ITO) rejected this claim
saying that the minor son was not in a position to give consent to the partition and the
wife was not a coparcener competent to claim a partition under Hindu Law. The High
Court quoted a Supreme Court decision in Apoorva Shantilal Shah v. Commissioner of
Income Tax
159
. It held that the father, whether in exercise of his superior right as father
or in exercise of the right as patria potestas is valid. The principle was again upheld in
Commissioner of Income Tax v. Avinash Kumar Maheshwari
160
wherein it was again laid
down that the Karta, in exercise of his right of patria potestas had the right to conduct
partial partition.
CIT v. Dharam Pal Singh
161
Two major issues were dealt with in this case. The first issue was whether there is no
ipso-facto partition of a joint family property immediately after the death of a male
coparcener having coparcenary interest in the coparcenary property. The court held
that no ipso-facto partition of joint family is presumed in this regard and the court
favoured an assumption of continuity of the HUF till actual partition. Second issue was
this: since under Section 6 (Explanation 1) of the Hindu Succession Act, 1956 says that
after the death of a coparcener there is deemed partition, would this mean after Kartas
death, his share would be liable not to be taxed as income of HUF. The Court held in
negative. It held that the fiction given by Explanation 6 of Section 6 of Hindu Succession
Act has nothing to do with the actual disruption of status of HUF. A transaction can be
recorded as partition under Section 171 only if, where the property admits of a physical
division, a physical division of the property has taken place.
157
[2005] 142 Taxman 420 [All].
158
Came to effect on 18
th
June, 1980.
159
[1983] 141 ITR 558; 13 Taxman 1 (SC).
160
[2003] 133 Taxman 402 (All).
161
[2005] 146 Taxman 421 (All.).
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Commissioner of Income Tax v. A. P. S. Parameswaran Pillai
162
This case laid down the principal that the share of income derived from assets
devolved on heirs from estate of deceased Karta had to be assessed in status of individual
heirs and not in the hands of joint property. One P was the Karta of an HUF consisting
of himself and his sons. Then, on partition, his HUF consisted of himself and his wife.
On his death, the property he obtained on partition of earlier HUF was devolved on his
heirs. The issue before the Madras High Court was whether the income derived from
asset devolved on heirs from estate of deceased Karta had to be assessed in status of
individual heirs and not in the hands of the joint family. The Madras High Court cited
the Supreme Court decision in Commissioner of Income Tax v. P. L. Karuppan Chettair
163
and ruled that even assuming that there was succession as provided under the Hindu
Succession Act, 1956
164
, the property would devolve on the heirs of the deceased
under Section 8 of the Hindu Succession Act and that the income from the properties
devolved on succession had to be assessed in the status of individual and not in the
hands of the HUF.
Tax Planning:
Tax Planning can be defined as an arrangement of the financial affairs within the
scope of law in a manner that derives maximum benefit of the exemptions, deductions,
rebates and relief and reduces the tax liability to minimal. The HUF is an effective tax-
saving vehicle as under the Income Tax Act, 1961 it is treated as a separate taxable
entity and is eligible for all the deductions and exemptions, including the benefit of the
basic limit chargeable to tax and wealth tax thats available to an individual. Accordingly,
income up to Rs. 50,000 is tax-free; it can claim various tax benefits such as exemptions
under Sections 54 (residential house property) and 54F (assets other than residential
house property) in respect of capital gains; deductions under Section 80D (insurance
premium paid on the health of its members), 80G (donations made by HUF) and
Section 80L (income on bank and post office deposits, etc.); and rebate under Section
88 (premium paid on life insurance policies for its members, and contributions to the
Public Provident Fund accounts of its members, etc.).
165
162
[2003] 128 Taxman 84 (Mad.).
163
[1992] 197 ITR 646.
164
Section 8 of the Hindu Succession Act, 1956.
165
http://www.outlook-money.com/scripts IIH021C1.asp?sectionid=5&categoryid=46&
articleid=5302.
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166
http://www.indianexpress.com/res/web/pIe/full_story.php?content_id=71695.
167
h t t p : / / w w w. o u t l o o k mo n e y. c o m/ s c r i p t s / I I H0 2 1 C1 . a s p ? S e c t i o n I d =5 &
CategoryId=125&ArticleId=4590&NoCache=7%2F5%2F2006+5%3A02%3A00+AM.
Under the Income Tax Act 1961, the HUF has been designated the status of a
distinct tax entity, and so the income earned by an HUF is assessed to tax as a separate
person. This enables an HUF to enjoy much the same tax breaks as an individual. An
HUF allows an individual to reduce his tax liabilities as he can divide his income into
two distinct assessment units: as an individual and as the Karta of his HUF and enjoy
the tax breaks under two distinct capacities.
166
Other tax-planning options are to ensure
that gifts or inheritances meant for the benefit of all the members of a family are gifted
specifically to the HUF, instead of separately to individual members of the family. Since
there is no gift tax and estate duty, neither the benefactor nor the recipient will attract
tax on such a transfer. The capital of an HUF can also be enhanced by borrowing funds
from people who are not members. If the borrowing are specifically in the HUFs name,
and it is thereafter invested in the HUFs name, the income arising on the investment
will be regarded as the income of the HUF. Another option is to transfer individual funds
to the HUF and then invest the money in tax-free instruments. Since the income from
such investments will be tax-free, it will not be clubbed with the individuals income. The
income arising on the reinvestment of the tax-free income (which may be in taxable
income-yielding assets) will also not be clubbed, since only the income arising on
transferred amounts is clubbed.
167
The taxation scheme governing HUF is such that the incidence of double taxation is
avoided. As per proviso to Section 64 (2) of the Income Tax Act, once a particular
income is included in the total income of an individual, it has to be excluded from the
total income of the HUF of which he is a member. The rate of tax levied on a HUF is
quite high and is separately taxed on its income. In order to avail the exemption under
Section 10 (2) of the Income Tax Act, income should be distributed amongst members
in order to avoid the same income from being taxed twice. Although it is possible for a
member of the HUF to transfer his or her individual assets to the HUF, such a transfer
isnt beneficial from the tax point of view. This is because contributions by a coparcener
or a member to the HUFs property will invoke the clubbing provision, that is the
income will not be split across two entities but will be clubbed with the person who
transferred it and therefore taxable at the hands of the contributor and not the HUF. But
if the HUF re-invests or re-employs the funds, the income generated thereafter will be
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taxable in the hands of the HUF and not in the hands of the coparcener or member
who contributed to the HUFs property.
168

Section 30 of the Hindu Succession Act, 1956
169
comes in handy for effective tax
planning as it is well known that testamentary succession alters statutory succession in
a pre-determined way. The phenomenon of the bigger and the smaller and the still
smaller HUF can continue ad infinitum for maximum tax advantage.
With its renowned peculiarity, India has retained its phenomenal characteristic of
bringing to tax such entities apart from individuals as Hindu Undivided Families or
HUFs which have withstood the tests of time. The concept of joint families, joint income
and joint property that is shared and enjoyed by all the members of the family is
recognized as a legal expression in the form of the Hindu Undivided Family which is a
rather efficient tax-reducing tool under the Income-Tax Act. It is evident from the flexibility
and leniency of the taxation rules governing the Hindu Undivided Family that it was the
intent of the legislature that an establishment such as HUF be encouraged.
For effective tax planning, a tax-payer may resort to a device to divert the income
before it accrues or arises to him. Hence, there can be many ways wherein taxes for
individuals can be saved when the income is earned under the aegis of HUF. For
example, one of the basis principles of tax planning is to create new units of assessment
and to distribute the income/wealth among the old units and the new units. This can be
achieved easily by partitions, especially partial partition. An HUF has an obligation to
maintain the wife and minor children of the assessee. Thus, the expenses of maintenance
can be charged to HUF or to the individual assessee depending on whoever earns
more so that tax can be saved in this way.
However, in the name of tax planning, Tax Avoidance or Tax Evasion may become
rampant and the line between Tax Planning and Tax Avoidance is very thin. When
financial transactions are arranged in a way that it becomes obvious that they were
entered with a malafide intention of either not paying taxes or with a view to defeat the
genuine spirit of law, they cannot be accepted as legitimate Tax Planning. But the
decisions of the Courts suggest that, if need be, the Courts are ready to take stern
action to curb any sort of manipulative action by an individual, which might also harm
rights of the coparceners in the future.
168
http://finance.indiamart.com/taxation/income_tax/clubbing_provisions.html.
169
Section 30: Any Hindu may dispose of by will or other testamentary disposition any property, which
is capable of being so in accordance with the provisions of the Indian Succession Act, 1925, or any
other law for time being in force and applicable to Hindus.
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CHAPTER - V
ALIENATION
Introduction:
The Hindu Joint Family is much more than just an assemblage of
related families living together. The Hindu Joint Family system is an
institution which means much more to its members than control over
joint family property. Living in a joint family is a wonderful experience of
staying together with your relatives, of being part of each others festivities
and celebrations, of knowing that you have family members to rely upon
in times of emergency. Hindu Joint Family is a institution which originated
in the Vedic period. So, a clear understanding of alienation of joint
family property first necessitates an understanding of the institution of
joint family prevalent in ancient Hindu Law and property patterns.
Alienation means transfer of property, such as gifts, sales, and
mortgages, it is one of the basic incident of ownership
170
. Where especially
the property is owned by more than one owner, no single can acquire
the power to alienate that property or the whole of it. He with respect to
joint family property Karta or the manager is entrusted with the
management. However, he does not own the property as a whole, and
has an interest in it just like the other coparceners and if all coparceners
give their consent or authorize him to sell the property, he can do so and
such a transfer could be binding on the interests of all the members,
171
and
the purpose of sale will be immaterial.
172
But in collective ownership, if
one or more of the coparceners withhold their consent or express their
170
Hari Singh Gour, The Hindu Code, 6
th
ed.1996, p.586.
171
Poonam Pradhan Saxena, Family Law Lecture, 1
st
ed. 2004, p.217.
172
Where it is made without the consent of coparceners, when all are major, the alienation would bind
the share of those of the coparceners who had given the consent.
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dissent to such alienation, or could be due to the minority of the coparceners, then the
property cannot be transferred.
But with the rise in materialism, even the sacred institution of joint family took the
brunt. The greed of the individual members of the family led to demand of increasing
control over the management of property. The Courts, accordingly taking the socio-
legal conditions of society into account, interpreted the position of Karta in a modern
perspective and curbs were put on his powers of alienation. This chapter aims to examine
the subject of Alienation from both ancient and modern perspectives and establish the
powers of alienation of different members/coparceners of the joint family.
Thus, it can be said that alienation has a very wide scope and application. The
distinguishing feature of this power is that it was traditionally given only to the father or
the Karta and that, but the power itself is near autocratic as it allows them to sell, gift or
mortgage the whole joint family property without the consent of any coparcener, this is
why the ancient texts have specified several conditions which alone would justify such
acts of the manager. These conditions have changed over the centuries to keep in pace
with the changing conditions and the ancient rules have been modified by the Privy
Council in accordance with the principles of equity, justice and good conscience. The
object of this chapter would be to look into all such changes while at the same time
making an effort of understanding the various rules and anomalies which govern the
law of alienation. The lack of any codified law as well the changing face of the commercial
transactions a joint family enters into these days have created many situations where
even the jurists have still not agreed upon the settled law and this constant situation of
flux makes alienation a very interesting study. The effort has been made to list the entire
varying viewpoints and critically analyze them in the light of old traditions and newfound
legal principles. Alienation is of vast practical utility as it gives a way of using the joint
family property for the common use of the family and it is a classic example of the
unique position of the Hindu Joint Family which is always ready to help its members in
times of need and who work together for common benefit.
Alienation under Sastric Hindu Law:
The vast frame work of Hindu Law was administered by Sastric and customary law
which varied from region to region within the country and sometimes it also varies
within the region. Formation of different Schools ultimately led to the diversity to the
complexity of law in the country, these are then keep perpetuating in the regions because
it is known that without which the chaos could rise. But these ancient laws could be
ALIENATION
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termed as a dynamic law because they kept changing based on the requirement and
under necessary circumstances.
The Dharmasastras cautioned against the indiscriminate transfer of joint family
property to the detriment of its member, as property is always a security in times of need
and it is this need backed authorization that is reflected in the dictates of the Smritis and
the commentaries which empower the Karta to alienate the property, despite the dissent
of the other major coparceners or the presence of minor coparceners.
The History of Dharmasastra encompasses the notion of manager, as a head of the
family and its manager, the father has independent authority to spent the ancestral
wealth (except immovable property) for indispensable act of religious duty expressly
enjoined by Vedic and Smritis text and for making gifts of affection, for maintenance of
the family and for ridding the family of distress.
173
Mitakshara School of Hindu Law:
A Hindu who governed by Mitakshara Law has full power of alienation over his
separate property, that is, property which is not held by him jointly with others. He can
sell it or mortgage it, or alienate it by gift inter vivos or bequeath it by will either in
favour of a stranger or relative.
174
Self-acquisition does not belong to co-heirs, and in
passage, Vijnaneswara expressly state that the son must acquiesce in the fathers
disposal of his own self acquired property
175
.
Fathers Power of Alienation:
Mentioned in the text of Mitakshara the father is subject to the control of his sons
and the rest, in regard to the immovable property. Whether self acquired or ancestral,
this statement has been a controversial issue in Mitakshara Law.
Vijnaneswara on the one side imposes restriction on fathers power of alienation
on the self-acquired immovable properties and on the other it gives full power over
ancestral movable property. It is now settled that Mitakshara father had no greater
power on the joint family movable property then immovable property. But it proposes
173
P. V. Kane, History of Dharmasastra, Ancient and Medival Religion and Civil Law, , , , , Vol. III, 3
rd
ed.1993,
p.554.
174
Allandi Kuppuswami (rev.), Mayne, Hindu Law and Usage, 14
th
ed. 1998, p.735.
175
Mit.I,i, 27.
ALIENATION
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independent power in the disposal of them for indispensable acts of duty and for the
purpose prescribed by the text as gifts through affection, support of the family, relief
from distress and so forth. The comment on Nilakantha text, the father is the master of
all gems, pearls and corals was that it signifies that father is independent in using the
property but not in alienating them.
176
But sometime it never received a full discussion.
177
Regarding gift of love and affection, the father has power to make a small portion
of movable ancestral property, especially in terms of jewelers, ornaments, etc., by father
to his wife or daughter or son-in-law or daughter-in-law or to the near relatives. In
Guramma v. Malappa
178
even the gift of immovable property was held valid, so it is
necessary that gift through affection within reasonable limits of ancestral movable property
has to be fully recognized.
179
One important rudimentary thing to be noted here is that
in no case the immovable property be given to anyone, not even to wife of daughter in
law. Nor it is gifted.
Coparceners Power of Alienation:
The Mitakshara does not show any individual power to the coparcenary with regard
to alienation of the joint family property. The Smritikars also did not seem to confer on
coparceners, the interest over joint property. However, the authorities of the texts are so
scanty. The interest of the coparcener is the out come of judicial legislation according
to Paras Diwan in his Family Law, to this, the first notion was, when it was held that
personal money decreed against the coparceners could be excited against his undivided
interest in the joint family property. The Court extended his principle to voluntary alienation
also. So its divided into two head, involuntary and voluntary, the former refers to alienation
of the undivided interest in execution proceeding, this is also the fact that the Hindu
sages laid great emphasis on the payment of debt, so the Court seized this principle of
Hindu Law and started executing personal money decrees against the joint family interest
of the judgment-debtor coparcener. And the later is just an extension of principle to
voluntary, means it is the next step of the former statement. The inclusion in the latter
part are making gifts, sale and mortgage, renunciation, etc., however, Mitakshara did
not pointed out any rights in this context.
176
Vyav.Mayukha, iv, I,5
177
Dev Kishan v. Ram Kishan, AIR 2002 Raj 370; Sunannud v. Bonomalee, Marsh 320,2 Hay 205.
178
(1964) SCC 510.
179
P.S. Sairam v. P.S. Ramarao Pisey, AIR 2004 SC 1619, Ramalinga v. Narayana, (1992) 49 IA.
ALIENATION
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Sole Surviving Coparcener on Alienation:
When all the coparceners die leaving behind one, such coparcener is known as
sole surviving coparcener, the joint family property passes into the hands of this
coparcener, it assumes a character of separate property, as long as he does not have
a son. The sole surviving coparcener has full power to alienate the joint family property
as he wishes, by sale, by mortgage or gift since at the time of alienation there is no
member who can challenge the alienation. He may even make a gift of the property to
someone which is contrary to express provision in Mitakshara Law, no coparcener can
dispose off his undivided interest in coparcenary property by gift
180
. The subsequently
adopted or a later born child cannot challenge either
181
, but if at the time of alienation
a child is present in the womb and is a member then the member on whose birth can
challenge the alienation.
Coparceners Right to Challenge the Alienation:
In the states where undivided coparceners are entitled to alienate his interest in
Mitakshara coparcenary, such alienation cannot be challenged. However, in the states
where he is not permitted to do so, any coparcener in existence at time of alienation, or
was conceived and subsequently born alive, can set it aside with the help of the Court.
182
The alienation made by Karta of a joint family can be challenged by the coparceners
having an interest in the joint family property. An alienation of a joint family property
made without legal necessity is not void, but voidable at the option of other
coparceners
183
. Where alienation is made by manager without legal necessity, but with
consent of all other coparceners, it is completely valid
184
. It is justified in equity too to
restrain an action against an act to which you have consented
185
. The coparcener is
given a right to challenge the alienation only after it is made. A coparcener cannot
180
Karunakar v. Golak, ,, ,, AIR 1995 Ori 110.
181
Mahadevappa v. Chanddabasappa, 1996 Mys 15, the Mysore H.C held that alienation by sole
surviving coparcener, while there was widow in the joint family capable of inducting a child by
adopting into joint family is not binding on the son subsequently adopted by the widow if alienation
is not made for a purpose binding purpose.
182
Supra n. 1 at p. 253.
183
Jose v. Ramakrishnan Nair, AIR 2004 Ker 16; Raghubanchmani v. Ambica Prasad, AIR 1971
SC 776.
184
Kandasami v. Somakanda, (1912) 35 Mad 177.
185
Ranganath Misra, (ed.), Mayne, Hindu Law and Usage, 15
th
ed. 2003, p.837.
ALIENATION
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claim the relief by injunction restraining the Karta from alienating the coparcenary
property. The coparcener has adequate remedy to impeach the alienation made by
Karta
186
.
The right of alienation by sole surviving coparcener is subject to rights over property
of an unborn child in mothers womb. Even if he is in utero i.e. the mothers womb, at
the time of alienation, he can sue to set aside the alienation even though he is born
subsequent to the alienation
187
. The right to challenge alienation is limited only to
those male issues who had been conceived at the time of alienation of joint family
property and not subsequent to alienation.
The widow had a limited estate in the property which devolved upon her through
succession before coming into force of the Hindu Succession Act, 1956. The reversioners
had the right to challenge any alienation made by the widow without legal necessity or
which is not for the benefit of the estate. But after the Act came into force, the limited
estate got converted into absolute ownership by virtue of Section 14(1) of the Act.
When the widow had absolute ownership over the property, she had absolute powers
of alienating the property which cannot be challenged by coparceners. The only exception
to this is when the alienation is made before the commencement of the Act which can
be challenged.
Coparceners Right to Challenge Alienation:
It is known via notice that the improper alienation can be challenged all or any one
of the coparceners existing at the time of alienation.
It is also settled that a coparcener who was in the womb at the time of alienation is
considered as an existing son or born son. So he can get alienation after his birth, this
law also applies to the alienation by sole surviving coparcener.
And also in the case of after born coparcener, as an, a sole surviving or the Karta,
who has no male issue makes an alienation of the joint family property without any
legal necessity is valid. Such alienation can be challenged by the subsequently born
son or what known as after born coparcener.
186
Kailash Chand v. Bajrang Lal, 1997 (1) HLR 342 (Raj.).
187
Santhosh v. Smt. Saraswathibai, AIR 2006 Karn 85; 2006(3) CCC 253 (Kant); Sabapathy v.
Somasundaram, 16 Mad 76.
ALIENATION
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Alienation by Karta:
The senior most male member in joint family is the head of the family and is called
the Karta or manager. The Karta represents the family and is authorized to act on
behalf of the family
188
. The Karta is given widespread powers in relation to conducting
everyday business on behalf of other family members. The Karta is given high regard
and is deemed to have implied consent of other family members to his decisions by
virtue of his position as Karta.
The Karta, as the head of the family, has control over the income and expenditure,
and he is custodian of the surplus. So long as he spends the income for the purposes of
the family, he can use as much amount out of the family income as he wishes to
189
.
These family purposes would be maintenance, education, marriage, shraadha, and
other religious ceremonies of the coparceners and of the members of their respective
families
190
.
The position is different with respect to alienation of joint family property. The most
common property is often dwelling house and lands. There is bound to be an emotional
attachment to the house one stays in and the lands which are used to feed ones family.
Therefore, the powers of Karta regarding alienation of joint family property are restricted
unlike family income. Vijnaneswara recognized three exceptional cases in which
alienation of joint family property could be made:
Apatkale, i.e., in time of distress or it refers to the need for emergency purpose
either faces by the family or a member of the family.
Kutumbarthe, i.e., it was explained in Mitakshara, meant for the benefit of Kutumb
or the family, basically it is a cost for maintenance for the joint family.
Dharmarthe, this is in other words indispensable duties, which means for pious
purposes, these duties have been carried out as a line from ancestral period of
the family.
The power of alienation of the manager of a joint family is governed by the rule in
Hanooman Prasads case
191
- The power of a manager to charge an estate not his
own is under the Hindu Law a limited and qualified power. It can only be exercised
rightly in case of need or for benefit of the estate.
188
Vijender Kumar, (rev.), G C V Subba Rao, Family Law in India, 8
th
ed. 2003 (1
st
rep. 2004), p.72.
189
Satyajeet A. Desai, (rev.), D.F. Mulla, Principles of Hindu Law, 18
th
ed. 2004, p. 421.
190
Ibid.
191
(1856) 6 MIA 393. Sivaraman v. Pillai, AIR 2005 Mad. 423.
ALIENATION
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Legal Necessity:
Alienation for the purposes of legal necessity is a modern doctrine. The term legal
necessity is intended to cover various situations where it becomes absolutely essential
for Karta to alienate joint family properties in the best interests of the joint family. For
example, the following have been held to be legal necessities:
1) Payment of government revenues and debts payable out of the family property
192
2) Maintenance of coparceners and members of their families
193
3) Marriage expenses of male coparceners and daughters of coparceners
194
4) Performance of necessary funeral or family ceremonies
195
5) Cost of necessary litigation in preserving the estate
196
The situations given above are just few of the examples where alienation was
established to have been for legal necessity. The enumeration of criterion for establishing
legal necessity is not even predictable. So, whether alienation was made for legal
necessity or not has to be decided on a case to case basis.
Benefit to the Estate:
There was conflict regarding the meaning of the term Benefit to the Estate. One
view is that it is of a defensive character calculated to protect the estate from a threat.
Another view is that it is enough for the act to be of benefit to the estate, if it is such as
a prudent owner would have carried out himself. In Bal Mukund v. Kamla Wati
197
, the
Supreme Court observed that for a transaction to be regarded as for the benefit of the
family, it need not be of a defensive character. The facts of each case have to be looked
into to decide whether such act was reasonably expected to confer benefit upon the
estate.
For example, Karta is not entitled to sell joint family land solely for purpose of
investing it elsewhere to bring in an income larger than that derived from a safer and
192
Muddit v. Ranglal, (1902) 29 Cal 797.
193
Vijay Ramraj v. Vijay Ananda, AIR 2003 All 564.
194
Sunderbai v. Shivnarayana, (1908) 32 Bom 81.
195
Chhotiram v. Narayandas, (1887) 11 Bom 605.
196
Nathuram v. Chhoma Chhagan, (1890) 14 Bom 562.
197
AIR 2002 SC 1385.
ALIENATION
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more stable property. Such a sale is not for benefit of the estate
198
. The Karta is also not
entitled to sell a land simply for the purpose of purchasing another land. In Vanisimatti
v. Jayavarapu
199
, it was held that selling of joint family property for migrating to a better
place has been held to be a sale for benefit of the estate. In Hari Singh v. Umrao
Singh
200
, when a land yielding no profit was sold and a land yielding profit was purchased
the transaction was held to be for benefit. In Gallamudi v. Indian Overseas Bank
201
,
when alienation was made to carry out renovations in the hotel which was a family
business, it was held to be for benefit.
Gifts of Love and Affection:
A gift of coparcenary property may be made by the Karta within reasonable limits
for pious purpose. Thus, on the occasion of fathers funeral, a gift of small item of
immoveable property may be made to the temple
202
. The Supreme Court has held in
Guramma v. Mallappa
203
that a father may make a gift of a reasonable extent of family
property to his daughter. Pious purpose does not include gift of love and affection, and
Karta cannot gift his property to his wife, including second wife, pregnant wife, an
intended wife, a concubine, a daughter in law or even to son or to coparceners. Joint
family comprises of male and female. Coparceners have a right by birth in the
coparcenary property, but daughters have a claim for maintenance. But daughters are
different, they are born in the family and unlike brothers they are restricted in the interest
of the joint property, and her right to maintenance ceases to be a member of the family.
Therefore, a gift to daughter by the father is neither an indispensable duty nor a pious
obligation. But it is the contribution of natal family property to the member of the family
to whom the thread of the relation remain intact even after the marriage.
Manu says:
204
To the unmarried daughters by the same mother, let their brother give portions out
of their allotments respectively, according to the class of their several mothers. Let each
give one-forth part of their distinct share and those who refuse to give it shall be degraded.
198
Palaniappa v. Deivasikamony, AIR 1917 PC 33.
199
AIR 1995 SC 105.
200
AIR 1979 All. 65.
201
AIR 2006 A.P. 37.
202
Ramalinga v. Sivachidambara, 42 Mad 440.
203
AIR 2000 SC 510.
204
Manu Ch. IX, S 118.
ALIENATION
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Even Mitakshara specifically mentions the providing for a share for the sisters, when
the father is dead and the partition by brother themselves. He says:
205
The allotment of such share appears to be indispensable requisite since the refusal
of it is pronounced to be sin. Even in terms of Judicial view, the judiciary upholds the
rights of the father and brothers, to validly gift a joint family immovable property to
daughter/sister at the time of her marriage or even afterwards,
206
and this is perfectly
valid.
So, the above mentioned texts clearly express recommendation to give property to
daughter at the time of her marriage or at the time of partition.
Fathers Position as Karta:
We have looked at powers of Karta to alienate joint family property. But there can
be different types of coparcenaries having different individuals as Kartas. The relation
of an individual to other members of joint family also determines the kinds of power of
alienation that might be attributed to that individual. For example, consider three different
coparcenaries consisting of father and sons, uncle and nephews, and elder brother
and younger brothers. Out of these three, the father will have maximum rights of
alienating joint family property followed by uncle and then by elder brother.
In the case of father, there is special power of alienating property for his antecedent
debts, which fall within the scope of pious obligation doctrine. Alienation by the father
binds the coparcenary interest of his sons. A father can also gift away movable and
immovable joint family properties. The father has power of making, within reasonable
limits, gifts of ancestral movable property for performing indispensable acts of duty. A
gift of affection may be made to a wife, daughter or even son but within reasonable
limits. A Hindu father also has the right of alienating immovable joint family property
for pious purposes. However, the alienation must be by an act inter vivos and not will.
The Supreme Court has held that it is competent for father to make gift of immoveable
property to daughter, if gift is of a reasonable extent
207
.
205
Mitakshara Ch I, S7, pp10-11.
206
Kudutamma v. Narashima Charyalu, 17 Mad L J 528.
207
Gurramma v. Mallappa, AIR 1964 SC 5.
ALIENATION
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272
Implication of Section 6, Hindu Succession Act, 1956:
If a coparcener dies leaving behind heir in terms of proviso to Section 6
208
of the
Hindu Succession Act, 1956 can the Karta alienate the females share in the coparcenary
property, which has vested in her own succession? It seems that he cannot do without
her consent, since the property acquired under Section 6 is her absolute property.
Perhaps the sole surviving coparcener also cannot alienate the interest of any
female vested in her by virtue of operation of Section 6 of the Hindu Succession Act, it
possess a limitation to the sole surviving coparceners right to alienation.
It is also submitted in view of Bombay High Court that after coming into force of the
Hindu Succession Act the sole surviving coparcener cannot alienate the share of the
widow.
209
Alienation under Dayabhaga School:
The joint family is the area where Dayabhaga School and Mitakshara School differs
from one another fundamentally. Actually in true terms under Dayabhaga School there
is no joint family between father and son; sons have no right by birth, similarly sons
have no right of survivorship and therefore, under Dayabhaga all the properties whether
self acquired or coparcenary devolve by succession.
The Dayabhaga rejects the view that Yaj. II. 121 enables the son to demand partition
of the grandfathers property from the father even against the will of the later or that
father and son have equal rights in the grandfathers property. And these entrails that
under Dharmasastra the father has a full or absolute power of alienation not only in
respect of separate property but also in ancestral property too, this is one of the
rudimentary differences we find as compared to Mitakshara School. This applies to the
norms of property whether movable or immovable, and the most crucial figure, according
to that system, since sons have no interest by birth in the ancestral property. Thus, they
208
(1) On and from the commencement of the Hindu Succession (amendment ) Act, 2005, in a Hindu
Joint Family government by Mitakshara law, the daughter of a coparcener shall,
(a) by birth become a coparcener in her own right in a same manner as the son;
(b) have the same rights in the coparcener property as she would have had if she had been a son;
(c) be subject to the same liabilities in respect of the said coparcenary property as that of son,
And any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference
209
Shankaramma v. Madappa, 1977 Kant, 188.
ALIENATION
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273
can neither enforce a partition against the father nor control his management. It takes
place only after the death of the father.
Fathers Power under Dayabhaga School:
The father is the absolute owner of the property. Jumuthvahana
210
took the view
that the text of Vyasa prohibiting a sale or gift of ancestral immovable property was to
indicate a moral offence but not to invalidate the sale or other transfer.
211
In 1812, the
Sudder Court held that, the gift by the father, the whole estate, real and personal
ancestral, and otherwise, to a younger in the life time of the elder was held valid though
it was immoral and the whole gift of landed property held being forbidden. In 1831,
the Supreme Court of Bengal referred question to the Judges of Suddar Dewanny, who
returned the following certificate: on mature of the points referred to us, we are
unanimously of opinion that the only doctrine that can be held by the Saddar Dewany
Adalat, consistently with the decisions of the Court, and the customs and usages of the
people, is that a Hindu, who has sons, can sell, give or pledge, without their consent,
immovable ancestral property, situated in the province of Bengal; and that, to such
property.
212
This certificate has ever since accepted as a settling a law in Bengal, on the
points to which it refers and make it no difference that the property is impartable, and
descends by the rule of primogeniture.
Power of Coparcener of Alienation of his Share:
As regards to coparceners in Bengal, that is brothers, cousins, or the like, who have
taken the property jointly, there is no difficulty. In Bengal the rights of every coparcener
are definite to the share, this right passes through the line of inheritance to female or
other relations, just as it were already divided, and it may get disposed of by each male
member just as it were separate of self-acquired property. And such alienations will be
taken into account as part of his property, and of course no person can disposed of
property which is more than his share though he can unless there is consent or when it
has become a part of necessity. So in Bengal undivided coparceners can lessee out the
undivided property which is equivalent to his share, and put his lessee in his possession.
213
210
Writer of Dayabhaga.
211
Daya Bh. II, 28.
212
Jugomohum v. . . . . Neemoo, 90 ILR 432.
213
Ram Debul v. Miterjeet, (2002 ) 17 All 420.
ALIENATION
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274
A Dayabhaga coparcenary may also start his own business on the land of joint
property, provided he obtained consent from other coparceners.
Alienees Rights and Remedies - Duties of Alienee and Burden of Proof:
The person in whose favour the joint family property has been transferred is called
the alienee. The alienee acquires a good title to the property when the alienation is
valid. But when alienation is invalid, he does not acquire a good title to the property
unless he satisfies some duties. In Hanuman Prasad v. Mst. Babooee
214
, it was established
that where the validity of alienation is challenged in a Court, the burden of proving that
the Karta had the competency to alienate the property is on the alienee and not on the
Karta. The rule is in tune with the principle that where the person transferring property
is not exclusive owner of the property, the duty is on the alienee to act with reasonable
diligence. The alienee should enter into the contract only after making reasonable
enquiries about the transfer being permissible in law.
The burden of the proof is on the alienee to show that the alienation was either for
legal necessity
215
or for the performance of religious or indispensable duties or was one
that would bring benefit to the estate. The reason why burden of proof lies on the
alienee is because alienee is seen to be the beneficiary in such a transfer which is
prejudicial to the interests of other coparceners. The possibility of this transfer being
declared invalid by the Court is enough for the alienee to make the Karta explain to
him, the situation the family is confronted with and the necessary action that Karta
wants to take
216
.
The Courts also realize that although the legal necessity may be there, yet the
Karta may misuse the money obtained. So, the alienee is not bound to see the actual
application of the money advanced or of the consideration because it is impossible for
the alienee to control the utilization of money
217
.
Rights of Alienee:
Where a coparcener alienates his undivided share, the alienee gets only an interest
to the extent of coparceners share as it stood at the time of alienation. The position in
214
(1856) 6 MIA 393.
215
Faquir v. Harnam, AIR 1967 SC 727.
216
P P Saxena, Family Law Lectures, 1
st
ed. 2004, p. 237.
217
Baijnath v. Gokul, AIR 2005 All 37.
ALIENATION
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275
Madras, Uttar Pradesh, West Bengal, Patna, Madhya Pradesh is that the alienee does
not have a right of joint possession of the property with the coparceners
218
. The reason
for not permitting the alienee to have joint possession with the coparceners is to avoid
introduction of a stranger into the family. But the alienee has a right to file a suit for
partition, making all the coparceners defendants as the executing Court has no power
to direct a partition
219
. Where instead of a general undivided interest, the coparcener
alienates a specific item out of the coparcenary property, the alienees remedy will be
merely to sue for a general partition and he cannot claim any particular property
220
.
The alienee is permitted to stand in the shoes of the coparcener and is therefore,
entitled to only that interest of the coparcener, which the latter had in the property on
the date of alienation. The reason behind this is that it was undivided property at the
time it was alienated, and till it is divided, there is community of interest and unity of
possession and alienating coparcener himself is incompetent to claim any specific
property.
The rule in Bombay is different. The purchaser of an undivided interest of coparcener
is entitled to sue for partition of property and specification of his share. Once the
partition is affected, he can get an exclusive possession of the same. The alienee also
has the right to joint possession with other coparceners. In case the partition is not
affected, and he takes the possession, the other coparceners can either have joint
possession with him or they can file a suit to get him evicted. But the Court is not bound
to pass an eviction order. The alienee can be allowed to remain in possession as
tenant-in-common in accordance with facts and circumstances of the case. For example,
where the purchaser is a relative in possession for a long time, the Court may pass an
order for joint possession, rather than an eviction order.
221
It can be concluded that the Sastric law of alienation though centuries upon centuries
old, is still surprisingly relevant. The rules regarding conditions in which a valid alienation
can be made are very practical and pragmatic, for example, the condition of apatkale
i.e. in the time of distress gives actual utility of the joint family property because the
share of all the members can be used to avert distress to any one of them, this is a
safety net which saves people from utter ruin and gives them a chance to start afresh, a
218
Dulkiyaar v. Ramsukhwant, AIR 2007 Raj 32, Ramkishore v. Jainarayan, (1913) ILR 40 Cal 966.
219
Satyanarayan v. Panalal, AIR 1980 Ori 169.
220
Madras Hardware Mart v. Hutcheeswaran, 1997 (1) HLR 569 (Mad).
221
Babaji v. Vasudev, (1876) ILR 1 Bom 95.
ALIENATION
NALSAR Pro
276
chance which is never given to the people in the supposedly highly civilized and
progressive western nations. Secondly, coming to the condition of kutumbarthe or for
the benefit of estate, it provides the joint family members a chance to improve their
standard of living by pooling their resources and utilizing them for their own benefit.
This can be put to practical use for family benefit also in the shape of family business
which is a common Hindu occurrence. Lastly, we come to dharmarhte i.e. alienations
made for religious purposes, this gives us an insight into the traditional Indian thinking
where religion is a way of life. Hence, religious purposes are as important as times of
distress as they lead to deliverance.
The new changes made by the case law mostly by the Privy Council and the High
Courts have been equally empowering and given the joint family members the power
to use the property for their upliftment. Chief among these are first, the total control
which a father now has on over his separate movable and immovable property, this is
a departure from the ancient law which did not allow a father to dispose off his separate
property according to his own wishes. Secondly, the new powers given to alienate his
share in the undivided family property for his own use with or without the consent of the
other coparceners. This gives the power to him to use his share for purposes which may
not qualify as necessity for the whole family but are very important for him. It also gives
him a right to benefit from his share without severance from the joint family which
occurs at the time of partition. Thirdly, the ground of apatkale has been satisfactorily
extended to include along with situations of emergency and distress, those situations
which may seem proper and reasonable to the Court. This has gone a long way in
making the law of alienation much more suited to present conditions.
ALIENATION
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277
CHAPTER - VI
PARTITION
Partition under Mitakshara School of Hindu Law
Introduction:
The only property that can be made as the subject of partition is
Coparcenary Property. It is essential that the property be earlier held as
joint property in the coparcenary for it to be brought within the ambit of
partition. Separate property cannot be the subject of partition amongst
the members of coparcenary. But if the property is of such a nature that
it has been allotted at a previous partition to a member will of course be
indivisible between himself and the separated members but will be divisible
between himself and his own descendants
222
. An important question in
this regard is when does severance of status take place? The Supreme
Court has held that from the date of institution of the suit such severance
takes place
223
.
Property Indivisible from its Nature: Where the property is indivisible
from its very nature it is considered that such property must either be
enjoyed by the heirs jointly or sold, and the value distributed; or it may
be valued and retained by one coparcener exclusively and appropriate
amount credited to his share. Members may hold family idols in turns or
as the Bombay High Court ordered that family idols should be taken in
222
Periasami v. Periaswami (1878) 5 IA 61; Rangnnath Mishra (rev.) Mayne, HINDU LAW AND USAGE,
15
th
ed. 2003, p.850. Also see Gannmani Anasuya v. Parvatini Amarendra Chowdhary, AIR 2007
SC 2380.
223
Kakumanu v. Kakumanu, AIR 1958 SC 1042.
NALSAR Pro
278
possession by the senior most male member, with liberty to other members to have
access to them for purpose of worship
224
.
Property available for Partition:
Before the division of property is made, it is necessary to make provisions for the
liabilities of joint estate, which are payable out of the joint family property, personal
debts of the father neither tainted with immorality nor are illegal in its very purpose,
maintenance of dependent female members and of disqualified heirs, and also for the
marriage expenses of the unmarried daughters or sisters
225
. These three are the essential
sub-heads for which provisions have to be made under all circumstances.
As far as marriage expenses of a male member is concerned it was held that since
the institution of a suit of partition by a member of joint family effects the severance of
joint status of the family, a male member who is then unmarried, is not entitled to have
a provision made on partition for his marriage expenses
226
. This is in stark contrast to
the position of marriage expenses for unmarried fathers daughters or sisters. But the
marriage expense of sons daughter will be paid out of his own share, as it is the liability
of his branch and not from the entire joint family property
227
.
As per the Hindu Law the sons are bound to perform at their own expense the
funeral ceremonies of their widowed mother. It is important to note that if no provision
has been made exclusively for this purpose, then if one of the sons performs it at his
own expense he is entitled to a contribution from his brothers
228
.
Mode of Taking Accounts: Under Mitakshara School Karta is not liable to keep
accounts and no coparcener can even at the time of partition ask about previous
misappropriation. After severance of status has been effected an account must be
taken of the entire family property in the hands of all the different members. Money laid
224
Damodar Das v. Uttam Ram, (1893) 17 Bom 271.
225
Yajnavalkya says, Uninitiated sisters should have their ceremonies performed by those brothers
who have already been initiated, giving them a quarter of ones own share. Yajna 11 124; Rangnnath
Mishra (rev.) Mayne, HINDU LAW AND USAGE, 15
th
ed. 2003, p.853.
226
Ramalinga v. Narayana, (1922) 49 IA 168, 45 Mad 489, S.A.Desai (rev.) Mulla, Hindu Law, Vol.-
1,18
th
ed. 2004, p. 574.
227
Sankarnarayana v. Official Receiver, AIR 1977 Mad 171.
228
Vaidyanath v. Aiyasami, (1909) 32 Mad 191; S.A. Desai (rev.) Mulla, Hindu Law, Vol.-1, 18
th
ed.
2004, p. 575.
PARTITION
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279
out by one member of the family upon the improvement or repair of the property, or for
any other object of common benefit would constitute a debt to him from the rest of the
family only if money which he had expended were advanced out of his separate property,
without an intention of making a present of it to the family. He would then be entitled to
reimbursement of his outlay as well on partition as before it.
229
Same was the ratio in
case of Anar Devi v. Parmeshwari Devi
230
For the purpose of accounting certain rules have been laid down which have to be
adhered to:
1. No coparcener is entitled to call upon the manager to account for his past dealings
with the joint family property, unless he establishes fraud, misappropriation or
improper conversion.
2. No charge is to be made against any coparcener because a large share of the
joint income was spent on his family in consequence of his having a larger family
to support.
231
3. Also, a coparcener who is entirely excluded from the enjoyment of joint family
property is entitled to an account of the income derived from the family property,
and to have his share of the income ascertained and paid to him, that is the
mesne profits.
232
This arises only after partition has come into effect since prior to
that no member of coparcenary has a defined share, and consequently he cannot
put forth a claim for mesne profits or for any share of income from the joint family
properties.
Persons entitled to Claim:
Coparceners: The guiding rule in this regard is that any adult coparcener may sue
for partition, and every coparcener is entitled to share upon partition. The earlier law in
this regard was that a son could not ask for partition without the assent of his father,
when the father was joined with his own father, brother or other coparcener. But after
229
Muttuswamy v. Subbiramaniya, (1863) 1 Mad HC, 309; Rangnath Mishra (rev.) Mayne, HINDU
LAW, 15
th
ed. 2003, p.854.
230
AIR 2006 SC 3332
231
Abhay Chandra v. Pyari Mohan, (1870) 5 Beng LR 349; Rangnath Mishra (rev.), Mayne, HINDU
LAW AND USAGE, 15
th
ed. 2003, p.852.
232
S.A. Desai (rev.), Mulla, Hindu Law, Vol.-1,18
th
ed. 2004, pp. 575-576.
PARTITION
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280
the decision of Abu Hamir v. Aher Duda
233
, it was held that the assent of father is not a
pre-requisite to a suit, against grandfather and his collaterals, for partition by metes
and bounds, which means actual partition, where there had already been severance of
status. This is the status under the Mitakshara Law. Under the Dayabhaga School which
prevails in Bengal and Assam, son has no right to claim partition of property held by his
father during the life time of his father as the son has no vested interest in it. But where
a stranger to the family acquires a title to a portion of the family property, by a purchase,
his remedy is by suit to compel his vendor to come partition; he cannot demand a
partition merely, of the portion over which he has a claim.
234
Sons born after Partition: There is a difference of opinion among the various scholars;
Yajnavalkya holds the view that, the partition has to be opened up again, in order to
give the after-born son the share which he would have had if he had been in existence
at that time.
235
Whereas Manu along with some others like Narada and Gautama
holds the view that, the after-born son is to receive share only from his father, but in
case father has re-united with his brothers, he is to share with them.
236
Son begotten at the time of Partition: this means that son who is in his mothers
womb at the time of partition is entitled to a share, although he is born after partition,
as if he was in existence at the time of partition. If a share is not reserved for him he has
complete rights to get partition open and seek his claim
237
.
After born Son: It is possible that after partition from his sons, father may or may not
reserve a share for himself. If he reserves a share for himself a son begotten and born
after partition cannot reopen partition. This son will be a coparcener with his father and
after fathers death would be entitled to inherit the whole of separate property of father,
to the entire exclusion of separated sons
238
. In case the father has not kept anything
aside as his share the son born as well as begotten after partition is entitled to have the
233
AIR 1978 Guj 10.
234
Manjaya v Shanmuga, (1915) 38 Mad 684.
235
Yajna, II, 122; Rangnnath Mishra (rev.), Mayne, HINDU LAW, 15
th
ed. 2003, p.857.
236
Manu, IX, 216; Nar XIII, 44; Gaut XXVIII, 29; Rangnath Mishra (rev.), Mayne, HINDU LAW, 15
th
ed.
2003, p.857.
237
Jagat Krishna v. Ajit Kumar, AIR 1964 Ori 75.
238
Shivajirao v. Vasantrao, (1909) 13 Bom 267; Rangnath Mishra (rev.), Mayne, HINDU LAW, 15
th
ed.
2003, p.858.
PARTITION
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281
partition reopened not only in the property that stood at the time of original partition
but also in the accumulations made with the help of the property.
239
Thus, the unborn
child cannot be deprived of his share in the paternal estate by a prior partition. This
principle can only be applicable in cases where the partition is between father and
sons, and there is no warrant for its extension to a son born to a separated coparcener,
other than the father of the family of partition.
Minor Coparcener: A suit for partition can be brought on behalf of a minor only if
it is for the benefit of the minor, and advancing his interest. In Pedasubhhayya v.
Akkamma
240
, the Supreme Court opined that the Court should be satisfied that the next
friend of the minor has, in instituting a suit for partition acted in his interest. An absent
coparcener stands on the same footing as the minor.
Adopted Son: Amongst the three higher classes that is the twice-born classes as
adopted son takes the same share as the aurasa son. After the commencement of the
Hindu Succession Act,1956 there is no difference between an adopted son and a real
son.
Illegitimate Son: The illegitimate sons of the three higher regenerate classes are not
entitled to claim partition
241
. In case of Mitakshara School, the son of a Sudra does not
acquire by birth any right in his fathers property and hence cannot enforce partition in
his lifetime
242
. But after his death he succeeds to his estate with the legitimate son of the
father. The Supreme Court had held in the case of Gur Narain Das v. Gur Tahal Das
243
,
that though an illegitimate Sudra son cannot claim partition in the lifetime of his father,
he can do so after his death if the father was separate from his collaterals. Where the
father leaves no legitimate male issue, illegitimate son is entitled to inherit half of a
share, which he would have taken had he been legitimate, in Mitakshara School.
244
239
Chengama v. Munisama, (1897) 20 Mad; S.A. Desai (rev.) Mulla, HINDU LAW, Vol.1, 18
th
ed.
2004, p. 583.
240
AIR 1958 SC 1042. This view was re-iterated in the case of Venakata Reddi v. Lakshamma, AIR
1963 SC 1601.
241
Roshan Singh v. Balwant Singh, (1900) 22 All 191, 27 IA 51; S.A. Desai (rev.) Mulla, HINDU LAW,
Vol.-1, 18
th
ed. 2004, p. 584.
242
Raja Jogendra v. Nityanand, (1891) 18 Cal 151; S.A. Desai (rev.) Mulla, HINDU LAW, Vol.1, 18
th
ed. 2004, p. 585.
243
AIR 1952 SC 226.
244
Kamulammal v. Visvanathaswami, (1923) 50 IA 23.
PARTITION
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282
Persons entitled to Share:
Apart from those mentioned above, there are some female members who have the
right to entitlement in the property even though they themselves cannot claim for it. Any
property that these females may take after partition is their absolute property by virtue
of Section 14 of the Hindu Succession Act, 1956. Also the fact these females are
entitled to maintenance does not adversely affect their share at the time of partition.
Wife: A wife cannot herself claim partition
245
but when it takes place between her
husband and her sons she is entitled to a share equal to that of a son and she can enjoy
that separately from her husband
246
except in South India where it has since long been
an obsolete practice.
Mother: Widowed mother has right to equal share as that of her sons only when
partition by metes and bounds takes place
247
. In Dayabhaga School a widow becomes
the heir of her husband, if he leaves no male issue whether he is undivided or not.
Grand Mother: Paternal grandmother is entitled to a share in case partition takes
place between her grandsons, or between her son and son of predeceased son.
Coparceners Widow: When two or more widows succeed to their husbands property
either of them has the right to partition.
248
Daughter: In case of a custom prevailing at a point of time she is entitled to claim
share.
249
After the commencement of Hindu Succession (Amendment) Act, 2005 in
case of joint Hindu family governed by Mitakshara, the daughter of coparcener shall
become a coparcener and have the same rights as that of a coparcener. Hence, she
can now claim partition and would have share as a son.
What constitutes Partition?
Partition may come into effect without the instrument of writing
250
, but where the
value of immovable property is above rupees 100 requires registration under Section
245
Punna Bibee v. Radha Kissen, (1904) 31 Cal 476.
246
Shiromani v. Hem Kumar, AIR 1968 SC 1299.
247
Pratapmull v. Dhanbatti, 1973 P.C 21; Paras Diwan, MODERN HINDU LAW, 15
th
ed. 2003, p.333.
248
Venkat v. Keshava, AIR 2003 SC 3314
249
Pachi Krishnamma v. Kumaram, AIR 1982 Ker 137.
250
Section 9 of the Transfer of Property Act, 1882.
PARTITION
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283
17(1) of the Indian Registration Act, 1908. It is important to remember that partition
does not, amount to a transfer of property as partition means that the totality of property
of the family in which all coparceners jointly had subsisting title would be transformed
into separate titles of individual coparceners in respect of several items of properties
allotted to them
251
. There are various circumstances which indicate whether partition
has actually taken place or not, but these are not hard and fast rules, the mere existence
of separate transaction
252
, or division of income is not conclusive evidence. The central
point is that when partition is brought there must be an intention of the coparceners, to
alter to their title. The Supreme Court has taken the view that an uncommunicated
declaration is no better than mere formation or harbouring an intention to separate.
253
Fathers Power to affect a Partition: A Hindu father under Mitakshara School can
affect a partition between himself and his sons without their consent, for both ancestral
and self-acquired property. His power is also extended to division between the sons
inter se
254
. This power extends to division not only by metes and bounds, but also to a
division of status
255
. In all such cases father should act in bona fide interest and it must
be in accordance with law. Whereas in Dayabhaga Law if the father gives his property
to one son and separates him, the others will get the property on his death.
Partition by agreement: The coparceners in a joint family can by an agreement
amongst them separate and cease to be a joint family, and are entitled in such
circumstance to partition the joint property. When the members agree among themselves
either with reference to a particular property or entire joint estate that it shall henceforth
be the subject of ownership in certain defined shares, this implies conversion of joint
tenancy to tenancy-in-common, and each member then enjoys a definite share in the
estate which he may claim the right to receive and enjoy in severalty
256
.
Severance by Unilateral Declaration: the earlier view that severance can take place
only through mutual agreement no longer holds true. A definite and unambiguous
251
V N Sarin v. Ajit Kumar Poplai, AIR 1966 SC432.
252
Baboo Ram v. Bachni, AIR 1978 P & H 343.
253
Raghavamma v. Chenchamma, AIR 1964 SC 136.
254
Shiv Dayal v. Ram Jiwaya, (1931) 12 Lah 574; Rangannath Mishra (rev.) Mayne, HINDU LAW AND
USAGE, 15
th
ed. 2003, p. 860. Also see Bhimashya v. Jannavya, 2007(2)AWC1432(SC)
255
Venkateswara Pattar v. Mankayammal, (1936) 63 IA 397; Rangannath Mishra (rev.) Mayne, HINDU
LAW AND USAGE, 15
th
ed. 2003, p.859
256
Appovier v. Rama Suba Aiyan, (1866) 11 MIA 75, 92; Rangannath Mishra (rev.) Mayne, HINDU
LAW AND USAGE, 15
th
ed. 2003,
PARTITION
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284
indication of intention by one member to separate himself from the family and to enjoy
his share in severalty will amount to division in status
257
. In such cases it is vital that the
decision has been expressed unequivocally and has been clearly intimidated to the
other coparceners. After this his right to obtain and possess share becomes
unimpeachable and the Court cannot examine his conscience, it has to give effect to
his right to have share allocated separately from the rest.
258
By Conduct: The intention to separate can be evidenced in different ways; it can
also be shown through conduct, the result is same as that of declaration. Attachment of
undivided share causes severance
259
. Once the coparcener has intimated by a notice
to the others his intention to separate, he cannot later unilaterally remove it; this principle
has been laid by several Courts including the Supreme Court
260
, which held that once
all defendants have been summoned and one of the defendants dies, it is not up to the
plaintiff to revoke the intention.
By Suit: It is a well-settled principle that institution of a suit by an adult member is an
unequivocal intimation of his intention to separate and there is consequently a severance
of joint status from the date when suit is instituted.
261
Every suit for partition should
ordinarily embrace all joint family properties.
262
Once the Court has issued summons
and partition has come into effect it cannot be withdrawn this was held by the Apex
Court in the case of Puttrangamma v. Ranganna
263
.
By Arbitration: A reference to arbitration or an agreement appointing a person as
arbitrator for division of joint family property. The fact that no award is subsequently
made, will not amount to renunciation of intention to separate
264
.
257
Puttarangamma v. Mt Ranganna, AIR 1968 SC 1018.
258
Girja Bai v. Sadashiv Dhundiraj, (1913) 43 IA 151, 160; Rangannath Mishra (rev.) Mayne, HINDU
LAW AND USAGE, 15
th
ed. 2003, p. 884.
259
Muneswari v. Jugal Mohini, AIR 1952 Cal 368.
260
Puttrangamma v. Ranganna, AIR 1963 SC 1018.
261
Joala Prasad v. Chanderjot, (1938) 17 Pat 430.
262
T.N Rajsekar v. N. Kaviswanathan, AIR 2005 SC 3794.
263
Ibid n. 38.
264
Syed Kusum v. . . . . Jarawarsingh, (1922) 49 IA 358; Rangannath Mishra (rev.) Mayne, HINDU LAW
AND USAGE, 15
th
ed. 2003, p.889.
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285
Births and Deaths pending suit: The share of an adult coparcener who sues for
partition is ascertained on the date of suit and is neither diminished nor augmented by
later births and deaths in the family. If he dies without obtaining a decree, his widow or
other legal representative is entitled to continue the suit and inherit the share.
Mode of Division:
The earlier principle of Hindu Law which stated that partition among the coparceners
was to be of two kinds, one in accordance with priority of birth and the other, allotment
of equal shares. Now this has been changed and the only recognized principle now is
equality of division. Partition in itself could be either partial or total. The partiality is in
regards with the persons making it, or the property divided.
Partial Separation: When there is partial partition the family as to the property, the
family ceases to be undivided so far properties in respect of which such partition has
taken place with all the incidents flowing from there, but continues to be undivided with
regards to the remaining property.
265
The coparceners cannot claim a partition partial
as to the persons or the property as of right though such partitions are sanctioned by
usage and may be decreed by consent.
266
The Privy Council held that the fact of separation having been effected among
brothers raises no presumption that there was a separation of joint family constituted
and headed by each brother
267
. But, the Supreme Court in the case of Bhagwati Prasad
v. Rameshwari Kuer
268
has laid down that, the general principle is undoubtedly that a
Hindu family is presumed to be joint unless a contrary is proved but where one of the
coparceners separates himself from the other members of the joint family and has his
share in the joint family partitioned off to him, there is no presumption that the rest of
the coparceners continued to be joint. It would be a question of fact to be determined
in each case and the burden of proof would lie on the party who asserts a particular
state of things.
269
265
Kalloomal Tapeswari Prasad v C.I.T, Kanpur, AIR 192 SC 760.
266
Chandar Shekhar v. Kundan Lal; H.S Gour, THE HINDU CODE, 6
th
ed. 1996, vol.-1, p.491.
267
Hari Baksh v. Baboo Lal, 1924 P.C 126; Paras Diwan, MODERN HINDU LAW, 15
th
ed. 2003,
p.342.
268
AIR 1952 SC 72.
269
Ibid.
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286
Reopening of Partition:
The general rule in this regard is that a partition is made only once. There are some
exceptions to this generalization. The posthumous son can claim re-opening of partition
also an adopted son; similar is the case of an heir of a disqualified person and an
absent coparcener. Whenever a partition is re-opened, shares must be allocated on a
fair and equitable principle.
Fraud: A partition may be re-opened, if any coparcener has obtained an unfair
advantage in the division of the property by fraud upon the other coparceners
270
. Similar
is the case if undue influence.
271
Mistake: In case after a partition has been made and it is discovered that property
allotted to one of the coparceners did not belong to the family, but to a stranger or is
subject to a mortgage, then the coparcener to whom such property has been allotted is
entitled to compensation out of the share of other coparceners and if necessary, partition
can be re-opened for re-adjustment of share
272
.
At the instance of Minor: It has been very clearly summarized by the Supreme Court
in the case of Ratnam Chettiar v. Kuppuswami
273
, where a partition is proved to unjust
and unfair and is detrimental to the interest of the minors; the partition can be reopened
any time. In such cases, it is the duty of the Court to protect the interest of minors.
Reunion:
A reunion in estate property so called, can only take place between persons who
were parties to the original partition.
274
The rules of Mitakshara at this point are fairly
precise. It was held in the case of Ram Narain Chaudhary v. Pan Kuer
275
that in a Hindu
270
Moro Vishvanath v. Ganesh, (1873) 10 Bom HC 444; S.A. Desai (rev.) Mulla, HINDU LAW, Vol. 1,
18
th
ed. 2004, p.628.
271
Venkappa v. Gangama, AIR 1988 Ker 133.
272
Damodra Nayak v. Vatsala Nayak, AIR 1990 Ker 348.
273
AIR 1976 SC 1.
274
Bal abux v. Rukhmabai , (1903) 30 Cal 725; S.A. Desai (rev.) Mul l a, HINDU LAW,
Vol.-1, 18
th
ed. 2004, p. 631.
275
(1932) 62 IA 16; Rangannath Mishra (rev.) Mayne, HINDU LAW AND USAGE, 15
th
ed. 2003,
p. 867.
PARTITION
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287
family governed by Mitakshara, a reunion is valid only if it is with the father, brother or
paternal uncle and only if it is between the parties to partition. Whereas Dayabhaga is
more emphatic at this point, a reunion is only valid with a father, brother or paternal
uncle.
276
Reunion can be effected either by an oral agreement between the parties after the
partition or by their subsequent conduct. To constitute a reunion there must be an
intention of the parties to reunite in estate and interest. In Bhagwan Dayal v. Reoti
Devi
277
the Supreme Court pointed out that it is implicit in the concept of a reunion that
there shall be an agreement between the parties to reunite in estate with an intention to
revert to the former status.
Effect of Reunion: The effect of reunion is to restore the undivided status of the
reuniting coparceners, that is, status quo ante is fully restored in both the Schools.
276
Dayabhaga, XII, 3-4; DKS, V, 4-5; Rangannath Mishra (rev.) Mayne, HINDU LAW AND USAGE,
15
th
ed. 2003, p. 864.
277
AIR 1962 SC 287.
PARTITION
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288
Partition under the Dayabhaga School of Hindu
Law
Introduction:
Much before Jawaharlal Nehru championed the codification of law
applicable to Hindus, Sastric law and customary usage prevailed. But
there was no overarching, unifying law as the country was vast and
communications and social interactions in the past were difficult. This
lead to a diversity in laws differing from region to region and also diversity
based on castes. Consequently, in matters of property also, there were
different Schools, like Dayabhaga in Bengal (also known as Bengal School
of Hindu Law) and the adjoining areas; Mayukha in Bombay, Konkan
and Gujarat and Marumakkattayam or Nambudri in Kerala and
Mitakshara in other parts of India.
278
The multiplicity of succession laws
in India, diverse in their nature, owing to their varied origin made the
property laws very complex.
In this part we set out to analyze in depth the features of law of
partition under the Dayabhaga School. This has been discussed at two
levelsone, under the Sastric law and second, the impact of Hindu
Succession Act, 1956 and also the Hindu Succession (Amendment) Act,
2005 on the Dayabhaga Law of partition. Observe that, though
Dayabhaga was not a prominent treatise in the rest of India except for
Bengal, however, the way in which this School dealt with subjects of
partition was more equitable and thus the present law as regards property
matters has been largely inspired by the Dayabhaga system.
278
Smt. Tara Mani v. Narinder Kumar, AIR 2002 P&H 365; Hamida Khatoon v. Baryapore Panchayat,
AIR 1947 Pat. 122.
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289
The Genesis of Dayabhaga Philosophy:
At the very outset, we must gather the genesis of Dayabhaga philosophy in this
section. Dayabhaga is basically the treatise written by Jimutavahana the first of the
triumvirate of Bengal writers on Dharmasastra.
279
There is no doubt that Dayabhaga is
the most popular of Jimutavahanas works. It stood as a paramount authority in matters
of partition in the British Indian Courts of Bengal.
280
Although, there were no divisions
in the earlier work, however, later on in its multifarious translations it was divided into
sections based on subjects and also translated into English by Colebrooke. In the original
text the topical areas covered the following headsDefinition of daya, fathers power
over ancestral property, partition of fathers property, division amongst brothers, property
of women, persons excluded because of disabilities, property which is impartible (self-
acquired), order of succession to one dying sonless, re-union, partition of coparcenary
property concealed but discovered afterwards, indicia of partition.
281
Jimutavahana quotes in Dayabhaga among Smriti sages, Manu, Narada, Vishnu,
Gautama, Vasistha, Harita, Yama, Vyasa, Baudhayana etc. Manusmriti is of maximum
relevance to us for this has been cited the most number of times in Dayabhaga treatise,
and so has been referred to at relevant points.
The words daya and vibhaga have been variously defined by authors. Some define
it to be one in which sons arrange for the partition of their fathers wealth. The
Smritisangraha quoted that the word daya applies to wealth that is to be divided.
282
Further authors believe that Dayabhaga also refers to wherever there is a question of
distribution of wealth of the father or grandfather or even of the mother (as held by
Narada).
Tracing the historical roots of the ancient Hindu Law it is said that it originated in
what we call the Bengal proper which can be roughly described as the valley of the
Ganges below Bhagalpur. This place is precisely where the prevailing treatise for partition
came to be known as Dayabhaga, the author being Jimutavahana. There is no
satisfactory authority to affirm the date at which he wrote the treatise. However, it is
believed that it was written between the 12
th
and the 16
th
century.
279
The other two being Sulapani and Raghunandana.
280
P. V. Kane, History of Dharmasastra, Vol. I, Part II, 3
rd
ed., 1997, p. 705.
281
Id at p. 704.
282
P. V. Kane, History of Dharmasastra, Vol. III, Part II, 3
rd
ed., p. 545.
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290
At the outset, it is important to note that Dayabhaga recognizes only one mode of
devolution, namely succession. It does not recognize the rule of survivorship even in the
case of joint family property because a member of a Dayabhaga joint family holds his
share quasi-severally, so that it passes on his death to his heirs as if he was absolutely
seized thereof, and not to the surviving coparceners.
283
Therefore, it is relevant to
understand the guiding principle of succession under Dayabhaga School and the
reckoning of heirs.
The guiding principle determining the succession under Dayabhaga School is the
doctrine of spiritual efficacy. This essentially means that the test to determine the rival
heirs is the number and also the respective offering he/she makes to the deceased; that
is to say, the three generations next to the owner, in an unbroken male descent.
284
Let us
now reckon the class of heirs which can present the spiritual offerings to the deceased.
The term sapinda as used in the Smritis meant only those connected with the funeral
obligations. Manu has written that when a man dies, his property goes to his nearest
sapinda. Therefore, the question is what the meaning of the word sapinda is. That
depends upon the meaning of the word pinda. It is this difference which formulated the
cornerstone of the philosophy of the law of partition as developed in the different
Schools in India. For example: according to Mitakshara the word pinda means the
particles of the body of the deceased.
It is pertinent to note that according to Dayabhaga, pinda means the rice cake
which is offered in the Shraddha ceremony to ones deceased ancestors. The offering
next in importance is that of the lepa, or fragments of the rice cake, the crumbs as we
might call them and the persons who make this offering are called sakulyas. The offering
of least importance is the simple libations of water, and persons connected to this
offering are called samonadacas.
Now, relating the two concepts of spiritual efficacy and pinda it follows that under
the Dayabhaga School the traditional rule is that only the person who can perform
Shraddha for his ancestor can inherit the property.
283
Subhadrabai Kachari Khandagale v. Balwanta Narayan Jadhav, 2005 (1) Bom CR 875.
284
Dayabhaga XI 34 as quoted in P. V. Kane, History of Dharmasastra, Vol. I, Part II, 3
rd
ed.
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291
Who can perform the Sharddha ceremony?
It is now clear that only that person can inherit under Dayabhaga School that can
perform the Shraddha ceremony for the deceased. The essential question that we then
face is who can perform the Shraddha ceremony. Also amongst sapindas, sakulyas
and samonadacas respectively, whose offering is most efficacious?
In the book called Parvana Shraddha the list of persons who can perform Shraddha
is mentioned. First in the list appears the son, their offering being most efficacious;
followed by the sons son, etc.
285
The general rule is that if a person at a higher position
in the list is available, then one cannot go down the list, and the list terminates there.
The line is not continued beyond the great-grandsons.
For instance, if the son is alive, then the sons son (i.e. grandson of the deceased)
has no right to perform Shraddha, because the grandson is given in Parvana Shraddha,
where the son appears first.
Thus, evolves the fundamental principle of this School which states that there is no
right by birth in Dayabhaga when the father is alive.
286
Similarly, in Dayabhaga the
unborn son in the mothers womb cannot have a share in the property, because an
unborn son cannot perform Shraddha.
Dayabhaga Law also identifies father, then the mother, then the brothers, then the
brothers, sons, and then the brothers sons sons. The sisters are excluded, but their
sons succeed after the brothers sons sons; and finally come the brothers daughters
sons. But Dayabhaga prefers the father to the mother, because he presents two oblations
in which the deceased son participates, while the mother presents none.
287
Dayabhaga also recognises cognates, i.e. the relatives of the deceased through
the mother. It is said that these are also in some way sapindas. They are generally
called bandhus. There is some difficulty in finding out the order in which they succeed,
and since it is rare that an heir has to be sought outside the fathers family, the question
has not been much discussed. The question would have to be decided by the religious
doctrine of spiritual benefit, and it is not improbable that Hindus who are accustomed
285
Markandey Katju, THE IMPORTANCE OF MITAKSHARA IN THE 21ST CENTURY, http://www.ebc-
india.com/lawyer/articles/2005_7_3.htm (12th June, 2007).
286
Mathew Varghese v. Rosamma Varghese, AIR 2003 Ker 312.
287
Satya Charan Chaunder v. Smt. Kamala Dey, (2000) 3 CAL LT 539 (HC).
PARTITION
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292
to keep up sacrifices which confer the benefit would be able to say whose sacrifice was
most efficacious. When all the sapindas both on the fathers and mothers side are
exhausted, we then go to the sakulyas, and practically these are found by continuing
the enumeration of agnates upon the same principle as that already indicated through
three generations lower and three generations higher. On failure of the sakulyas we
should have to fall back upon the samonadacas, but probably all that can be said with
certainty is that the sakulyas and samonadacas between them exhaust entirely the male
agnates of the deceased. Where there are several persons whose offerings are equally
efficacious, i.e. who stand in the same relationship to the deceased, they all take: the
male descendants per stirpes, and the other relatives of the deceased per capita.
To summarize, we trace the heirs under Dayabhaga Law as: First, the sons, then
the sons sons, and then the sons sons sons, then the widow, then the daughters, and
then the daughters sons. After these come the parents, and it is peculiar that of these
the mother comes before the father, then the fathers sons and then the fathers sons
sons. Then we go back to the preceding generation, and follow the same order.
The Concept of Joint Family:
To begin with, a Hindu Joint Family consists of the common ancestor and all his
lineal male descendants up to any generation together with the wife/wives (or widows)
and unmarried daughters of the common ancestor and of the lineal male descendants.
As we saw earlier, Dayabhaga School neither accords a right by birth nor by
survivorship in the property. It is important to note that neither sons nor daughters
become coparceners at birth nor do they have rights in the family property during their
fathers life time. Nevertheless, on his death, they inherit as tenants-in-common.
288
This
is how the notion of joint family and joint property is recognized. Since the ownership
arises only on the extinction of the fathers ownership nobody can compel the father to
partition the property in his lifetime and the latter is free to give or sell the property
without their consent. Hence, under Dayabhaga Law, succession rather than survivorship
is the rule.
288
Discussed by the Supreme Court recently, in the case of M/s. Meera and Company, Ludhiana etc. v.
Commissioner of Income-tax, Punjab, J & K and Chandigarh, Patiala, AIR 1997 SC 1973.
PARTITION
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293
Furthermore, under Dayabhaga School, if the brothers are living separately for a
long time and have been performing religious observances separately, they must not
be considered together for the ancestral estate.
289
The Position of Women:
We must note at this point that there is a reasonable consideration given to women
in matters relating to partition under Dayabhaga Law and therefore, it becomes essential
to analyze their situation.
The Dayabhaga Law recognized five females relations as being entitled to inherit
namely, widow, daughter, mother, paternal grandmother, and paternal great-
grandmother.
290
Let us consider their separate cases.
To begin with a widow, she succeeds to her husbands interest on her husbands
death even if he be joint with his brother. It is difficult to establish her claim on the
ground of spiritual benefit, and it rests upon authority rather than principle. Ideally, she
takes a share equal to that of a son when brothers come to partition. Dayabhaga text
remarks on this, that this right is that relating to the partition of the sons of the same
mother and thus, the mother is only to be construed as real.
291
Furthermore, as regards the case of a step-mother who is herself sonless, is not
entitled to share when her step-sons come to partition, but is entitled to maintenance.
292
However, the opinions of ancient writers on the subject are very conflicting; they are set
forth at great length in Dayabhaga, with a conclusion in favour of the widow. Probably
the intrusion of the widow is connected with the fact that she could in early times by
cohabitation with a brother, and in later times by adoption, procure an heir to her
sonless husband. This reasoning is rather obsolete and is now debunked.
In case of more than one son from different mothers, the rule is to allot shares as
there are number of sons and then divide property amongst each branch per capita to
the summation of the entire property.
289
Devi Oarshad v. Thakur Dial, 1 All. 105 F. B. at p. 109.
290
M. Indira Devi, WOMANS ASSERTION OF LEGAL RIGHTS TO OWNERSHIP OF PROPERTY, in
Women and Few, Contemporary Problems, by L. Sarkar & B. Sivaramayya (ed. 1994), p. 168.
291
Dayabhgaa III. 29-30, p.67 as quoted in P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3
rd
ed.
p. 1292.
292
Srimati Hemangiri v. Kedarnath, L. R.16 I. A. p. 115 at p. 117.
PARTITION
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294
In case of an unmarried sister, according to the Sastric law, the brothers should
severally give fourth part of their share when separated.
293
This is based upon the
reasoning of father having got the daughter wed at tremendous expense, or otherwise
after his death the unmarried daughter gets a part of his property. This however in
practicality only takes place in case of a widow daughter.
Note that grandmother cannot herself demand a partition. Grandmother is entitled
to a share when the subject matter of the partition is the property of her husband.
294
If
there occurs a partition between her grandsons, she takes the share equal of her
grandson
295
and also if the partition takes place between grandsons and great-grandsons
she takes the share equal of her grandson.
296
Lastly, the doctrine of unchastity applies
to all females under Dayabhaga Law.
297
The Property which can be divided:
By traditional definition the joint family properties are those which are obtained
from father or paternal grandfather or paternal great-grandfather or share obtained on
partition or self-acquired properties or separate properties of an individual (like those
inherited from a maternal grandfather) thrown into the joint family properties.
The coparcener might have acquired properties out of his own income, which is his
separate property. Such coparceners may throw their separate, self-acquired property
into the stock of the joint family property, which therefore, becomes the property of the
joint Hindu family. But the intention must be clear. The mere intention that the members
of a joint Hindu family are entitled to enjoy the benefits of the separate property may
not be enough evidence to include the separate property in the joint Hindu family
property.
Also note that, the ambit of self acquired property in Dayabhaga is very broad as
compared to that of Mitakshara. Under this, gifts acquired by near relation like members
father in law or even if a member learnt a skill at the expense of the family and acquired
293
Ganganath Jha, ManusmrtiWith the Manubhasya of Medhatiti, Vol. VII, 2
nd
ed., verse CXVIII,
p. 98.
294
Kiranbala v. Sushil, 53 CWN 709.
295
Purna Chandra v. Sarojini, (1904) 31 Cal 1065.
296
Sibbosoondery v. Bussomutty, ,, ,, (1881) 7 Cal 191.
297
Ramnath v. Durga, (1879) 4 Cal 550.
PARTITION
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295
property benefited through that skill, that is supposed to be his own property which is
not so, in case of other schools of partition.
298
There must be a specific observation made here, that as regard the property that
had been concealed by a member during the time of partition, the Dayabhaga School
does not direct the same to be distributed proportionally.
299
The conclave of joint family
property, stricto sensu, is not guilty of wrong. This is not the case with others like
Yajnavalkya, Apararka, Vyavaharaprakasa.
Lastly observe that in case of partition under the Dayabhaga Law, sons exclude
others except in case of non agricultural property. In case of non agricultural property
a wife gets a share equal to that of a son.
Initiation of Partition:
The question before us in this section iswho exactly can initiate the partition
under the Dayabhaga School? Since we are looking at the Sastric law the observation
of the renowned author Ganganath Jha in his bookManusmrti is interesting to note
here. He remarks on Verse CIV of Manusmiriti holding that in the lifetime of parents the
sons have no power to divide the property.
300
This has been the guiding philosophy of
the Dayabhaga School. Partition is also not allowed even if the father is ill or suffering
from chronic disease nor has not all wits about him.
301
Jimutavahana further went on to
say that even though the father was dead there should not have been any partition
during the lifetime of the mother.
302
We thus can relate to the law under Dayabhaga School that developed subsequently.
In a Dayabhaga family there can only be a partition as between brothers, or the
descendants of brothers but between a father and his sons there can be no partition,
the sons not being owners. The father may, if he chooses to do so, distribute the property
amongst his sons, and he sometimes does so; but this is a distribution of his own
298
P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3
rd
Ed., p. 1309.
299
Dayabhaga XII. 11-13, as quoted in P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3
rd
ed.
p. 1320.
300
Ganganath Jha, ManusmrtiWith the Manubhasya of Medhatiti, Vol. VII, 2
nd
Ed.,
p. 87.
301
Dayabhaga III. 9, p.60 as quoted in P. V. Kane, History of Dharmasastra, Vol. III, Part II, 3
rd
ed.,
p. 569.
302
Id at p. 568.
PARTITION
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296
property, and not a partition. The father can distribute the property as he pleases. In
simple words, fathers decision is absolute.
Once the partition has been initiated, the rules governing the property division as
under this School apply. We must observe that it has been specifically mentioned in
Dayabhaga that after the initiation even if the members of the family are minors or
single member is demanding the partition, it has been expressly admitted under the
School.
303
A relevant point to be noticed here is that an aurasa son under Dayabhaga system
cannot demand or claim partition during the fathers lifetime and so is the position of
adopted son.
304
If after a person adopts he has an aurasa son, the adopted sons share
becomes reduced according to most commentators.
305
Allotment of Shares:
We have discussed how the partition is initiated under Dayabhaga and in this
section we analyse the process of partition under this School. To begin with, we must
observe the formalities which are to be dispensed with before the final separation
instigates. The first point in this regard is the payment of the joint family debts out of the
joint family property.
306
Secondly, any personal debt of the father which does not fall
under the category of being immoral or illegal must be recompensed. Thirdly by a very
important provision is to be made before the partition concerning the female members
who are entitled to maintenance and disqualified coparceners.
307
A case may come up
where amongst brothers some are unmarried and there must be a provision made for
their marriage expenses.
308
As to the claim for share by coparceners is concerned, under Dayabhaga system, it
is submitted that in cases where the father is alive and he wishes a partition, he may as
303
Dayabhaga III. 16-17 as quoted in P. V. Kane, History of Dharmasastra, Vol. III, 3
rd
ed., p. 573.
304
Id at p. 597.
305
Id.
306
Ponappa v. Pappuvayyanagar, 4 Mad 1 (F.B.) at p. 49.
307
Manu VIII. 166.
308
This is however the old law on the subject and it is no longer necessary to make any provision of
such sort. See Ramalinga v. Narayan, L.R. 49 I. A. 168; Jairam v. Nathu, 31 Bom 54; Sundrabhai
v. Shiv Narayan, 32 Bom. 81; Venkataraduyu v. Sivaramkrishnayya, 58 Mad. 126; P. V. Kane,
History of Dharmasastra, Vol. III, 3
rd
ed. p. 621.
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297
he please distribute the property.
309
The reasoning to this draws from the very philosophy
of Dayabhaga where father is supreme and the sons if by chance try to alter the decision
made by him, are necessarily to be punished.
If on the demise of the father, the brothers decide for a partition, the ideal way as
recognised now is that to allot them equal shares. Even though an old practice, it is
pertinent to note that, the eldest son in all texts has been given a special place in
matters relating to partition by allotting him the whole share, the best of share, the
largest share and so on. Under the Dayabhaga Law, ideal of two shares are allotted for
the eldest brother when the father is not alive and if he is alive, he should retain two
shares with himself.
310
Under the present Dayabhaga Law, each coparcener has, a certain definite share
in the joint property of which he is the absolute owner.
311
The rule stands as: each
branch takes per stripes and as regards every other branch, the members take per
capita.
Further, on the death of a coparcener who leave a male issue, his property share
will passes on to this issue. In case, he leaves no male issue, the share shall be taken
over by the devisee or assignee.
To make the allotment of shares more clear, let us take an example:
Here, on the demise of A, his sons should ideally distribute equally. The allotted
shares for B, C and E are 1/3
rd
(per stripes). However, E is dead; therefore, F and G
distribute their fathers share amongst themselves i.e. 1/6
th
(per capita). But because C
is alive and thus D is not entitled to any share in fathers lifetime.
309
P. V. Kane, History of Dharmasastra, Vol. III, 3
rd
ed., p. 623.
310
Id at p. 625.
311
Durga Nath v. Chintamoni, (1904) 31 Cal 214.
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Reunion:
The text of Dayabhaga says: a man who being once separated from his father,
brother, or paternal uncle again dwells through affection with them (or any one of
them) is said to be re-united with them (or him).
312
It can be noted that, in Dayabhaga,
a re-union is possible only with a father, brother and paternal uncle.
313
Mitakshara vis-a-vis Dayabhaga:
One unyielding debate since ages is which of the two SchoolsMitakshara or
Dayabhaga is more equitable in the light of partition. This section analyses the merits
and downsides of one School over the other.
The myriad questions thus posed before us are does Mitakshara system not give
better rights to males or does it protect the financially weaker members of the family?
Does it discriminate against women? Whether Mitakshara coparcenary system should
be retained or discontinued? Does retention of the system help the agricultural activities
of the family or will it be detrimental to the business or agriculture?
314
We observe four
basic differences and all other distinguishing factors are subordinate to there three
prime differences.
First, Mitakshara, one of the two schools of Hindu Law prevails in a large part of the
country. In Mitakshara Law, on birth, the son acquires a right and interest in the family
property. However under Dayabhaga system the sons do not have any right in the
lifetime of the father and their right arises only after his death.
Secondly, there is no such thing in terms of coparcenary under the Dayabhaga
system as in the Mitakshara and the members who can claim share on partition are
only tenants-in-common.
315
312
Dayabhaga Chapter 12, as quoted in P. V. Kane, History of Dharmasastra, Vol. V, Part II, 3
rd
ed. p.
1303.
313
Abhai Churn Janav v. Mangal Jana, (1892) 19 Cal 634, 638; Tarachand Ghose v. Pudum Lochun
Ghose, 5 WR 249; Ramhari Sarma v. Trihiram Sarma, 7 Beng LR 336; Akshay Chandra v. Haridas,
(1908) 35 Cal 721.
314
Lalit Sethi REFORMING PROPERTY RIGHTS OF WOMEN, http://pib.nic.in/feature/fe1099/
f1210992.html (20th May, 2007).
315
Tapan Dass v. Sosti Dass, 90 CWN 1018.
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Thirdly, it is true to state that the Mitakshara coparcenary is gender discriminatory
and does not include daughters in the system. This is not so in case of Dayabhaga for
a reason that even females can offer pindas in the Shraddha ceremony and hence have
a share equal as other coparceners on partition.
316
Fourthly, the Dayabhaga Law of partition necessarily relates to the segregation of
property as there can be no severance of status as such.
The present law and the relevance of Dayabhaga system:
As it has been discussed in the previous pages that laws under the prevailing Schools
were first copious and incoherent and secondly, they were discriminatory towards women.
To address the drawbacks suffered by the Hindu Law on grounds of property and to
remove the disparities and disabilities suffered by Hindu women Pandit Jawaharlal
Nehru, the then Prime Minister of India expressed his unequivocal commitment to carry
out reforms.
317
As a consequence, despite the resistance of the orthodox section of the Hindus, the
Hindu Succession Act, 1956
318
was enacted and came into force on 17
th
June, 1956.
Besides being applicable to all the Hindus including Buddhists, Jains and Sikhs it lays
down a uniform and comprehensive system of inheritance and applies to those governed
both by the Mitakshara and Dayabahaga Schools and also to those in South India
governed by Murumakkattayam, Aliyasantana, Nambudri and other systems of Hindu
Law.
Note that, though this law relates to intestate succession, yet it considerably altered
the meaning of coparcenaryship in India which was the basis of joint property partition.
Many changes were brought about giving women greater rights, yet in Section 6 of the
Act Mitakshara Coparcenary was retained.
319
316
Ram Dulari v. Batul Bibi, 1976 All 135.
317
Reba Som, Jawaharlal Nehru and the Hindu Code: A Victory of Symbol over Substance?, Modern Modern Modern Modern Modern
Asian Studies Asian Studies Asian Studies Asian Studies Asian Studies Vol. 28, No. 1 (Feb., 1994), pp. 165-194. (Available at Stable URL:http://links.jstor.org/
sici?sici=0026749X% 28199402%2928%3A1%3C165 %3AJNATHC%3E2.0.CO%3B2-%23) (last
visited on 23
rd
August, 2007).
318
Hereinafter referred to as the Act.
319
LAW COMMISSION OF INDIA 174
TH
REPORT ON Property Rights of Women: Proposed Reforms
under the Hindu Law, May, 2000, http://www.lawcommissionofindia.nic.in/kerala.htm.
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300
In effect, Section 6 of the Hindu Succession Act gave recognition to Mitakshara
Coparcenary and also Section 4 of the Act gave overriding application to the provisions
of the Act and laid down that in respect of any of the matters dealt with in the Act all
existing laws whether in the shape of enactment or otherwise which are inconsistent
with the Act are repealed. Any other law in force immediately before the commencement
of this Act ceased to apply to Hindus in so far as it is inconsistent with any of the
provisions contained in the Act. It is therefore, clear that the provisions of Dayabhaga
Law will cease to apply, in so far as they are inconsistent with the provisions of the
Hindu Succession Act.
320
This means, that Section 6 is applicable to Dayabhaga system.
At the very outset, it is interesting to note that Hindu Succession Act could be said
to be inspired by the lesser prevalent law on partition: Dayabhaga though Mitakshara
was much in vogue all throughout India because of the very reason that for the first time
recognised on a uniform basis equal rights for men and women in property matters.
321
The right to survivorship was restricted and in the case of a female relative or a male
who claimed through the female relative, an interest in the coparcenary property of the
intestate would now devolve upon his heirs though succession.
322
This is precisely the
rule recognised by Dayabhaga philosophy, wherein the guiding principle was succession
not survivorship.
Also, it must be noted that Act distinguished between separate property and joint
family property. The separate property of a (non-matrilineal) Hindu male dying intestate
(that is without leaving a will) devolves, in the first instance, equally on his Class-I heirs,
namely, son, daughter, widow and mother (plus specified heirs of predeceased children).
If previously governed by Dayabhaga, this rule applied also to joint family property.
But, if previously governed by Mitakshara (which covers most of India), a different rule
applied. Sons, as coparceners in the joint family property additionally had a direct birth
right to an independent share; while female heirs (e.g. daughter, widow, and mother)
had claims only in the deceaseds notional portion.
323
320
Sundari v. Laxmi, AIR 1980 SC 198.
321
K. D. Shah, CAN A FEMALE MEMBER BECOME A KARTA HUF?, http://www.lexsite.com/services/
network/caa/contro27.shtml (12th June, 2007).
322
Kirti Singh, OPINION ABOUT MATTERS OF INHERITENCE, The Independent, Editorial, http://
www.independent-bangladesh.com/news/dec/22/22122005ed.htm (23rd May, 2007).
323
BINA AGARWAL , INDIA-HINDU SUCCESSION (Amendment) ACT 2005 Addresses Gender
Inequalities, http://www.un-instraw.org/revista/hypermail/alltickers/fr/0195.html (12th June, 2007).
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301
Despite Dayabhaga system not being recognised in the Hindu Codified Law on
inheritance and partition it is remarkable to notice the Hindu Succession (Amendment)
Act, 2005 to be proactive in its content drawing largely from the Dayabhaga viewpoint.
324
To analyse this stance let us first look into the changes brought about by the Amendment.
The old institution of joint Hindu family was crumbling fast under pressures of
modern economic development and conditions. The changed social milieu is adversely
affecting the joint family system.
325
This was affectively realized by the law makers of the
day and changes were proposed by the 2004 Bill based on the recommendations in
the 174
th
Report of the Law Commission of India, on Property Rights of Women:
Proposed Reform under the Hindu Law.
326
Drawing the inspiration from the various
State Amendments to this effect like in Andhra Pradesh, Tamil Nadu, Maharashtra
(which is the only one to apply retrospectively), Kerala
327
, and Karnataka
328
the Lok
Sabha members overwhelmingly supported the Hindu Succession (Amendment) Bill,
2004, that was moved by Law Minister H R Bhardwaj, which was passed in the Upper
House to pass it through a voice vote.
329
Amendments relating to the Subject:
First, Section 6 as substituted by the Amendment Act recognises same right to a
daughter as that of a coparcener by birth, as if she had been a son. Even if she
predeceased her father, her children would be entitled to the share of their mother. She
324
Jaswant Singh Sidhu, EQUAL RIGHTS FOR WOMEN, http://www.freeindiamedia.com/women/
24_july1_06.html (25th May, 2007).
325
Id.
326
Ranjith Attokaran, MY ESSAYS AND VIEWS ON LAW IN GENERAL AND INDIAN LAW IN PARTICULAR
THE Hindu Succession (Amendment) Bill, 2004, http://indianlawyer.blogspot.com/2005/09/hindu-
succession-amendment-bill-2004.html (12th June. 2007).
327
Accordingly the Kerala Government, by the amendment dated 01/12/1976, has abolished the joint
hindu family; The Kerala Joint Hindu Family System (Abolition) Act, 1975 (Act 30 of 1976).
328
Selvakumar, Division of the joint Hindu family property, Deccan Herald, Friday, October 14, 2005
http://www.deccanherald.com/Archives/oct142005/realty1643320051013.asp (23rd May, 2007).
See the Hindu Succession (Maharashtra Amendment) Act, 1994 (Act 40 of 1994); the Hindu
Succession (Andhra Pradesh Amendment) Act, 1986 (Act 13 of 1986); the Hindu Succession (Tamil
Nadu Amendment) Act, 1989 (Act 1 of 1990); and the Hindu Succession (Karnataka Amendment)
Act, 1994 (Act 23 of 1994).
329
RS cl ears bi l l gi vi ng women equal ri ght to property, Deccan Heral d, Wednesday,
August 17, 2005, http://www.deccanheral d.com/Archi ves/aug172005
national1456182005816.asp (21st May, 2007).
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302
has the right to make out a will in respect of her share in joint family property like any
other male member.
Secondly, she will also have a right to demand partition, a right which has been
recognised in the context of Andhra Pradesh Amendment in Sai Reddy v. S. Narayana
Reddy
330
. She can ask for partition even when her father is alive just as a son unless
there has already been a registered partition or succession has already taken place
before 20
th
December 2004, which is the cut-off date for application of new law.
331
This
was a right given to females under Dayabhaga system only, and it found recognition in
Amendment Act, 2005.
Thirdly, another positive change the Bill brings about is the deletion of Section 23
of the Hindu Succession Act, which states that a daughter cannot ask for her share in
dwelling house if male heirs are still residing in it. This Section previously restricted her
right to reside in the inherited residence, unless she is a widow or has been separated
from or deserted by her husband. Again, borrowing from Dayabhaga School and also
catering to the need of the hour, the legislators deleted Section 23.
Fourthly, Section 24 of the Hindu Succession Act, which restricts certain classes of
widows from inheriting property - like a widow of predeceased sons who has remarried,
has also been deleted. Dayabhaga system placed no restriction upon such females to
inherit even the coparcenary property.
Lastly, the Act is also amended the list of Class-I of the Schedule in the Hindu
Succession Act, giving the predeceased daughters heirs the same rights as were earlier
given to the predeceased sons heirs.
332
A long road ahead: What does the Amendment lack?
The Amended Act stops short of giving complete equality and the amendments are
not comprehensive enough. To begin with, first, the Mitakshara Joint Family System is in
itself is hierarchical while if the inspiration was truly drawn from Dayabhaga system
such defects would never have cropped up.
330
(1991) 3CC 647.
331
Constitution should abolish caste, November 1005, http://www.themronline.com/200511m1.html
(29th May, 2007).
332
Kirti Singh, OPINION ABOUT MATTERS OF INHERITENCE, The Independent, Editorial, http://
www.independent-bangladesh.com/news/dec/22/22122005ed.htm (last visited on 19th June,
2007).
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Secondly, the Amendment Act leaves untouched a major source of inequality: rights
in agricultural land.
333
Especially with regard to rural India to ensure effective economic
security for widows in India it is necessary to ensure their command over property which
is the most significant form of property is arable land.
334
This however, was also a
defect in the Dayabhaga Law.
Thirdly, the amendment favours some women over others. On the positive side, the
amendments will increase the shares of daughters who are unmarried when the
amendments come into effect and in the long run increase the shares of all daughters.
It will also give daughters direct rights in some property which the father cannot will
away. But the amendments will decrease the shares of other Class-I female heirs, such
as the mans widow and mother, since the coparcenary share of the deceased male
from whom they inherit will decline. Therefore, this time the amendment creates problem
not against the other sex but with the same sex and their share of property.
Finally, an amendment of the law can only be successful if daughters ask for and
get their share in the parental property. At present, women are routinely coerced into
relinquishing their shares to maintain peace in the family and because they are worried
of souring relationships with their natal family. It is important that women effectively
demand their share as a matter of right as the women in Bengal governed by Dayabhaga
Law previously did.
The study on the subject of Dayabhaga School of Partition, can be conveniently
concluded at the point that the treatise of Dayabhaga though lesser prevalent vis--vis
Mitakshara is certainly a more equitable law, both for men and women and also amongst
themselves. Even under Sastric law, the incorporation of womens share in the property
and the right of the father being supreme without arbitrary meddling of the sons are just
two of the features to highlight the reasonableness of the system. Also observe that the
333
Malli, a Rajasthani widow when asked about her condition after the death of her husband and her
rights over his agricultural land she made an interesting but true remark: My bangles are broken
my days of shame are gone. I have one small son, one calf, one field. A calf to feed, a son to
nurture. But the land, baiji, this half acre of earth to feed me, to rest my head.; Bina Agarwal,
Widows versus Daughters or Widows as Daughters? Property, Land, and Economic Security in Rural
India, http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=69398 (12
th
June, 2007).
334
Bi na Agarwal , The Indi an Express 23/12/2004, A BILL OF HER OWN?, http://
www.indiarightsonline.com/Sabrang/gender.nsf/9ad8c95d52b7d568e5256abc00320f4c/
1af5e769678d41b3e5256f74004275d3?OpenDocument (30
th
June, 2007).
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Hindu Succession Act and its proactive provisions are guided by the same line of thought.
However, due to prominence of Mitakshara system the coparcenary under it has been
retained under the Section 6 of the Hindu Succession Act which is also applicable to
Dayabhaga system. There are however substantial changes made to the nature of
coparcenary retained under Section 6 which is much similar to Dayabhaga Law.
Further, what the Hindu Succession Act has progressively done is that it has abolished
the ancient disqualifications known to Dayabhaga School like the blind, leprous, and
deaf-and dumb which was previously nowhere done or thought of.
335
As we saw the 2005 Amendment Act, that while the amendments reduce inequality
between sons and daughters on some counts, they will increase inequality between
daughters and other women on the same counts. In this sense, the amendments are
flawed. The most democratic step would be to abolish joint family property, as in Kerala.
If such measures are met with, it is not a far cry to see the law of partition in India in all
communities irrespective of the State legislations is more comprehensible and impartial.
There are often allegations raised as to the powers given to the father under
Dayabhaga system. Under Dayabhaga Law the father has sole rights over all ancestral
property, whether immovable property such as land, or property such as livestock and
household effects. He could divide this property during his lifetime, allotting it according
to his will and all such powers were considered arbitrary.
336
However, the researcher
disagrees with such an argument that under the Hindu Jurisprudence much weight age
has been accorded to fathers supreme authority and it is only for the benefit for the
family that the authority is exercised.
337
335
J. Duncan M. Derrett, THE HINDU SUCCESSION ACT, 1956: AN EXPERIMENT IN SOCIAL
LEGISLATION, The American Journal of Comparative Law, Vol. 8, No. 4. (Autumn, 1959), pp. 485-
501. (Available at Stable URL: http://links.jstor.org/sici?sici=0002919X%28195923%298%
3A4%3C485%3ATHSA1A%3E2.0.CO%3B2-K) (last visited 17
th
September, 2007).
336
Marvin Davis, THE POLITICS OF FAMILY LIFE IN RURAL WEST BENGAL, Ethnology, Vol. 15, No. 2.
(Apr., 1976), pp. 189-200. (Available at Stable URL:http://links.jstor.org/sici?sici=0014-
1828%28197604%2915%3A2%3C189%3ATPOFLI%3E2.0.CO%3B2-4). (last visited on 17
th
September, 2007).
337
George Rankin, HINDU LAW TO-DAY, Journal of Comparative Legislation and International Law,
3rd Ser., Vol. 27, No. 3/4. (1945), pp.1-17. (Available at Stable URL:http://links.jstor.org /
sici?sici=1479-5949%281945 %293%3A27%3A3%2F4 %3C1%3AHLT%3E2.0.CO%3B2-O) (last
visited on 5
th
July, 2007).
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338
Dayabhaga, V1.i. 44-50; Alan Gledhill, THE INFLUENCE OF COMMON LAW AND EQUITY ON
HINDU LAW SINCE 1800, The International and Comparative Law Quarterly, Vol. 3, No. 4. (Oct.,
1954), pp. 576-603. (Avai l abl e at Stabl e URL: http://
links.jstor.orgsici?sici=00205893%28195410%293%3A4%3C576%3ATIOCLA%3E2.0.CO%3B2-
7) (last visited 16
th
September, 2007).
English scholars during the British rule, when Dayabhaga was much in vogue in
Bengal regarded Dayabhaga system as based on the principles of Equity and they often
took the example of that Dayabhaga was more favourable to self-acquisitions of a
coparcener which could not be regarded as joint family property subject to partition
merely because the family had supplied him with food and other necessaries.
338
Such was the legal scholarship enjoyed by Dayabhaga system of partition which is
much renowned also in the west and hold importance even till date. Even though the
system is now much altered by the Section 6 of the Hindu Succession (Amendment) Act,
2005, yet, the inspiration of the proactive and gender neutral amendments to the
property laws of Hindus are the derivations from Dayabhaga School.
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CHAPTER - VII
NOTIONAL PARTITION
Introduction:
Since the beginning of Hinduism, the Hindus had lived together as
families consisting of a male common ancestor, his male descendants,
their sons and their unmarried daughters and widows i.e. they have
been living together as a Hindu Joint Family. Anthropologists and
sociologists still do not agree whether the joint family evolved out of
despotic patriarchal family or the democratic village community. One
thing is certain; the joint family is a unique contribution if Hindu
jurisprudence that is unparalleled in any modern or ancient system of
law. A Hindu may not escape a joint family, as there is a presumption
that every Hindu family is a joint family unless otherwise proven. The
Hindu Joint Family may or may not be linked with a piece of ancestral
property.
339
It is not a necessity that the members of a joint family share
joint ancestral property but it is, at the same time, very rare indeed that
they do not hold any joint property i.e. they will have at least those
utensils and implements used in the day to day running of the
household.
340
The coparcenary on the other hand is a narrow body of
people within the joint family consisting of the father, son, sons son and
sons sons son. Like joint family, to begin with it consists of father and
his three male lineal descendants; in its continuance the existence of the
father son relationship is not necessary. The rule is that so long as one
is not removed by more than four degrees from the last holder of the
property, howsoever one is removed from the original holder, one will
be a coparcener.
339
Chander v. Godhani, 1981 Pat. 43; K.O. Reddy v. Venkata Narayana Reddy, 1984 S.C.117; Pran
v. Rejendrra, 1986 Del. 121.
340
Paras Diwan and Peeyushi Diwan, MODERN HINDU LAW, 12
th
ed., 1998, p. 236.
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What must be noted in the definition of a joint family as well as the coparcenary is
the fact that it is completely patriarchal and woman has been treated as subservient,
and dependent on male support. Prior to the Hindu Succession Act, 1956 Sastric and
customary laws that varied from region to region governed Hindus and sometimes it
varied in the same region on a caste basis resulting in diversity in the law. Consequently
in matters of succession also, there were different Schools, like Dayabhaga in Bengal
and the adjoining areas; Mayukha in Bombay, Konkan and Gujarat and
Marumakkattayam or Nambudri in Kerala and Mitakshara in other parts of India with
slight variations The multiplicity of succession laws in India, diverse in their nature,
owing to their varied origin made the property laws even mere complex. Earlier, woman
in a joint Hindu family, consisting both of man and woman, had a right to sustenance,
but the control and ownership of property did not vest in her. In a patrilineal system,
like Mitakshara School of Hindu Law, a woman, was not given a birth right in the family
property like a son.
This construction of partition and succession of property was substantially changed
by the Hindu Succession (Amendment) Act, 2005. Section 6 of this Act now creates a
legal fiction in order for the daughter of a joint family to be treated on par with the son
with respect to coparcenary rights. Explanation-I of Section 6 enacts a provision for of
notional / deemed partition i.e. creates another legal fiction and invests the female
Hindu with rights to notional partition.
This part will discuss the concept of notional partition prior to and after the passing
of the Hindu Succession (Amendment) Act, 2005. It will first explain the basic concept
of notional partition and the need for it and it will then discuss the effect of the Amendment
Act of 2005 on notional partition with special reference to women. This part will also
be dependent on a number of case laws in order to explain the current position with
respect to notional partition in Hindu joint families.
The Concept of Notional Partition:
The concept of notional partition has been laid down in Explanation-I of Section 6
of the Hindu Succession Act. This concept may be explained with the aid of two tools;
the wording of the Explanation-I itself and the Supreme Court judgment in Gurupada v.
Heerabai
341
.
341
1978 SC 1239.
NOTIONAL PARTITION
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The language of the Explanation must be kept in mind while giving effect to the
proviso in this Section. The following underlined phrases are of significance in the
language itself
342
:
For the purpose of this Section the interest of a Hindu Mitakshara
Coparcener shall be deemed to be the share in the property that would
have been allotted to him, if a partition of the property had taken place
immediately before his death irrespective of whether he was entitled to claim
partition or not
343
.
The language clarifies that to a very limited extent of separating the share of the
deceased coparcener, the fiction of a notional partition is to be applied. It has to be
done for the purpose of deceased coparceners of ascertaining the interest of the deceased
coparcener. It is stated in the Explanation that the interest of the deceased coparcener
has to be ascertained on notional partition by applying a fiction irrespective of whether
he was entitled to claim partition or not. Outwardly it would appear strange if one says
that a coparcener was not entitled to a partition of the family property, especially in a
Mitakshara joint family as is specified by the Explanation. This may in fact happen in
some specific exceptions; a full bench of the Bombay High Court interpreted Mitakshara
Law to reach the conclusion that a son is not entitled to ask for partition in the lifetime
of his father without his consent when the father is not separated from his own father,
brothers and nephews.
344
As a matter of custom in Punjab a son cannot enforce partition
against his father during his fathers lifetime.
The wording in the Explanation gave rise to a series of conflicting judgments from
various High Courts especially when the female relative happened to be the wife or the
mother living at the time of the death of the coparcener.
345
While the proviso to the
Section 6 gives the formula for fixing the share of the claimant, Explanation-I gives the
clue for arriving at the share of the deceased. The conflicting judgments basically took
three separate views:
342
Ranganath Mishra, (rev.), Mayne, TREATISE ON HINDU LAW AND USAGE, 15
th
ed. 2003, p.
1133.
343
Explanation I to Section 6 of the Hindu Succession Act, 1956.
344
Apaji v. Ramachandra (1892) 16 Bom 29 FB.
345
AIR 1964 Bom 263 at 264.
NOTIONAL PARTITION
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(i) The First View: Shirambai v. Kalagonda
346
:
This decision took the view that under notional partition, shares need be allotted
only to coparceners, and not to female members. The bench stated:
The interest of a Hindu Mitakshara coparcener available for division under
this section will be such share in the property as would be allotted to him if
a partition of the property had taken place immediately before his death
amongst the coparceners according the rule of Hindu Law providing a share
to mother and maintenance and marriage expenses must be treated as
abrogated in view of section 4 which gives the Act overriding
effect.
347
The Court was of the opinion that the rule of Hindu Law which provides a share to
the mother and maintenance to and marriage expenses to the daughter stood abrogated
in view of Section 4 of the Act. Therefore, the view was expressed that Section 4 of the
Act overrides this concept and provides that the female members are not be included
as claimant in the coparcenary property of the deceased coparcener. The same view
was endorsed in Kanahaya Lal v. Jamma
348
(ii) The Second View: Literal construction
The basic assumption of this view are:(a) notional partition is envisaged only for
the purpose of the ascertainment of the successional shares; (b) notional partition
envisages taking into account the share of female heirs, marriage expenses of unmarried
daughters, funeral expenses etc.; (c) nothing contained in the Hindu Succession Act,
1956 shall be deemed to affect the uncodified Hindu Law of partition
The above view is indifferent to the anomaly that may arise, namely that while we
reduce the successional share of the widow on the assumption that she would be
entitled to a share on actual partition, she might not be receiving such share at all. For
example, if the deceased died leaving behind a widow and a son, according to it under
the notional partition the share of the deceased is 1/3.The successional share of the
widow will be 1/6. The hardship it entails to the widow, that is, while her share is
reduced on the assumption that she will be entitled to a share on partition, but that
such partition is unlikely as there is one coparcener, is ignored.
346
Shirambai v. Kalagonda , AIR 1964 Bom 263.
347
Ibid at 264
348
Kanahaya Lal v. Jamna, ILR (1972) 2 Delhi 64.
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(iii) The Third View: Rangubai v. Laxman Lalji
349
The third view that prevailed had been taken in Rangubais case, overruling the
decision in Shiramabais case. Under this, in the illustration taken earlier, the widow
would be entitled to her share under the notional partition as well as her share under
the succession, together making her share 1/2 = (1/3+1/6). In other words, it converts
the notional partition into an actual partition, an effect not envisaged by the legislature.
It now removes the anomaly in a forthright way.
A Full Bench of the Bombay High Court in Sushilabai v. Narayanrao
350
reconsidered
this aspect as to whether the scope of the fiction is as large as was held in Rangubais
case. The Full Bench adhered to the view of Rangubais case on the narrow ground that
where there are only two coparceners and one of them died, then if any person other
than the coparcener is entitled to a share as a result of severance of the deceased
coparcener, the share of such other person will become fixed. Thus, the Court did not
answer the question as to what would happen if there were more than two coparceners
in the notional partition. Therefore, this judgment, though rational, has only a limited
scope of application, as it does not deal with more complex situations that may routinely
arise.
The Supreme Court confirmed and upheld the view of the Bombay High Court in
the case of Gurupada v. Heerabai,
351
which was a landmark judgment with reference
to notional partition. The judgment is discussed in the subsequent pages in order to
better facilitate the understanding of the concept of notional partition.
The Supreme Court on Notional Partition: Gurupada v. Heerabai -
This case was a landmark judgment of the Supreme Court with reference to notional
partition and Section 6 of the Hindu Succession Act, 1956. The Court supported the
view taken in the Rangabais case and further elaborated on the same in order to
supply a decision, which can be used in complex case with more than two surviving
relatives, male or female. The following is the case and bring out the salient features in
the judgment that make it easier to understand the concept being discussed.
349
Rangubai v. Laxman Lalji, AIR 1966 Bom 169.
350
Sushilabai v. Narayanrao, AIR 1975 Bom 257 FB.
351
Gurupada v. Heerabai, 1987 SC 1239.
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Facts:
The following is the family tree of the deceased coparcener:
Khandappa died and was survived by his wife Hirabai, who is the plaintiff, two sons
Gurupad and Shivapad, who are defendants 1 and 2 respectively, and three daughters,
defendants 3 to 5.
Hirabai filed a special civil suit for partition and separate possession of a 7/24
th
share in her husbands property on the basis that these properties belonged to the joint
family consisting of her husband, herself and their two sons. If a partition were to take
place during Khandappas lifetime between himself and his two sons, the plaintiff would
have got a 1/4
th
share in the joint family properties, the other three getting a 1/4
th
share
each. Khandappas 1/4
th
share would devolve upon his death on six sharers: the plaintiff
and her five children, each having a 1/24
th
share therein. Adding 1/4
th
and 1/24
th
, the
plaintiff claims a 7/24
th
share in the joint family properties. The suit was only contested
by defendant 1 (Gurupada) while the others admitted the claim.
Judgment:
The Trial Court rejected defendant 1s case that the properties were Khandappas
self-acquisitions and that he had partitioned them during his lifetime. Upon that finding
the plaintiff became indisputably entitled to a share in the joint family properties but,
following the judgment of the Bombay High Court in the Shiramabai case the Trial
Judge limited that share to 1/24
th
, refusing to add 1/4
th
and 1/24
th
together. The
Bombay High Court dismissed defendant 1s appeal by holding that the suit properties
belonged to the joint family, that there was no prior partition and that the plaintiff is
entitled to a 7/24
th
share.
The Bombay High Court based its decision on the case of the Rangubais case
where another Division Bench of the Bombay High Court had already reconsidered
and dissented from the earlier Division Bench judgment in Shiramabai Bhimgonda.
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The bench felt that Shiramabais case was not fully argued and was incorrectly decided
and that on a true view of law, the widows share must be ascertained by adding the
share to which she is entitled at a notional partition during her husbands lifetime and
the share which she would get in her husbands interest upon his death. In the judgment
under appeal, the High Court based itself on the judgment in Rangubai Laljis case
endorsing indirectly the view that Shiramabais case was incorrectly decided.
The Supreme Court on appeal held the view of the High Court that the suit properties
belonged to the joint family and that there was no prior partition is well founded and is
not seriously disputed, the decision of this appeal rests on the interpretation of
Explanation-1 to Section 6 of the Hindu Succession Act, 1956.
The Court held that before considering the implications of Explanation 1, it is
necessary to remember that what Section 6 deals with is devolution of the interest that
a male Hindu has in a Mitakshara coparcenary property at the time of his death. Since
Explanation-1 is intended to be explanatory of the provisions contained in the Section,
what the Explanation provides has to be co-related to the subject matter, which the
section itself deals with. In the instant case the plaintiffs suit, based as it is on the
provisions of Section 6, is essentially a claim to obtain a share in the interest that her
husband had at the time of his death in the coparcenary property. Two things become
necessary to determine for the purpose of giving relief to the plaintiff: One, her share in
her husbands share and two, her husbands own share in the coparcenary property.
The proviso to Section 6 contains the formula for fixing the share of the claimant while
Explanation-1 contains a formula for deducing the share of the deceased.
The Court also said that they saw no justification for limiting the plaintiffs share to
1/24
th
by ignoring the 1/4
th
share which she would have obtained had there been a
partition during her husbands lifetime between him and his two sons. The bench stated:
We think that in overlooking that 1/4
th
share, one unwittingly permits ones
imagination to boggle under the oppression of the reality that there was in
fact no partition between the plaintiff s husband and his sons. Whether a
partition had actually taken place between the plaintiffs husband and his
sons is beside the point for the purposes of Explanation 1. That Explanation
compels the assumption of a fiction that in fact a partition of the property
had taken place, the point of time of the partition being the one immediately
before the death of the person in whose property the heirs claim a share
352
.
352
Gurupada v. Hirabai AIR 1978 SC 1239, at 1242.
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The Court also stated that that the fiction created by Explanation-1 has to be given
its due and full effect as the fiction created by Section 18-A(9)(b) of the Indian Income-
tax Act, 1922, was given by the Supreme Court in Commissioner of Income-tax, Delhi
v. S. Teja Singh
353
. It was held in that case that the fiction that the failure to send an
estimate of tax on income under Section 18(a) (3) is to be deemed to be a failure to
send a return, necessarily involves the fiction that a notice had been a failure to send a
return, necessarily involves the fiction that a notice had been issued to the assessee
under Section 22 and that he had failed to comply with it. In an important aspect, this
case is stronger in the matter of working out the fiction because in Teja Singhs case, a
missing step had to be supplied which was not provided for by Section 18A(9)(b),
namely, the issuance of a notice under Section 22 and the failure to comply with that
notice. Section 18A(9)(b) stopped at creating the fiction that when a person fails to
send an estimate of tax on his income under Section 18A(3) he shall be deemed to
have failed to furnish a return of his income. The Section did not provide further that in
the circumstances therein stated, a notice under Section 22 shall be deemed to have
been issued and the notice shall be deemed not to have been complied with. These
latter assumptions in regard to the issuance of the notice under Section 22 and its non-
compliance had to be made for the purpose of giving due and full effect to the fiction
created by Section 18A(9)(b). In the Gurupad case it is not necessary, for the purposes
of working out the fiction, to assume and supply a missing link which is really what was
meant by Lord Asquith in his famous passage in East End Dwellings Co. Ltd. v. Finsbury
Borough Council
354
: :: ::
If you are bidden to treat an imaginary state of affairs as real, you, must
also imagine as real the consequences and incidents which, if the putative
state of affairs had in fact existed, must inevitably have flowed from or
accompanied it; and if the statue says that you must imagine a certain state
of affairs, it cannot be interpreted to mean that having done so, you must
cause or permit your imagination to boggle when it comes to the inevitable
corollaries of the state of affairs.
The Court was also very happy to find that the view which that it had taken had
also been taken by the Bombay High Court in Rangubai Lalji v. Laxman Lalji
355
in which
353
AIR 1959 SC 352.
354
1952 A.C 109 (132).
355
AIR 1966 Bom 169.
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Patel, J., very fairly, produced his own earlier judgment to the contrary in Shiramabai
Bhimgonda v. Kalgonda
356
as incorrect. Subsequently, a Full Bench of that High Court
in Sushilabai Ramchandra Kulkarni v. Narayanrao Gopalrao Deshpande
357
, the Gujarat
High Court in Vidyaben v. Jagdischandra N. Bhatt
358
and the High Court of Orissa in
Ananda v. Haribandhu
359
had taken the same view. In recent times, the Bombay High
Court has applied the same concept and interpretation in the case of Subhash S/o
Eknathrao Khandekar and Bharat S/o Eknathrao Khandekar v. Sow. Prayagabai W/o
Manohar Biradar
360
by the Gujarat High Court in Surajram Hiralal Bachkaniwala-Late
Taragauri P. Bachkaniwala v. Controller of Estate Duty
361
and the Supreme Court in
Anar Devi v. Parmeshwari Devi
362
. . . . . In all three cases the ratio of Gurupads case has
been upheld while taking into account the changes bought about by the Act of 2005.
Hence, according to the Supreme Court decision in the Gurupadas case as well
as the subsequent concurring decisions from various High Courts, we find that the legal
fiction of notional partition must be taken into account when there is a partition
subsequent to the death of a coparcener. The claimants in this partition, according to
the Gurupads case, as to receive their share from the notional partition as well as their
interests in the deceaseds property or share in the notional partition.
The Hindu Succession (Amendment) Act, 2005 and Notional Partition:
On 9
th
September 2005, The Hindu Succession (Amendment) Act 2005 came into
force. The Act today is viewed as a progressive legislation in personal laws. The aim of
the Act was to end the gender discrimination in personal laws and give equal rights to
women in succession. It has amended Section 6 to include the right of a daughter to be
a coparcener by birth and abolished the doctrine of survivorship. It has also removed
Section 23 from the existing Act. Section 23 dealt with the devolution of a dwelling
house of a male amongst his heirs. The words displaced by him was amended to
displaced by him or her to include the womens right to property.
356
AIR 1964 Bom 263.
357
AIR 1975 Bom 257 FB.
358
AIR 1974 Guj 23.
359
AIR 1967 Ori 194.
360
MANU/MH/0611/2007.
361
MANU/GJ/1248/2006.
362
AIR 2006 SC 3332.
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The Act of 2005 is accompanied by the following implications:
The daughter of a coparcener shall by birth become a coparcener in her own
right in the same manner as the son;
The daughter has the same rights in the coparcenary property as she would have
had if she had been a son;
The daughter shall be subject to the same liability in the said coparcenary property
as that of a son; and any reference to a Hindu Mitakshara coparceners shall be
deemed to include a reference to a daughter of a coparcener;
The daughter is allotted the same share as is allotted to a son;
The share of the pre-deceased son or a pre-deceased daughter shall be allotted
to the surviving child of such pre-deceased son or of such pre-deceased daughter;
The share of the pre-deceased child of a pre-deceased son or of a pre-deceased
daughter shall be allotted to the child of such pre-deceased child of the pre-
deceased son or a pre-deceased daughter.
The Amendment cleared by the Union Cabinet proposes to make the daughter
also a coparcener in the joint family property. It is pertinent to point out that some
States like Karnataka, Andhra Pradesh and Maharashtra have already passed laws
making the daughter a member (coparcener) of the joint family while other States like
Kerala have completely abolished the joint family system. This could be done as Laws
of Succession fall in Entry5 of the concurrent list of the VIII Schedule to the Constitution.
It is relevant to note that the Hindu Code Bill, as originally framed by the B.N. Rao
committee and piloted by Dr. B.R.Ambedkar, had recommended abolishing the
Mitakshara coparcenary with its concept of survivorship and the sons right by birth in a
joint family system and substitute it with a principle of inheritance by succession.
It can be clearly inferred from the aforementioned implications that the Act of 2005
will affect the concept of notional partition as envisage by Explanation-I of Section 6 of
the Act.
The following chart will help us to define the difference in the concept of notional
partition before and after the amendment:
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Prior to the amendment, according to the concept of notional partition, the wife,
Son 1 and Son 2 would each receive + 1/20 = 6/20 of the property while the
daughters would receive 1/20 each of the property if there was a partition after the
death of the father. Total property = 6/20 + 6/20 + 6/20 + 1/20 + 1/20 = 1
363
.
After the amendment of 2005, the daughters would now get the same coparcenary
rights as the sons and that would apply to notional partition as well. Therefore, they
would each get 1/6 + (1/6 1/5) = 1/6 +1/30 = 6/30. Therefore, we find that the
new amendment entitles the daughter to an extra share in the coparcenary property
and brings her at par with the son by way of a legal fiction.
In the cases of Subhash S/o Eknathrao Khandekar and Bharat S/o Eknathrao
Khandekar v. Sow. Prayagabai W/o Manohar Biradar
364
, , , , , Surajram Hiralal Bachkaniwala-
Late Taragauri P. Bachkaniwala v. Controller of Estate Duty
365
and Anar Devi v.
Parmeshwari Devi
366
the Gurupad ratio has been enforced with due allowance for the
Act of 2005. The result of this interpretation is the same as the mentioned example.
Therefore, the Hindu Succession (Amendment) 2005 has affected the concept of
notional partition in a significant manner. It must be noted that there have been no
specific legislation with regard to notional partition, and therefore, the Act of 2005
leaves certain question about notional partition unanswered, but at the same time, the
Act of 2005 clears up certain doubts that have been raised with regard to notional
partition in prior cases.
363
The equation was followed in Gurupad v. Hirabai, AIR 1978 SC 1239: Raj Rani v. Chief Settlement
Commissioner, Delhi, AIR 1984 SC 1234.
364
MANU/MH/0611/2007.
365
MANU/GJ/1248/2006.
366
AIR 2006 SC 3332.
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Since the Act has declared the rights of a daughter in a Hindu Mitakshara coparcener
joint family, it has made clear the position of only a daughter with reference to partition.
The confusion that had arisen in cases prior to the Gurupad case and had been resolved
to a great extent by Gurupad has been restarted to a certain extent by the Act of 2005.
The Act, yet removing the proviso and leaving Explanation-I to Section 6 unchanged
has merely left to the Courts with a tool to determine the share of the deceased coparcener
but has taken away the tool that was used to divide this share. Further, by restricting
itself only to the daughter of a coparcener and excluding from its ambit other female
members of the family, the amended Section undoes to a great extent its objective of
gender equality.
The main consequence of the Act of 2005, as has been mentioned in the prior
pages, is to bring about gender equality with respect to property rights in a Hindu Joint
Family. As a result of this gender equality, the daughter of a deceased coparcener may
now claim an extra share in the property of the coparcener in addition to the claim she
has as a Class-I heir. Therefore, the main consequence of this Act with respect to
notional partition is the fact that the daughter now receives an extra portion in the share
of the deceased coparcener of a Mitakshara joint family and as a logical consequence,
the son as well as the widow of the coparcener now receives a reduced share in the
property. This is disadvantageous to the widow as well as other female members of the
joint family.
In the absence of a clear legislation, the ratio passed in Gurupads must continue
to be followed while dealing with female members of a joint family on the death of a
male Hindu coparcener. The concept of notional partition is still relevant after the
Amendment Act of 2005. Section 6 the Act does affect Explanation I of the Act but it
does not make it irrelevant. The concept is still socially as well as economically relevant
for Hindu joint families and will continue to decide the manner in which a partition will
take place in a Mitakshara Hindu Joint Family after the death of a coparcener.
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CHAPTER - VIII
SUCCESSION
Introduction:
Hindu Joint Family is a unique contribution to the Hindu jurisprudence
which might come to an end in one generation by partition but comes
into existence again automatically. Thus every individual is believed to
be a member of a Hindu Joint Family until contrary is proved. Now one
very important aspect, though not a pre-requisite, is Hindu Joint Family
property. Since property is important succession of the property becomes
topic of discussion. Talking about succession of property in the past,
which means succession according to the Sastric laws, there were two
Schools Mitakshara and Dayabhaga through which succession of property
was governed. Both Dayabhaga and Mitakshara have established two
separate systems of inheritance. Two fundamental differences are: - one
relates to the ruling cannon in determining the order of succession; in
Mitakshara, its propinquity, in Dayabhaga its religious efficacy. Another
radical difference is that in Dayabhaga there is only one course of
succession whether the family is divided or undivided and whether the
property is ancestral or self-acquired. In Mitakshara, property which is
joint will follow one, and property which is self-acquired will follow another
course of succession. The former is based on right by birth and
unobstructed inheritance while the latter is called obstructed inheritance.
For Mitakshara School it is three class of heirs a) Gotraja sapinda; b)
Samanodakas; c) Bandhus.
The order of succession was that the first class succeeded before the
second and the second succeeded before the third. The property of a
deceased Hindu governed by Dayabhaga Law passes by succession,
including his share his in undivided property. The Class of heirs are: i)
sapindas, ii) sakulyas and iii) Samanodakas.
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367
U.P.D. Kesari, MODERN HINDU LAW, 1st ed.1996, pp.1-2.
368
(1864) 9 MIA 539, 607-610.
369
Ranganath Misra (ed.), Mayne, TREATISE ON HINDU LAW & USAGE , 15
th
ed. 2003, p. 915.
370
Satyajeet Desai (ed.), Mulla, PRINCIPLES OF HINDU LAW, Vol. I, 18
th
ed. 2001, p. 112.
Then the legislatures on 17
th
June 1956 passed a legislation called the Hindu
Succession Act, 1956 which amended and codified the law relating to succession
among Hindus. Through this Act inheritance laws became uniform.
Sections 6 and 8 of the Act mentioned the devolution of property by the Class-I and
Class-II heirs and then agnates and cognates. Thus, these two Sections lay down the
law regarding the succession of property of a male Hindu dying intestate. Similarly,
Sections 15 and 16 lay down the rule of succession when a female Hindu dies intestate.
A very recent change was made in the law of succession in 2005. The Hindu
Succession (Amendment) Act, 2005 has given the status of a coparcener to a daughter
of a coparcener, to be more specific; daughter of a coparcener is also a coparcener
and thus, can ask for partition. Thus, this is a drastic change in the Hindu Law which
has great socio-legal consequences.
Law of Succession under Mitakshara School of Hindu Law:
The Mitakshara School of Hindu Law prevails in whole of India except in Bengal
and its adjoining parts where Dayabhaga system prevails. The Mitakshara system
recgonizes two modes of devolution of property, namely devolution by survivorship and
devolution by succession. The rule of survivorship governs the devolution of the
coparcenary property while the rule of succession governs the devolution of self acquired
property.
367
The text of Yajanavalka written by Vijananeswara which forms the basis of the
Mitakshara School lays down no rules of inheritance as regards the separate property
of one who dies as an undivided member of a family, but it was finally settled by the
Judicial Committee in Katma Nachiar v. Raja of Shivganga
368
that the course of succession
stated in the Mitakshara should be extended to the separate property of a man when he
dies leaving no male issue
369
. The devolution of property in accordance with the rules
of succession took place in three cases
370
: 1) if the deceased while being a joint
coparcener dies leaving behind self-acquired property, such property goes to his heirs
by succession; 2) if the deceased was at the time of his death, the sole surviving member
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of a coparcenary, the whole of his property including the coparcenary property would
pass to his heirs by succession; and 3) if the deceased was separate at the time of his
death from other coparceners, the whole of his property, however acquired would pass
to his heirs by succession. The order of succession to the property of the deceased, who
had separated but had reunited at the time of his death is different from the order of
succession applicable in the above three cases. The order of succession in Mitakshara
School was based on the rule of consanguinity or proximity of blood relationship. There
were three classes of heirs recognized by Mitakshara School namely gotraja sapindas,
samanodakas and bandhus. The first class succeeded before the second and the second
class succeeded before the third. The gotraja sapindas consisted of relationships which
extended to seven degrees inclusive of the deceased. In total there were 57 gotraja
sapindas. The samanodakas of a person included all his agnates from the 8
th
to the
14
th
degree. The bandhus on the other hand are all cognates i.e. persons connected
with the deceased through a female or females.
The law in all States except in Madras and Bombay was that women in general
were excluded from inheritance to the estate of a man who died without a male issue.
The only recognized exceptions were the widow, the daughter, the mother, the fathers
mother, the fathers fathers mother, and also other female lineal ancestors above the
last. By the Hindu Law of Inheritance (Amendment) Act, 1929, a sons daughter, a
daughters daughter and sister had been admitted as heirs under the Mitakshara Law
and placed immediately after a fathers father and before a fathers brother. The Hindu
Womens Rights to Property Act, 1937 put three female heirs - the widow, the widow of
a predeceased son and the widow of a predeceased son of a predeceased son on the
same level as the male issue of the last owner along with the male issue or in default of
them.
However, women succeeding as heirs whether to a male or to a female, took only
a limited estate in the property inherited by them, except in certain cases in the Bombay
State i.e. she was entitled only to the income of the property, she could neither make a
gift of the property nor could she sell it, unless there was a legal necessity, either for the
gift or for the sale and on her death the property would not pass to her heirs, but to the
next heir of her husband. For the purpose of succession to stridhana, under Mitakshara
School stridhana was divided into two classes: shulka which was gratuity for which a
girl was given in marriage and the remaining kind of stridhana constituted the other
class. Shulka devolved in the following order - uterine brother, father, fathers heirs.
Stridhana of the other kind devolved in the following order - unmarried daughter,
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married daughter who is unprovided for, married daughter who is provided for, daughters
daughter, daughters son, sons sons son.
371
The Smriti law says that persons on the basis of certain disabilities can be excluded
from partition as well as inheritance. Under Mitakshara School there were several grounds
which disqualified an heir from inheritance. Unchastity excluded a widow from inheritance
but once the husbands estate was vested in her, it could not be divested because of her
subsequent unchastity. Change of religion or loss of caste was once grounds for exclusion
from inheritance but however the Caste Disabilities Removal Act, 1850 brought about
a change in this. Persons suffering from physical disabilities like congenital blindness,
deafness, dumbness were disqualified to inherit, those who were lame by birth or impotent
or suffering from want of any organs or were victims of incurable disease like leprosy
were also excluded from inheritance, however the Caste Disabilities Removal Act removed
all this and laid down only congenital lunacy or idiocy as grounds for disqualifications.
In Kenchava v. Girimallappa
372
, the Privy Council decided that even apart from
Hindu Law, principles of justice, equity and good conscience exclude a murderer from
succeeding to the estate of the murdered person, thus a murderer was excluded from
inheritance.
An important principle with regard to disqualification was that property once vested
in a person could not be divested by a subsequent disability.
Law of Succession under Dayabhaga School of Hindu Law:
The Dayabhaga School of Hindu Law recognizes only one mode of devolution of
property i.e. by succession. There is no concept of survivorship in Dayabhaga system
because there is no right by birth. Thus, the rules of inheritance are the same whether
the family is divided or undivided and whether the property is joint or separate.
Unlike the Mitakshara School where the order of succession is based upon proximity
of blood relationship, in Dayabhaga School the order of succession is based upon
religious efficacy i.e. the capacity to confer spiritual benefit on the deceased owner.
However, in most cases spiritual efficacy and propinquity run on the same lines as a
result of which the heirs under the two schools are the same, however all persons who
are heirs under Mitakshara Law are not heirs under Dayabhaga Law.
371
S.A. Desai (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. I, 20
th
ed. 2005, p. 222.
372
(1924) 51 IA 368.
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The basis for determining the order of succession based on religious efficacy was
the parvana sradha ceremony in which three kinds of offerings were made -pinda,
pinda-lepas, and liabations of water. On the basis of these three offerings there were
three classes of heirs -sapindas, sakulyas, and samanodakas. The sapindas succeeded
before the sakulyas who succeeded before the samanodakas.
The only females recognized as heirs in Dayabhaga School were the widow, daughter,
mother, fathers mother and fathers fathers mother. For the purpose of succession to
stridhana, stridhana was classified into four classes -shulka, yautaka, anwadheyka,
ayatauka. The order of succession to each class was different.
373
The grounds which disqualify an heir from inheritance under Dayabhaga School
are the same as under Mitakshara School except that under Dayabhaga School the
condition of unchastity applies not only to the widow but also to other female heirs,
such as daughter and mother to the same extent as it does to a widow.
Difference between Mitakshara and Dayabhaga Schools:
Mitakshara divides heirs into three classes a) Sapindas; b) Sakalyas; c) Samandakas.
Sapindas of the Bengal School are sapindas of Mitakshara School within four degrees
only, plus bandhus of Mitakshara School but not all bandhus. In Dayabhaga Law no
bandhus or cognates can inherit while there is a gotraja sapinda or samanodaka in
existence
374
. Cognates come within agnates and they inherit before sakulyas and
samanodakas. Cognatic heirs under Mitakshara are limited in number compared to
those under Dayabhaga Law. Every person who is a cognatic heir under Dayabhaga
Law is also an heir under Mitakshara Law. Sapinda as per Mitakshara means a person
connected through pinda or body. As per Dayabhaga it means same pinda or funeral
cake presented to manes of ancestors at the Parvana Sraddha ceremony
375
.
Law of Succession under the Hindu Succession Act, 1956:
The object of passing the Act was to amend and codify the law relating to succession.
The Act brought about fundamental and drastic changes in the law of succession. The
most important change brought about was the evolution of a fairly uniform system of
373
G.M.Divekar, HINDU LAW- A CRITICAL COMMENTARY, 2
nd
ed., 2002, p. 122.
374
S.A. Desai (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. I, 20
th
ed. 2005, p.213.
375
Ibid.
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law in the country among Hindus. Distinctions based on Dayabhaga and Mitakshara
Schools were put to an end. However, the old framework has been retained to a great
extent e.g. Mitakshara bias of preference of males over females and of agnates over
cognates has been considerably whittled down, but as we go to remote heirs the rule of
agnatic preferences reasserts itself.
376
The main object of the Act was to provide equitable rights to women as heirs and to
provide an honourable social status and reasonable security to women.
377
The important
changes brought about by the Act and the various rules of succession laid down by the
Act have been further discussed.
Order of Succession:
The order of succession under the Act is based on the Mitakshara principle of
propinquity i.e. it is based on proximity of relationship. The Dayabhaga principle of
religious efficacy has been abrogated. The three classes of heirs recognized by the
Mitakshara School - gotraja sapindas, samanodakas, bandhus and the three classes of
heirs recognized by the dayabhaga i.e sapindas, sakulyas and bandhus ceased to exist
in case of devolution taking place after the enforcement of the Act.
378
The heirs to the
estate of a Hindu male under the Act are divided into four classes: 1) heirs specified in
Class-I of the Schedule; 2) heirs specified in Class-II of the Schedule; and 3) Agnates 4)
Cognates. The property first devolves on the twelve preferential heirs mentioned in
Class-I of the Schedule to the Act, secondly on the heirs mentioned in Class-II of the
Schedule, thirdly on the agnates and lastly on cognates.
379
As per Section 9 of the Act Class-I heirs succeed simultaneously and to the exclusion
of all others i.e. they form one group of heirs and succeed as a body and heirs of Class-
I are excluded so long there is a single heir mentioned in Class-I.
380
Section 10 lays down four rules as per which distribution of property amongst heirs
in Class-I of the Schedule takes place:
376
Paras Diwan et.al, MODERN HINDU LAW, 12
th
ed.1999, p.341.
377
R.B.Sethi, THE HINDU SUCCESSION ACT, 1
st
ed.1957, p.iii.
378
Satyajeet Desai (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. II, 17
th
ed.1998, p.225.
379
380
U. P. D. Kesari, MODERN HINDU LAW, 2
nd
ed.1998, p.235.
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1) The intestates widow takes one share. If there is more than one widow all of them
take one share and divide it amongst them equally. However, if the deceased had
taken a second widow after the Hindu Marriage Act, 1955 had come into force,
the marriage would be void and such a widow will not be entitled to get any
share.
381
2) The surviving sons and daughters and the mother of the intestate take one share
each.
3) Heirs of predeceased son or predeceased daughter take per stripes not per capita
i.e. share in the property will devolve branch-wise and not per individual.
4) It is laid down that in case of devolution of property on heirs of predeceased son
or predeceased daughter the doctrine of representation applies i.e. heirs in each
branch would take the share which their parents would have taken had he/she
been alive.
Sections 9 and 11 of the Act lay down the rules as per which the property of the
intestate is devolved on the Class-II heirs. Heirs in Class-II are divided into 9 groups
and each group is mentioned in a separate entry in the Schedule. According to Section
9, the heirs of the 1
st
entry are preferred to heirs in the 2
nd
entry and heirs in the 2
nd
entry
are preferred to the heirs in the 3
rd
entry and so on. As per Section 11 the property of an
intestate shall be divided between the heirs specified in any one entry and each heir in
the entry gets an equal share. Thus heirs, which are listed in an entry which is above the
entries in which other heirs are listed, inherit equally the entire estate of the intestate. In
Satya Charan v. Urmila
382
the Supreme Court reiterated that no distinction is to be
made between a brother and sister listed in the second entry of Class-II heirs and the
two succeed simultaneously. The rule of preference and the mode of the distribution of
property among agnates and cognates are the same, with the overriding rule that
agnates are always preferred over cognates. The rules of preference in case of agnates
and cognates are as follows as per Section 12 of the Act
1) the heirs who have fewer or no degrees of ascent from the deceased will be
preferred.
2) Where the number of degrees of ascent from the deceased is the same or none
the heir who has fewer or no degrees of descent will be preferred.
381
Paras Diwan, MODERN HINDU LAW, 13
th
ed.2000. p.248.
382
AIR 1970 SC 1714.
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3) In case any of the two or more heirs cannot be said to be nearer to the propositus
even after applying the two rules then such heirs take simultaneously.
If a Hindu male has no heirs as mentioned in the four classes of heirs as per the Act
then as per Section 29 of the Act, the property of such a person devolves upon the
government.
Devolution of Coparcenary Interest of a Mitakshara Coparcener dying
intestate:
Section 6 of the Act has brought about drastic and fundamental changes in the law
of succession. The reason for bringing about such an enactment which gave an effect
to such a rule was that it was felt that radical reform was required in Mitakshara Law of
coparcenary and that where one coparcener died it was necessary that not only in case
of his separate property but also in respect of his undivided interest in the coparcenary
property, there should be equal distribution of that share between his male and female
heirs and particularly between his sons and daughters. In order to bring about these
favourable changes the whole concept of Mitakshara coparcenary could have been
done away with but there was a strong sentiment in favour of the retention of Mitakshara
coparcenary even in attenuated form and the rules laid down under Section 6 are a
compromise in consequence of this.
Section 6 of the Act provides that the coparcenary interest would devolve upon the
coparceners as per the rule of survivorship provided that the deceased has left no
female relative specified in Class-I of the Schedule or a male relative specified in that
class who claims, through such a female relative. If the deceased has such an heir left
then the property devolves by testamentary or intestate succession as the case may be
but not according to the rule of survivorship.
383
The interest of the deceased in the coparcenary is determined by assuming that a
partition had taken place just before the deceaseds death and the interest of the
deceased is the interest that he would have gotten had the actual partition taken place
in his life time. An important question that however arises is whether this notional
partition is to have the effect not merely of bringing about devolution of succession of
the interest of the deceased coparcener in a Mitakshara family but goes further and
results in a partition among all the members who would be entitled to a share in the
383
Thus Section 6 is read with Section 8 or Section 30 of The Hindu Succession Act, 1956.
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coparcenary property when a regular partition takes place. This important issue was
addressed in the case of Gurupad v. Hirabai
384.
In this particular case the deceased was
a member of the Mitakshara coparcenary. He died leaving behind his widow, two sons
and three daughters. His widow subsequently asked for partition and claimed her share
to be 7/24. The 7/24 was the sum total of the 1/4
th
that she would get at the time of the
notional partition that would take place between the deceased and the others, and the
1/24
th
that she would get out of the interest of her husband. The Supreme Court said
that though she was not capable of asking for partition, if a partition took place her
share would be 7/24. The decision of the Supreme Court does not say that the fiction
and notional partition must bring about total disruption of the joint family or that the
coparcenary ceases to exist even if the deceased was survived by coparceners. With
regard to this it would be appropriate to quote the observation of the Supreme Court in
the subsequent case of State of Maharashtra v. Narayan Rao
385
: Gurupads case has
to be treated as authority (only) for the position that when a female member who
inherits an interest in joint family property under Section 6 of the Act files a suit for
partition expressing her willingness to go out of the family she would be entitled to both
the interest she has inherited and the share which would have been notionally allotted
to her as stated in Explanation 1 to Section 6 of the Act
Section 6 of the Hindu Succession Act reads- When a male Hindu dies after the
commencement of this Act, having at the time of his death an interest in a Mitakshara
coparcenary property, his interest in the property shall devolve by survivorship upon the
surviving members of the coparcenary and not according to the provisions of this Act :
Section 6 of the Hindu Succession Act basically denies the female heirs coparcenary
rights in Mitakshara Hindu Joint Family. It confers the coparcenary rights to only the
male heirs. This has invited a lot of controversy as it ostensibly discriminates against the
women. In fact the major amendment which the draft bill envisages is in this Section.
The present Section of the Act has grave implications for the female relatives of the
deceased male such as daughters. For example if property rights are devolved according
to the this law then at the death of a male Hindu who has left two sons and a daughter
along with a widow, the sons and widow will get 1/4
th
of the deceaseds interest in the
coparcenary. Besides they will also get 1/4
th
of his share (i.e. the share of their father).
However, the daughter will get the rights only according to succession. This will actually
384
AIR 1978 SC 1239.
385
AIR 1985 SC 716
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amount to a mere 1/16
th
of the total property. Thus, we find that the daughter is clearly
in a disadvantageous position.
Other than this the major disadvantage of not being given the coparcenary status
is that they cannot demand partition at their will. Every adult coparcener is entitled to
enforce a partition of the coparcenary property.
386
However since the women are not
awarded the coparcenary status in Mitakshara joint family they cannot demand partition
until the male coparceners demand partition.
According to section 6, if the deceased had left him surviving a female relative
specified in Class-I of the Schedule or a male relative, specified in that class who claims
through such female relative, the interest of the deceased in Mitakshara coparcenary
property shall devolve by testamentary or intestate succession as the case may be,
under this Act and not by survivorship.
This means that when a coparcener dies, his interest in Mitakshara coparcenary
would devolve not by survivorship to his kin, as the case in the past, but would instead
pass on to the female relative in Class-I of the Schedule or any male claiming through
such female, any such interest, by succession.
But how do we know what portion the deceased coparcener would have got? It is
here that the concept of notional partition comes in. The same is explained in Explanation
1 of Section 6 which reads: - For the purposes of this Section, the interest of a Hindu
Mitakshara coparcener shall be deemed to be the share in the property that would
have been allotted to him if a partition of the property had taken place immediately
before his death irrespective of whether he was entitled to claim partition or not.
The notional partition is not a real partition. On the death of the coparcener there
is no automatic partition under Hindu Law but, it seems, in reference to notional partition,
severance of status is deemed to have taken place from the date of death of the
coparcener who has left an heir.
387
However there is no direct severance of status and
it is merely a fiction. Notional partition has two facets. First, all rules relating to partition
as laid down in the Hindu Law apply to notional partition. If it were not so, the provision
would not work. Secondly, notional partition not being real partition, no severance of
status takes place among the surviving members of the Hindu Undivided Family, and
therefore, no one elses interest except that of the deceased coparcener gets severed.
386
S.A. Desai (rev.), Mulla, Principles of Hindu law, 18
th
ed., 2004, p.418.
387
Shive Honda v. Director, AIR 1992 Bom 72; Diwan, P., Family Law 6
th
ed. 2001, p. 417.
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It may be emphasized that the exercise of notional partition is undertaken to separate
the share of the deceased coparcener as only by doing so, the proviso be made to
work.
388
Cases related to Section 6 of the Hindu Succession Act, 1956:
Gurupad v. Hirabai
389
is the most important case as regard the concept of notional
partition and section 6 of the Hindu Succession Act go. The area of law was explored
before this in much detail by the Bombay High Court in two contradictory decisions
before the present case, those being Shriramabai v. Kalgonda
390
and Rangubai Lalji v.
Laxman Lalji
391
. In the former case, the widow of a Mitakshara coparcener was given
only a marginal share in the property and the two shares that ought to have been
clubbed were not. In the latter case, the learned judge felt that the former case was not
fully argued and was incorrectly decided and that on a true view of law, the widows
share must be ascertained by adding the share to which she is entitled at a notional
partition during her husbands lifetime and the share which she would get in her husbands
interest upon his death. An interesting point here is that both cases were adjudged by
the same judge, Justice Patel. The view of the latter Court would be upheld in the
present case.
Facts: -
The facts of the case are that the plaintiff (Hirabai) was married to Kandappa S.
Magdum. He died on June 27
th
1960 leaving behind him his wife, two sons and
three daughters. On November 6
th
of 1962 Hirabai filed a suit for partition and
separate possession of a 7/24
th
share in two houses, land, two shops and movables
on the basis that these properties belonged to the joint family consisting of her
husband,, herself and her two sons. Her rationale for this was that if a partition
would have occurred during the lifetime of her husband, she would have got a 1/
4
th
share, along with her husband, and their two sons. Kandappas 1/4
th
share
would devolve upon his death upon his wife, 2 sons and three daughters, totaling
to 6. Thus, each would get 1/6
th
of one 1/4
th
= 1/24
th
of the property. Now
388
Diwan, P., Law of Joint Family System, Debts, Gifts, Maintenance and Pre-emption 1
st
ed. 1993.
p. 252.
389
AIR 1976 SC 1239
390
AIR 1964 Bom 263.
391
AIR 1966 Bom 169.
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Hirabai argued that by virtue of S.6 her share would be 1/24
th
+1/6
th
= 7/24
th
of
the total property.
One of her sons, Gurupad, disputed the claim saying that the properties were not
joint family properties but Kandappas self acquisitions and that on the date of his
death there was no joint family in existence since the father had effected a partition of
the suit properties between himself and his two sons, one in 1952 and the other in
1955. There was therefore no question of a fresh partition.
Judgment: -
The trial Court rejected the defendants case that the properties were Kandappas
self acquisitions and that he had partitioned them during his lifetime. However, following
the decision of the Bombay High Court in Shrirambai v. Kalagonda the judge limited
the share to 1/24
th
and refused to add the 1/4
th
to it.
A division bench of the High Court dismissed the defendants appeal and allowed
the plaintiff a 7/24
th
share, holding that the suit property did indeed belong to the joint
family. An appeal by special leave was subsequently filed by the Gurupad.
The Supreme Court upheld the Decision of the High Court and allowed Hirabai to
claim her 7/24
th
share in the property. In doing so, the Honble Court scrupulously tied
to interpret what Section 6 said. Giving the judgment, Chandrachud, C.J. said that the
interpretation of Explanation 1 was the subject matter of acute controversy between the
parties. He said that two things were necessary to determine if relief should be given to
the plaintiff or not. Firstly, her share in her husbands share and secondly, her husbands
own share. He went on to say that the proviso to Section 6 contained the formula for
fixing the share of the claimant while Explanation 1 contained a formula for deducing
the share of the deceased.
Though she was not herself a coparcener entitled to demand partition, yet if a
partition were to take place between her husband and his sons, she would be entitled
to a share equal to that of a son. In such a partition there would thus be 4 shares, those
of the husband and wife and those of the two sons. The 1/24
th
of her share would
devolve upon her by virtue of her being mentioned in the Class-I of the schedule as
mentioned in Section 8.
The Court saw no justification for limiting the share of the plaintiff to 1/24
th
and
ignoring the 1/4
th
share that she would have got by virtue of there being an actual
partition. It held that whether a partition had actually taken place between the plaintiff s
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husband and her sons was besides the point for the purpose of Explanation 1. That
would compel the assumption of a fiction that in fact a partition of the property had
taken place, the point of time of the partition being the one immediately before the
death of the person in whose property the heirs claim a share. The appeal of Gurupad
was hence dismissed.
Case Analysis: -
In a short but very detailed decision, the Supreme Court analyzed the entire concept
of notional partition and came up with a landmark judgment. The Court interpreted the
Section in the best possible way and the same has been used as precedent in several
successive cases. Thus, in the words of Chandrachud, C.J., what is required to be
assumed is that a partition had in fact taken place between the deceased and his
coparceners before his death. That assumption once made, is irrevocable. The decision
heightens the status of most women and deserves all the credit it can get for that. But
the question of the property of the daughters is left unanswered, which may be said to
be the biggest flaw of the Act. However, with the Report of the 17
th
Law Commission of
India, and the subsequent Hindu Succession Amendment Bill of 2004 seek to rectify
this flaw in the law which has for ages discriminated against women.
State of Maharashtra v. Narayan Rao
A very important point of law was laid down in State of Maharashtra v. . . . . Narayan
Rao
392
as regards the status of the family after the death of a Mitakshara coparcener
and the subsequent notional partition.
Facts: -
The facts of the case deal with a family that owned extensive lands totaling up to
about 305 acres. The Karta died after the Hindu Succession Act came into force
and his interest devolved upon the 3 surviving members, his wife, mother and son
in equal shares. After the Land Ceiling Act came into force the question of
determination of surplus land came into question and it was subsequently held by
the respondents that on the death of the Karta, he surviving members of the
family ceased to hold the family property as members of a family and each of
them was hence entitled to be allowed to retain one unit of the ceiling area under
the Act.
392
AIR 1985 SC 716.
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Judgment: -
The Bombay High Court held that each of them entitled to a separate share, even
though they may be living together at the time.
The Supreme Court on the other hand reversed the decision saying that when a
female member who inherits an interest in the joint family property under Section 6 of
the Hindu Succession Act files a suit for partition expressing her willingness to go out of
the family she would be entitled to get both the interest she has inherited and the share
which would have been notionally allotted to her, as stated in Section 6 of the Hindu
Succession Act. But she does not cease to be a member of the family on the death of a
male member of the family whose interest in the family property devolves on her without
her volition to separate herself from the family. It is no doubt true that the right of a
female heir to the interest inherited by her in the family property gets fixed on the death
of a male member under Section 6 of the Act but she cannot be treated as having
ceased to be a member of the family without her volition. Thus, the Court held that
notional partition cannot be taken to be a real partition and there is subsequently no
severance of status.
Section 8 of Hindu Succession Act, 1956:
Section 8 deals with the general rules of succession in case of males. According to
this Section the property of a male Hindu dying intestate shall devolve accordingly-
Firstly upon the Class-I heirs
393
, if there is no Class-I heir than on relatives specified in
Class-II
394
, if there is no heir of any of the two classes, than upon the agnates
393
Class I heirs would include, Son, Daughter, Widow, Mother, Son of a predeceased son, daughter of
a predeceased son, daughter of a predeceased daughter, widow of a predeceased son, son of a
predeceased son, daughter of a predeceased son of a predeceased son, widow of a predeceased
son of a predeceased son.
394
I. Father
II (1) Sons daughters son, (2) sons daughters daughter,(3) brother, (4) sister.
III (1) Daughters sons son (2) daughters sons daughter, (3) daughters daughters son (4) daughters
daughters daughter.
IV. (1) Brothers son (2) sisters son, (3) brothers daughter, (4) sisters daughter.
V. Fathers father; fathers mother.
VI. Fathers widow; brothers widow.
VII. Fathers brother; fathers sister.
VIII. Mothers father; mothers mother.
IX. Mothers brother, mothers sister
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of the deceased. Lastly, if there is no agnate
395
than upon the cognates
396
of the
deceased.
In Savitri v. Devaki
397
the Court held that- where a partition of a joint family property
takes place and a separate share is given to the mother, then in the case of death of
one of the sons the mother would be entitled to have a share in the separate property
of her son. Fact that earlier when the partition took place she was given a share would
not place any bar.
In Yudhistir v. Ashok Kumar
398
it was held that a Hindu male governed by Mitakshara
under Section 8 of the Act, the property that devolves on him will be his separate
property. Such a property would never amount to join family property in his hands as
against his son.
It must be noted at this point that a son, as mentioned in the Schedule, or a sons
son, or a sons sons son, has to be a legitimate son. This was laid down in the case of
Daddo v. . . . . Raghunath
399
by the Bombay High Court, where the Court held that an
illegitimate son is not entitled to claim any share in the property of his father. A son of
a voidable marriage is, however, a full fledged legitimate son and will inherit the property
of his father, but the son of an annulled voidable marriage will inherit the property of
the father alone and of no other relation.
400
Before the Act was passed however, in the
cases of Kamalammal v. . . . . Vishwanathaswami
401
as well as the Supreme Court decision
of Gur Narain v. . . . . Gur Tahal Das
402
, it was held that the illegitimate son takes half of
what he would have taken had he been a legitimate son. It is the submission of the
author that the view taken in these two cases is the right one simply because an illegitimate
son should not be made to suffer for not apparent fault of his own. The Court must take
into account the benefit of that illegitimate child because the very reason for the
395
One person is said to be agnate of another if they are related by blood or adoption wholly through
males.
396
One person is said to be cognate of another if the two are related by blood or adoption but not
wholly through males.
397
AIR 1982 Kar. 67.
398
AIR 1987 SC 558.
399
AIR 1979 Bom 176.
400
Diwan, P., Family Law, 6
th
ed. 2001 p. 420.
401
46 Mad 167 (PC).
402
AIR 1952 SC 225.
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procreation of the illegitimate child would be the fault of none other than the father and
the child who is not at fault, should subsequently not be made to suffer. It is in this light
that the judiciary must take some affirmative action in bringing up the status of these
illegitimate children.
In as much as the share of the daughters and more specifically, the illegitimate
daughters goes, the law was finally settled in 1994 with the Supreme Court judgment in
Vithal Bhai v. . . . . Bhana Bai
403
where it was specifically held that an illegitimate daughter
may not inherit.
The people whose names are mentioned in Class-II of the Schedule are next entitled
to a share. The Class-II heirs are divided into nine categories. The rule, as laid down in
the case of Satya v. . . . . Urmila
404
is that an heir in an earlier category excludes heirs in later
categories. All heirs in one category take simultaneously between themselves. Just
because numerals have been used in some categories, such as in categories II, III, and
IV, it does not indicate any preference of heirs in an earlier numeral over the heirs in a
later numeral. Thus, in category II, where sons daughters son bears numeral 1, it does
not mean that sons daughter in numeral 2 will be excluded.
Agnates and Cognates will inherit the property if there is no Class-I or Class-II heir
to be found. In so far as the agnates and the cognates go, the agnates will be preferred
as a general rule to the cognates, howsoever remote an agnate may be.
Thus, from the cases that have been studied above, Section 8, which is otherwise a
Section without too much conflict and one which is very clear may be summarized as
follows.
When a male Hindu having an interest in the Mitakshara coparcenary property
dies, his property would first devolve by succession upon any of the relatives mentioned
in Class-I of the Schedule. If there is no Class-I heir, then the property would devolve
upon the relatives mentioned in Class-II, in the specified order. In the rare case that
there is no Class-I and Class-II heir, the property will go to the agnates and if there are
no agnates then to the cognates. If there are still no heirs then the Government will
come in and escheat the property.
403
AIR 1994 SC 481.
404
AIR 1970 SC 1714.
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Act of 2005:
Hindu succession laws have long been viewed as a set of gender discriminatory
laws. However, not much effort has been put in going into the genesis of such laws.
These laws were formed at that time and according to the prevailing conditions of the
society. Thus, to improve the conditions on the contemporary society the government
introduced, the Hindu Succession (Amendment) Act, on 9
th
September 2005. The Act
today is viewed as a progressive legislation in personal laws. The aim of the Act was to
end the Gender discrimination in Hindu personal law and give equal rights to women
in succession.
The prevalent Mitakshara Law which governs the succession in Hindu Joint
Family got change substantially now. The first change brought about is that
sub- section (2) of Section 4 which dealt with the non-applicability of the Act.
The statute which was responsible for the prevention of fragmentation of
agricultural holdings or fixation of ceilings or devolution of tenancy rights
has been deleted. Now this Act has more applicability.
Another most important change is that Section 6 has been substituted by a
new Section. According to which now a daughter would be a coparcener
from her birth, and would have the same rights and liabilities as a son. She
will hold the property to which she is entitled as a coparcener. And she is
capable to disposed off the property by either a will or by testamentary
disposition. In Anar Devi v. Parmeshwari Devi
405
the Supreme Court held
that after the death of the original owner, the ancestral property should be
divided between the heirs of the owners. The property was divided among
two daughters and an adopted son.
The further change is that on the death of a Hindu having an interest in
coparcenary property, such property would devolve by either testamentary or
intestate succession as the case may be, and not by survivorship.
The amendment removed the pious obligation of Mitakshara Law. According
to which there is a pious obligation of a son, grandson or great grandson, to
fulfill the debt contracted by his father, grandfather or great grandfather.
Section 23 of Hindu Succession Act has been omitted by the amendment.
This Section dealt with special provisions such as dwelling houses and right
of female heir to seek partition of dwelling house. This Section is omitted
405
AIR 2006 SC 3332.
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because daughters are now coparceners and necessary changes have been
made.
Section 24 of the Act has been deleted. This Act dealt with the disability of a
widow of a predeceased son, the widow of a predeceased son of a
predeceased son or the widow of a brother, to succeed to the property in
case of widows remarriage. The deletion of this Section has removed the
disability and permitting succession to the property to which she is entitled.
Section 30 has been amended by inclusion of a female Hindu, thus
recognizing her right over disposal of property that she is capable of disposing
off.
The schedule in Class-I heirs has been amended by inclusion of son of a
predeceased daughter of a pre-deceased daughter; daughter of a pre-
deceased daughter of a pre-deceased daughter; daughter of a predeceased
son of a pre-deceased daughter and daughter of a pre-deceased daughter
of a pre-deceased son. These all be considered as a Class-I heirs.
Santhosh Kumar v Baby
Facts of the case: -
In this case of Santhosh Kumar v Baby
406
the respondent filed the suit for partition
claiming 1/2 share in the plaint schedule property. According to the plaintiff, the
property belonged to Chellappan Achari, father of the plaintiff and defendants
and the husband of the first defendant. Chellappan Achari died on 29-10-1978.
The plaintiff has 1/6
th
share in the property. She purchased the shares of the other
two defendants. The trial Court held that the plaintiff has 1/6
th
share in the property
and she having purchased 2/6 share of defendants she is entitled to 1/2 share in
the property. The contention that the property was acquired by Chellappan Achari
was accepted by the trial Court.
The plaintiff raised a contention that the house was renovated by her with her
funds. The second defendant, on the other hand, contended that he spent huge
amounts for renovation of the house. The second defendant claimed reservation
of house in his favour. The Trial Court held that, the second defendant renovated
the building by spending his funds and that he is entitled to get reservation of the
406
AIR 2007 Ker 214.
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house. The trial Court took the view that the plaintiff can reside in the room which
is now occupied by her till final decree.
Judgment: -
The second defendant challenged the judgment and decree of the trial Court. The
appellant has raised a contention for the first time in the Second Appeal that in view of
Section 23 of the Hindu Succession Act, the suit is not maintainable since the only son
of Chellappan Achari has not sought partition of the property.
Section 23 was omitted by the Hindu Succession Amendment Act of 2005 (Act 39
of 2005). The question whether the deletion of Section 23 of the Hindu Succession Act
is retroactive, was considered in Narayanan v. Meenakshi
407
it was held that- as the
Section was omitted the personal right of a male heir under Section 23 comes to an
end, the right of the female heir to claim partition cannot be defeated. In other words
a defeasible right of a male heir would get defeated the moment his personal right
ceases. Such personal right of a male heir is taken away by the omission of Section 23
of the Hindu Succession Act, 1956, by the Hindu Succession (Amendment) Act, 2005.
In view of the decision in Narayana v. Meenakshi the question of the appellant that
the plaintiff is not entitled to claim partition and that Section 23 of Hindu Succession
Act is a bar to claim partition, cannot be sustained.
Shri Brij Narain Aggarwal v. Sh. Anup Kumar Goyal
Facts of the case: -
In the case of Shri Brij Narain Aggarwal v. Anup Kumar Goyal
408
, a suit has been
filed by the plaintiff, husband of deceased Mrs. Mithlesh Aggarwal, after coming
into force of the Hindu Succession Act (Amendment Act 2005) whereby Section 6
of the Hindu Succession Act 1956 was amended.
One Mr. Pran Nath Goyal filed a suit for partition in which his sons and daughters
including the wife of the plaintiff were the parties. During the pendency of the suit,
on a joint application filed by the parties, under Section 21 of the Arbitration Act
1940, the entire matter was referred to arbitrator for deciding the question of
407
AIR 2006 Ker 143.
408
http://delhidistrictcourts.nic.in/JUL07/Brij%20Narain%20Vs. %20Anup%20Kumar%20Goyal.pdf
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division of property. The Arbitrator gave an award on 11.2.1989 and the award
was published on 11.12.1989 and wife of the plaintiff Mrs. Mithlesh Aggarwal
was granted 1/36th share in the two immovable properties of the deceased. An
appeal was preferred against the decree. The appeal was dismissed in default.
Thereafter, an Execution Petition was preferred before this Court which was
subsequently transferred to the District Court. The contention of the plaintiff is that
since execution petition was pending and the partition decree passed by the
Court in 1991 has not been given effect to by effecting partition by metes and
bounds, the partition is not complete as the decree has not been implemented.
Plaintiff relied upon Section 6 (5) of Hindu Succession Act as amended.
On the other hand, the contention of the learned Counsel for the defendant is
that since Mrs. Mithlesh Aggarwal died in the year 1998 and her share had
already been determined by a competent Court and a decree has been passed
which became final, no right survived in plaintiff to file a fresh suit even after
amendment of Hindu Succession Act.
Judgment:-
The Court held that the partition had already taken place by a decree of Court in
1991 itself. Mrs. Mithlesh Aggarwal, died in 1998. Mere pendency of the execution
would not give right to the plaintiff, who is husband of Mrs. Mithlesh Aggarwal, to
reopen the partition. The suit is not maintainable under the amended Hindu Succession
Act as claimed by the plaintiff.
Disqualifications:
Under the Act there are three grounds which disqualify an heir from succeeding to
the estate of the deceased namely, disqualification arising from re-marriage,
disqualification arising on account of commission of murder and disqualification arising
from conversion.
Section 24 provides for disqualification of the following heirs by virtue of remarriage:
1) Predeceased sons widow; 2) The widow of a predeceased son of a predeceased
son; 3) The widow of a brother.
The disqualification arises if she has re-married on the date the succession opens,
any subsequent remarriage after the succession has opened will not deprive the widow
of the share which she has already inherited as an heir. Heirs other than the three
mentioned in Section 24 cannot be disqualified by virtue of remarriage. Several cases
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have been decided on the basis of this principle.
409
In Kasturi Devi v. Dy Director of
Consolidation
410
it was held that a widowed mother was entitled to inherit from her son
in spite of the fact that she had remarried.
Section 25 disqualifies a murderer or an abettor of murder from inheriting the
property of the person murdered.
Section 26 disqualifies the converts descendants and the children born to such
descendants to inherit the property of any of their Hindu relatives, but the children or
descendants of such children born after his conversion are not affected by the rule if
they are Hindus at the time when the succession opens.
Other than these three grounds there is no other ground on the basis of which an
heir can be disqualified from inheritance, even disease etc. have been ruled out.
411
Section 27 lays down that if any person is disqualified from inheriting any property
under this Act, it shall devolve as if the person had died before the intestate.
The Progressive facets of the Hindu Succession (Amendment) Act, 2005:
The new amendment incorporated into the Hindu Succession Act has brought the
element of gender equality in to the Act to a large extent which was very much in
demand from the communities governed by the Act. The Hindu Succession (Amendment)
Act, 2005 has turned out to be the cynosure of all eyes as a result of its far-reaching
socio-legal implications. This legislative piece, which confers coparcenary rights to
daughters within a Hindu Joint Family system, is indeed one that is radical and
revolutionary in nature. The Bill, seeking to realize the Constitutional guarantee of
gender equality, was drafted in 2001 by the Law Commission which was then headed
by former Supreme Court judge, Justice B. P. Jeevan Reddy. The Constitution of India
enshrines the principle of gender equality in its Preamble and Parts III, IV and IV-A
pertaining to Fundamental Rights, Fundamental Duties and Directive Principles of the
State Policy respectively. The Constitution not only grants equality to women, but also
empowers the State to adopt measures of positive discrimination in favour of women.
And now as India becomes increasingly aware of the need for equal rights for women,
the government cannot afford to overlook, property rights have a deep impact on the
409
Chando Mahtain v. Khubalal, AIR 1983 Pat.33.
410
(1976) 4 SCC 674.
411
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national economy. The need to dispense with gender justice raises deep political debate
and at times acrimony in legislative forums. This enthused the house to move a bill to
make amendments into the Hindu Succession Act, to secure the rights of women in the
area of property. The aim is to end gender discrimination in Mitakshara coparcenary by
including daughters in the system. Mitakshara is one of the two schools of Hindu Law
but it prevails in a large part of the country. Under this, a son, sons son, sons sons son
have a right by birth to ancestral property or properties in the hands of the father and
their interest is equal to that of the father. The group having this right is termed a
coparcenary. The coparcenary is at present confined to male members of the joint
family. The Hindu Succession (Amendment) Act, 2005 is a landmark piece of legislation.
After 50 years, the Government finally addressed some persisting gender inequalities
in the Hindu Succession Act, which itself was path-breaking. Out of many significant
benefits brought in for women, one of the significant benefit has been to make daughter
as part of coparcenary (right by birth) in Mitakshara joint family property. Earlier the
female heir only had a deceased mans notional portion. With this amendment, both
male and female will get equal rights. In a major blow to patriarchy, centuries-old
customary Hindu Law in the shape of the exclusive male Mitakshara coparcenary has
been breached throughout the country. The preferential right by birth of sons in joint
family property, with the offering of shraddha for the spiritual benefit and solace of
ancestors, has for centuries been considered sacred and inviolate. It has also played a
major role in the blatant preference for sons in Indian society. This amendment, in one
fell swoop, has made the daughter a member of the coparcenary and is a significant
advancement towards gender equality. The significant change of making all daughters
(including married ones) coparceners in joint family property - has been of a great
importance for women, both economically and symbolically. Economically, it can
enhance womens security, by giving them birth rights in property that cannot be willed
away by men. In a male-biased society where wills often disinherit women, this is a
substantial gain. Also, as noted, daughter can become Karta of the joint family.
Symbolically, all this signals that daughters and sons are equally important members of
the parental family. It undermines the notion that after marriage the daughter belongs
only to her husbands family. If her marriage breaks down, she can now return to her
birth home by right, and not on the sufferance of relatives. This will enhance her self-
confidence and social worth and give her greater bargaining power for herself and her
children, in both parental and marital families.
Now under the amendment, daughters will now get a share equal to that of sons at
the time of the notional partition, just before the death of the father, and an equal share
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of the fathers separate share it means there will be an equal distribution of undivided
interests in coparcenary property. However, the position of the mother vis--vis the
coparcenary stays the same. She, not being a member of the coparcenary, will not get
a share at the time of the notional partition. The mother will be entitled to an equal
share with other Class-I heirs only from the separate share of the father computed at
the time of the notional partition. In effect, the actual share of the mother will go down,
as the separate share of the father will be less as the property will now be equally
divided between father, sons and daughters in the notional partition. The Preamble to
the Amending Act indicates the objective as the removal of discrimination against
daughters inherent in Mitakshara coparcenary and thereby eradication of the baneful
system of dowry by positive measures thus ameliorating the condition of women in the
human society. It is necessary to understand that if equality exists only as a phenomenon
outside the awareness and approval of the majority of the people, it cannot be realized
by a section of women socialized in traditions of inequality. Thus, there is need to create
social awareness and to educate people to change their attitude towards the concept
of gender equality. The need of the hour is also to focus attention on changing the
social attitudes in favour of equality for all by enacting a uniform law. Campaigns for
legal literacy; efforts to enhance social awareness of the advantages to the whole
family if women own property; and legal and social aid for women seeking to assert
their rights, are only a few of the many steps needed to fulfill the change incorporated
in the Act.
Therefore, the law of succession under Mitakshara, Dayabhaga and the Hindu
Succession Act, 1956 as well as under the Amendment, 2005 reveals a shift in
perspectives of the various facets of succession from a gender biased one to the gender
neutral one. What we had seen in the Sastric law was a law heavily tilted in favour of
men. The Act has removed several drawbacks which were inherent in the law of succession
as existed under Dayabhaga and Mitakshara Schools of Hindu Law. The Act has been
a major step towards creating gender equality and secularizing the laws as per the
changing needs of the modern society. It is however felt that certain more progressive
steps should have been taken for e.g. with regard to Section 14 of the Act, clarity as to
what is meant by restricted estate under sub-section (2) and to narrow it down to as far
as possible. It is also felt that coparcenary property should not fall within the ambit of
testamentary succession although that would mean not giving men and women absolute
ownership over their property i.e. coparcenary property, thus it is felt that Section 30
should not have been enacted in its present form and the old law under Mitakshara
School of Hindu Law should have been retained that did not allow a coparcener to
dispose of his undivided coparcenary interest by will.
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Succession of Female Hindus Property under the Act:
While the Act defines the interest taken by each of the three female heirs mentioned
in it, it does not say how their interests are to devolve on their demise.
412
The course of
succession would depend upon the question whether the female heir took the estate in
default of male issue or in their presence.
413
On the death of the widow of the last male holder, her estate would revert to his
male issue, if any. On the analogy of the reverter of a share allotted to a mother on
partition, the sons, grandsons, and great-grandsons will succeed as the heir of the
husband.
414
Likewise on the death of the predeceased sons widow, where in default of
her husbands male issue, she has taken the share of a son, her interest will pass to the
male issue of the father-in-law as his nearest heirs and as the persons entitled to the
estate from which her share was taken.
Where the widow of the predeceased takes the share of the grandson only, the Act
necessarily implies a reverter of her interest to her son or grandson or to her husbands
son or grandson. Similarly, the interest taken by the widow of a predeceased son will
revert on her death to her husbands branch, as she is allotted a share out of the
property of that branch. These appear to be the reasonable and probable implications
of the Act, though the language is defective and susceptible of the result that on the
death of the daughter-in-law or grand-daughter-in-law, her interest would pass to the
whole of the male issue and the surviving female heirs. But the intention of the law
makes in this respect appears only to be to convert the inchoate right of a widow which
existed before it to share along with the male issue, into perfect inchoate and enforceable
right.
Whether on the death of any of the female heirs, the other female heir or heirs will
be reversionary heirs entitled to come in before the daughter or the daughters son is
not free from doubt. On the wording of Section 3(3) it would seem that the next heir of
the husband would take the interest of the female heir on her death. Therefore, the
other female heir or heirs would come in before the daughter or daughters son.
415
412
Ranganath Misra (rev.), Mayne, Treatise on Hindu Law & Usage, 15
th
ed.2003, p.1014.
413
Ibid.
414
U.P.D. Kesari, Modern Hindu Law, 2
nd
ed., 1998, p.262.
415
Kamala Bala Bose v. Jiban Krishna, AIR 1946 Cal 461; Ranganath Misra (rev.), Mayne, Treatise on
Hindu Law & Usage, 15
th
ed. 2003, p.1015.
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Where a person died before the Act and his daughters succeeded to his property
and the daughter died after the Act, it was held that further succession should be
governed by the provisions of the Act and the widow of a predeceased son of the last
male holder would be entitled to succeed.
Significance of Section 14
416
Section 14 of the Hindu Succession Act, 1956, subject to certain qualifications,
now confers full and heritable capacity on a female heir in respect of all property
acquired by her whether before or after the commencement of that Act, with the result
that by retrospective operation of that Section she holds the property in her possession
as full owner and not as a limited owner. Male and female heirs are now treated as
equal without any distinction. The restraints and limitations on the powers of a female
heir have ceased to exist even in respect of existing property.
The underscoring of the rights of women to be in equali juria under the constitution
finds concrete shape in the Act of 1956. The Section 14 of the Hindu Succession Act
has applicability to all kind of property whether movable or immovable and the rights
of the Hindu female to the property, which she acquired as a limited estate before the
commencement of this Act, are enlarged. It is immaterial whether acquisition was through
inheritance, devise, gift, partition in lieu of maintenance or its arrears.
417
The Supreme Court in the case of Erramma v. Verupana
418
examined the ambit and
object of this Section and observed Section 14(1) of the Act contemplates that a Hindu
female, who in the absence of this provision, would have been limited owner of the
416
Section 14 of Hindu Succession Act 1956- Property of a female Hindu to be her absolute property-
(1) Any property possessed by a Female Hindu, whether acquired before or after the commencement
of this Act, shall be held by her as full owner thereof and not as a limited owner. Explanation: In this
sub-sec.., property includes both movable and immovable property acquired by a female Hindu
by inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or by
gift from any person, whether a relative or not, before, at or after her marriage, or by her own skill
or exertion, or by purchase or by prescription, or in any other manner whatsoever, and also any such
property held by her as stridhana immediately before the commencement of this Act.
(2) Nothing contained in sub-sec. (1) shall apply to any property acquired by way of gift or under a
will or any other instrument or under a decree or order of a civil court or under an award where the
terms of the gift, will or other instrument or the decree, order or award prescribe a restricted estate
in such property.
417
Acharya Shuklendra, Hindu Law, 1
st
ed. 2002, p. 411.
418
AIR 1966 SC 1879.
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property, will now become full owner of the same by virtue of this Section. The object of
this Section is to abolish the estate called limited estate or widows estate in Hindu
Law. It also makes a Hindu woman full owner of the property with all powers of disposition.
In case of Tulsamma v. Shashareddi
419
, it was debated whether sub-section (1) or
(2) of the Section 14 would apply. The court considered the conflicting opinions of
different High Court and examined as many as forty three decisions of the of various
High courts and the Supreme Court itself and after consideration of these decisions
observed that when a specific property was allotted to the widow in lieu of her claim for
maintenance, the allotment would be in satisfaction of her jus ad reum, i.e. the right to
be maintained out of joint family property was allotted to the widow. Also, where property
was allotted to the widow under an instrument decree, order or award, which prescribed
a restricted estate for her in the property, sub-section (2) of Section 14 would not be
applicable.
In this case, the appellant claimed maintenance out of the joint family properties in
the hands of the respondent who was her deceased husbands brother. The claim was
decreed in favour of the appellant and in the execution of the decree for maintenance,
a compromise was arrived at between the parties allotting the parties in question to the
appellant for her maintenance and giving her limited interest in such properties. The
Court observed: Sub-section (1) of Section 14 is large in its amplitude and covers
every kind of acquisition of property by a female Hindu including acquisition in lieu of
maintenance and where such property possessed by her at the date of the commencement
of the Act or was subsequently acquired and possessed, she would become full owner
of the property. Sub-section (2) is more in the nature of the proviso or exception to the
sub-section (1).
The rule laid down in this Section has very wide and extensive application and has
to be read in comprehensive manner. The Act overrides interalia
420
the old law on
subject of stridhana in respect of all property possessed by a female, whether acquired
by her before or after the commencement of the Act and this Section declares that all
such property shall be held by her as full owner
421
. The Act confers full inheritable
419
AIR 1977 SC 1944; see also Punithavalli v. Ramalingam, , , , , AIR 1970 SC 1730 (The estate taken by
a widow under sub-sec.. 1 has been held by the Supreme Court to be an absolute one which is not
defeasible and whose ambit can not be cut down by any text or interpretation of Hindu law)
420
Ramakrishna Mutt v. M. Maheswaran , AIR 2007 Mad. 180.
421
Ram Vishal v. Jagan Nath, (2004) 9 SCC 302.
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capacity on the female heir and this Section dispenses with the traditional limitations on
the powers of a female Hindu to hold and transmit property. The effect of this Section
results in the independence of women as regards to the absolute ownership of property
in contrast to stringent provisions against the proprietary rights of a female of older.
Succession to the Property of Female Hindu-Post 1956:
Under the previous law, succession to stridhana womens property varied
according to the woman being married or unmarried and according to the form of her
marriage. It also varied according to the source from which the stridhana
422
came and
the mode and manner of her acquisition of the property. The rules of descent of the
different Schools also varied. The Hindu succession Act, 1956 abolishes all this and
propounds in Section 15, a definite and uniform scheme of succession to the property
of a female Hindu who dies intestate after the commencement of the Act. The rules
relating to the mode of computation of shares of the various heirs are stated in Section
16. Basically Sections 15 and 16 deal with the whole set of rules which are essential for
the succession of the property of a female Hindu under Hindu succession Act, 1956.
Ambit of the Section:
This Section
423
deals with general rules of succession to the property of a Hindu
female dying intestate. Since the Act deals only with the intestate succession, this Section
deals with intestate succession to the property of a Hindu female. It will apply to the
422
S.A. Desai (rev.), Mulla, Hindu Law, 18
th
ed. 2004, Vol.2, p.282.
423
Section 15:-General rules of succession in the case of female Hindus:-
(1) The property of a female Hindu dying intestate shall devolve according to the rules set out in
Section 16 :
(a) firstly, upon the sons and daughters (including the children of any predeceased son or
daughter) and the husband;
(b) secondly, upon the heirs of the husband;
(c) thirdly, upon the mother and father;
( d ) fourthly, upon the heirs of the father; and
( e ) lastly, upon the heirs of the mother.
(2) Notwithstanding anything contained in sub-sec. (1)-
( a ) any property inherited by a female Hindu from her father or mother shall devolve, i n the
absence of any son or daughter of the deceased (including the children of any predeceased
son or daughter) not upon the other heirs referred to in sub-sec.. (1) in the order specified
therein, but upon the heirs of the father; and
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property of which she is the full owner in terms of Section 14
424
of the Act, in the case
of Renuka Bala Chatterjji v. A.K.Gupta,
425
it was decided that the Section does not
apply to property in which she has only a limited estate.
This Section has only prospective application and does not apply retrospectively to
any category of property. Thus, if a Hindu female had before coming into force of the
Act, succession to her property will be regulated by old Hindu Law.
Property:
The expression property in this Section means property of the deceased heritable
under this Act. It includes both movable and immovable property owned by a female
Hindu and acquired by her by inheritance;
426
or by devise; or at a partition; or by a gift
from any person whether relative or not (before, at or after her marriage); or her own
skill or exertion; or by purchase; or by prescription; or in any other manner whatsoever.
It also includes all property, which was held and possessed by her at the date of
commencement of the Act and of which she is declared to be the full owner by Section
14 of the Act
427
.
There is no distinction as to whether the property was acquired by her during
maidenhood or during coverture or after the dissolution of marriage. In other words,
no distinction is made between the statuses of Hindu female with reference to acquisition
of property.
428
Hindu female includes any female who is Hindu in terms of the definition
of Hindu contained in the Act. It is immaterial that she is a widow, married or unmarried
woman. The term Hindu female covers all these women if they just fulfill the criteria of
being a Hindu given in Section 2 of the Hindu Succession Act, 1956 as it the requirement
prior to Sections 15 and 16.
(b) any property inherited by a female Hindu from her husband or from her father-in- law shall
devolve, in the absence of any son or daughter of the deceased (including the children of
any predeceased son or daughter) not upon the other heirs referred to in sub-sec. (1) in the
order specified therein, but upon the heirs of the husband.
424
Jamunabai v. Bholaram, AIR 2003 M.P. 40.
425
AIR 1961 AP 498.
426
Balasaheb v. Jinwala, AIR 1978 Bom 44.
427
Jose v. Ramkrishnan Nair, AIR 2004 Ker. 16.
428
Paras Diwan, Modern Hindu Law, 15
th
ed. 2003, p.403.
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Three categories of Property:
Category I: Under category I only those properties are covered which are inherited
by her from her father or mother. The emphasis is on the word inherited; inherited by
intestate succession and will not apply to testamentary succession.
Category II: Under this category are included only those properties which she
obtained by way of inheritance from her husband or father-in-law. Properties which she
gets from her husband or father-in law otherwise than by inheritance are not covered
under this category.
Category III: All those properties which are not covered under categories I and II
are covered under this category, howsoever they are acquired. The properties inherited
by her from persons other than father, mother, husband or father-in-law will fall under
this category. Thus, the property inherited by a Hindu female from her brother
429
, property
received in gift from parent
430
, and bequest from a parent
431
, have been held to fall
under category III.
The rules of succession laid down in this Section cannot apply to property acquired
by a female under an instrument or a decree or an order of a Civil Court or under an
award which itself prescribed a restricted estate in such property. In any such case
succession to the property would be controlled, by the nature and extent of the restricted
estate thereby created.
432
In Emana Veeraraghavamma v. G.Subbarao
433
, a Hindu female inherited some
properties from her husband. She sold them, the sale was valid. Out of the sale proceeds
she bought some properties. The question was whether these properties are covered by
category II or category III. The Court held that these properties were covered under
category III. The reason is that the Hindu female inheriting property from her parents
becomes her absolute property and has power to deal with it the way she feels like; she
429
Jayantilal Mansukhlal v. Mehata Chhananlal Ambalal, AIR 1968 Guj 212.
430
Ayi Ammal v. Sbramania Asari, AIR 1966 Mad 369.
431
Bobballapati Kamesawarorao v. Kvir Vasudevarao, AIR 1972 AP 189.
432
See Section (2), Nothing contained in sub-section (1) shall apply to any property acquired by way
of gift or under a will or any other instrument or under a decree or order of a civil Court or under an
award where the terms of the gift, will or other instrument or the decree, order or award prescribe a
restricted estate in such property.
433
AIR 1976 AP 337.
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can sale it or gift it. If she alienates it, it cannot be said on her death that the property
inherited by her is still available for devolution to her parents heirs.
The General Order of Succession:
(I) Entry (A): Sons, Daughters and Husband:
(A) Son: The expression son used in Entry (a) has not been defined in the Act. It
includes both a natural son and a son adopted in accordance with the law relating to
adoption among Hindus in force at the time of the adoption. In case of a female
intestate who had remarried after the death of her husband or after divorce her sons by
different husbands would all be her natural sons and entitled to inherit the property.
434
The expression son also includes illegitimate son as according to the proviso to Section
3(1)(j) lays down inter alia that illegitimate children to be related to their mother.
In the case of Mallappa v. Shivappa,
435
it was decided that a step-son is not
entitled as son to inherit to his step-mother as one of the heirs under this Entry, but he
can succeed to her property as an heir of her husband under Entry (b) of the sub-
section. In Lachaman Singh v. Kirpa Singh
436
, the Supreme Court approved of the view
that sons in clause (a) does not include step-sons.
(B) Daughter: The rules relating to a son stated above apply mutatis mutandis
437
to the case of a daughter. A daughter adopted by her husband after death is not her
adopted daughter and is not included in the expression daughter. Nor are included
daughters of her husband from different wives. In short no step-daughter is an heir to
her under this Entry.
438
(C) Children of predeceased son and daughter: The sons and daughters of a
predeceased son and predeceased daughter take the property as representatives of
their deceased parent. The children of the predeceased son or daughter include legitimate
children, natural born or adopted. Illegitimate children are also included according
Section 3(1)(j). Therefore, a legitimate son of a predeceased illegitimate son is also
included in this Entry. A posthumous son of a predeceased son is also included in this
Entry.
434
Paras Diwan, Law of Intestate & Testamentary Succession, 2
nd
ed.1998, pp.177-178.
435
AIR 1962 Mys 140.
436
AIR 1987 SC 1616.
437
(Mutatis Mutandis- With the necessary changes in points of details.)
438
Gurnam Singh v. Ass Kaur, AIR 1977 P&H 103.
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The children of the void or annulled voidable marriage of son or daughter are not
included, as Section 16 of the Hindu Marriage Act, 1955 permits the children of void
or annulled voidable marriage to succeed to the property of their parents alone
439
. The
children of children of a predeceased son or daughter are also not included as it has
been held accordingly in the case of Anusayabai v. Jagdish.
440
(D) Husband:- - - - - The husband entitled to succeed under this Entry must be a person
who was lawfully married to the female intestate and whose marriage had not been
annulled or dissolved by a decree of a court or dissolved by any valid custom governing
the parties
441
. Until and unless divorce is not granted to living husband and wife under
any of the grounds of divorce given under Section 13 of the Hindu Marriage Act,
1955, such a husband is included in the term husband.
(II) Entry (B): Heirs of the Husband:
Falling all heirs of the intestate female specified in Entry (a), but not until then, all
her property will devolve upon the heirs specified in this Entry. However, property that
she might have inherited from her father or mother will not devolve upon them and will
devolve upon the heirs of the father.
The devolution upon the heirs of the husband of the female intestate shall be in the
same order and according to the same rules as would have applied if the property had
belonged to the husband and he had died intestate in respect thereof immediately
after her death.
Where a female intestate had remarried after the death of her first husband, the
heirs of the husband would be the heirs of the second husband, who if alive at the
time of the death of the intestate would himself have been entitled to succeed as her
husband under Entry(a). The heirs contemplated in Entry (b) must be the heirs of the last
husband that is of the person whose widow the intestate was at the time of her death.
(III) Entry (c): Mother and Father:
Failing all heirs of the intestate female specified in Entries (a) and (b), but not until
then all her property, howsoever acquired, will devolve upon her mother and father.
The property that will devolve under this Entry will include property inherited by her from
439
Pandit Devi Datt (Now Deceased) through LRs v. State, 2007(209) ELT343(Del).
440
AIR 1962 HP7.
441
Section 29 (2) of the Hindu Marriage Act, 1955.
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the mother when the intestate is survived by the father and property inherited by her
from the father when the intestate is survived by the mother.
The expression mother includes both a natural mother and an adoptive mother
of the intestate.
442
Unchastity of a mother is no bar to her succeeding as heir to her
daughter; nor does remarriage constitute any bar. In the case of Anhia Mandalanin v.
Baijnath,
443
the Court said that a step-mother is not entitled as mother to inherit to her
step-daughter as one of the heirs under this Entry, but she can succeed to her property
as an heir of her father under Entry(d). The expression father also includes both a
natural and an adoptive father of the intestate.
(IV) Entry (d): Heirs of the Father:
Failing all heirs of the intestate female specified in Entries (a) and (c), but not until
then all her property, howsoever acquired, will devolve upon the heirs of her father. The
devolution upon the heirs of the father shall be in the same order and according to the
same rules as would have applied if the property had belonged to the father and he
had died intestate in respect thereof immediately after her death.
(V) Entry (e): Heirs of the Mother:
Failing all heirs of the intestate female specified in Entries (a) and (d), but not until
then all her property, howsoever acquired, will devolve upon the heirs of her mother.
The devolution upon the heirs of the father shall be in the same order and according to
the same rules as would have applied if the property had belonged to the father and he
had died intestate in respect thereof immediately after her death.
In a case falling under Entry (e) the mother of the intestate becomes the starting
point. All her sons and daughters by different husbands are her sons and daughters
within the scope of Entry (a) and are therefore entitled too succeed as such.
444
Special order of Succession in case of Childless Female Intestate:
Sub- section (2) carves out two exceptions to that general scheme and order of
succession. Clause (a) of sub-section (2) relates to property inherited by the intestate
442
Under Section 8 of the Adoptions and Maintenance Act, 1956, woman married or unmarried, even
a widow can adopt a child and hence can be an adoptive mother.
443
AIR 1974 AP 177.
444
An illegitimate brother/sister of a female intestate can also succeed to her property.
SUCCESSION
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from her mother or father and clause (b) relates to the property inherited by her from
husband or father-in-law.
445
Clause (A): Property Inherited from Father or Mother:
The clause enacts that in a case where a female Hindu inherits property from her
father or mother, such property so inherited is to devolve not upon the other heirs but
upon the heirs of the father. In the case of Radhika v. Ahgnu, ,, ,,
446
Where female Hindu
died issueless i.e. she is not survived by a child or the child of such child, but her
husband is alive, even in the presence of the husband, the property will revert to her
fathers heirs. The purpose of the clause is that the property should not go into the
hands of other heirs as classified in Entry (a) and (b) of sub-sec. (1) but should go
instead to heirs of the father.
447
In such cases, it is presumed that upon the death of the woman, her father had
died, and his heirs will be ascertained accordingly. But there appears to be an anomaly
here, which has been noticed and explained by all the writers on Hindu Law. If a
woman inherits the property from her mother and dies issueless and her father is alive,
would the property go to her father or his heirs?
448
The unanimous opinion seems to be
that the property would be taken by the father, and it is only in his default (absence), it
would go to his heirs.
The other question that may arise is that when there is no heir of the father at the
time of her death, but the other heirs are alive as mentioned in sub-section (1), then
can the other heirs inherit the property or not? As it is not explicitly clear from the
clause, the inference that can be drawn is that property can be devolved upon the
husband or his heirs in such case.
The property under this clause is only the property that a female inherits from her
father or mother. Property acquired by her under any devise or bequest under a will
would devolve on her death in a manner prescribed in sub-section (1); nor would
property given to her by way of gift by her father or mother fall under this exception.
449
445
G.M.Divekar, Hindu Law, 2
nd
ed.2002, p.263.
446
(1996) 2 SCC 344.
447
Raghuwar v. Janki Prasad, AIR 1981 MP 39.
448
Poonam P. Saxena, Family Law Lectures, 1
st
ed.2004, p.427.
449
Meyappa v. Kanappa, AIR 1976 Mad 154.
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In Bhagat Singh v. Teja Singh, ,, ,,
450
two sisters inherited the property from their mother.
On the death of one, who died as an issueless widow, the other sister took the property
as her fathers heir and entered into an agreement to sell the same to X. the deceased
sisters husbands brother challenged the validity of this sale and claimed the property
as her heir under section 15(1)(b). The Supreme Court held that since both the conditions
were fulfilled i.e. she had inherited the property from her mother and had died issueless,
the property would revert to her fathers heirs i.e. the sister in this case.
In another case of Y.P.Duggal v. O.P.duggal,
451
an unmarried female inherited the
property from her mother and died leaving her brother and a widow of another brother.
The brother claimed the property as a sole survivor. The Court held that as the property
is to revert to her father and will devolve as if it belonged to the father, on his heirs, the
deceased brother would be the son of the father, and another brothers widow would
be related to the father as the widow of predeceased son. Thus both will inherit the
property in equal shares as class I heirs of the father.
Clause (B): Property inherited from Husband or Father-in-Law:
The clause enacts that in a case where a female Hindu inherits property from her
husband or father-in-law, such property so inherited is to devolve not upon the other
heirs but upon the heirs of the husband.
The clause is important as it elucidate the aspect related to the second marriage of
the intestate. It is conceivable that the intestate may have remarried after the death of
her husband from whom she may have inherited property or after the death of father-
in-law from whom she may have inherited property and may die without issue but
leaving her second husband. Such a case will fall under in this clause which enacts that
such property will not devolve upon other heirs referred to in sub-section (1), which
would include the second husband who survives her, but will devolve upon heirs of the
first husband.
In the case of Danistha Kalita v. Ramakanta Kalita,
452
the Gauhati High Court has
ruled that for the purposes of inheriting the property of the mother which was inherited
450
AIR 2002 SC 1.
451
AIR 2000 Del. 81.
452
AIR 2003 Gau 92.
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by her from her deceased husband, son and daughter would mean the son and a
daughter of that husband from whom or from whose father, she had inherited the
property. Here a woman died leaving behind a son and a daughter, born to her from
the husband whose property she had inherited. She also had a son from the previous
marriage. The Court held that the son born of the previous marriage was not entitled to
get the property and will be excluded from inheritance, as it was the property that was
inherited by the woman from her second husband and he was not the progeny of that
husband.
Section 16: Order of Succession and Manner of Distribution among Heirs
of a Female Hindu
453
:
This Section is a sequel of Section 15 which lays down the heirs to the property of
an intestate Hindu female.
Rule -1 explicitly declares about the priority of heirs according to Entries from (a) to
(e) and the proper method of their prioritization. Rule 2 deals with the case of children
of a predeceased son or daughter
454
so that they will not take per capita with the son or
daughter or husband of the intestate, but will take between them the share which their
father or mother, as the case may be, would have taken if alive at the time of the death
of the intestate, that is to say they will take per stripes.
Rule-3 applies to different Entries of sub-section (1) like Entry (b) heirs of her husband,
(d) heirs of her father and (e) heirs of her mother, along with two clauses of sub-section
453
16. Order of succession and manner of distribution among heirs of a female Hindu -The order of
succession among the heirs referred to in sec. 15 shall be, and the distribution of the intestates
property among those heirs shall take place, according to the following rules, namely:- Rule 1-
Among the heirs specified in sub-sec. (1) of sec. 15, those in one Entry shall be preferred to those in
any succeeding Entry and those including in the same Entry shall take simultaneously.
Rule 2- If any son or daughter of the intestate had predeceased the intestate leaving his or her own
children alive at the time of the intestates death, the children of such son or daughter shall take
between them the share which such son or daughter would have taken if living at the intestates
death. Rule 3-The devolution of the property of the intestate on the heirs referred to in clauses (b), (d)
and (e) of sub-sec. (1) and in sub-sec. (2) of sec. 15 shall be in the same order and according to the
same rules as would have applied if the property had been the fathers or the mothers or the
husbands as the case may be, and such person had died intestate in respect thereof immediately
after the intestates death.
454
Vurukutla Pamulu v. Kuppa Bhanumathi, 2007 (3) ALD 236.
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455
(Terminus a quo- point of beginning.)
456
Mohadevappa v. Gauramma, AIR 1973 Mys 142.
457
AIR 1974 SC 665.
(2). In all the above cases the terminus a quo
455
is the husband or father or mother
were the propositus and the ascertainment of the heirs will once again commence from
the husband or father,
456
father or mother, as the case may be.
The Supreme Court pointed out in Bajya v. Gopikabai,
457
that once it is found that
a case falls under sub-section (2)(b) of Section 15, the fiction envisaged in Rule 3 of
Section 16 is attracted and it is to be deemed as if the husband had died intestate
immediately after the female intestates death and Section 8 will come into operation
on that basis.
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CHAPTER IX
GIFT
Introduction:
Gift is a transfer of movable and immovable property without any
consideration. The one who makes the gift is the donor and the one in
whose favour the gift is made is the donee. There are various restrictions
imposed on different personal and various essential features that need
to be fulfilled for a gift to be considered valid. Earlier, in the Hindu
Principles of Gift, any gift made to an unborn child was held to be void
due to the non existence of the child during the execution of the gift. A
very important feature which needed to be fulfilled for the completion of
the gift under Hindu Law was the delivery of possession. The possession
of the gift had to be transferred from the donor to the donee in order to
qualify a gift as a valid one. However, as in case of unborn children the
gift could not possibly be delivered to the donee and hence the gift
made to the unborn child was accepted by a representative of the child.
Under the Mohammedan Law it is held that the process involving
transfer of gift have to comply with the three requisites of a contract. (a)
tender of property (b) acceptance of property and (c) delivery of
possession. Considering the fulfillment of these three points, the gift was
qualified to be a valid one. Acceptance in case of unborn child could
be carried out by a representative of the donee. Under the Mohammedan
Law a child in womb for six months or more was taken to be alive and in
existence.
However, a gift made to an unborn child becomes void if the testator
dies before the birth of the child. A gift made for a child not born is valid
up to the extent that the interest of the gift is not devolved in hid/her
name.
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Dan (Gifts) - History of Dharmasastra:
Manu and the others state that in the four yugas (ages) i.e. Krta, Treta, Dvapara
and Kali, the principal aspects of religious life were tapas, metaphysical knowledge,
sacrifices and gifts. Yama specifies the characteristic features of the four asramas as
follows; dharma of ascetics, cessation from taking ordinary food that of forest hermits,
Dan (making gifts) that of householders and obedience or service that of Brahmacarins.
Among the objects gifted, the most prominent were cows. It was said that those who
made gifts of Daksina (cows or fee) stand high in heaven and those who make gifts of
horses stand in the world of the sun, donors of gold were said to obtain immortality,
and those who give garments increase the duration of their lives. Donors according to
the Sastric law do not die, but reach mortality. It appears that although in the Rigveda
horses are considered important after cows, the sentiments changed after sometime.
The Varuna seizes him (i.e. suffers from dropsy) who accepts the gift of a horse and that
one should offer to Varuna as many offerings prepared on the four potsherds as the
horses accepted. Jaimini establishes two propositions in connection with this that the
Isti to the Varuna is to be performed when the gift of a horse or horses is accepted in a
Vedic sacrifice and that the Isti is to be performed by the donor and not by the acceptor.
The Kathaka also recommends that the horse should not be accepted as a gift, as it has
two rows of teeth. In the Taitriyya Brahmana it is said that he who accepts gifts with two
rows of teeth secure a portion of its spirit to themselves and he should offer a mess
cooked on twelve potsherds to Vaisvanara. Dharmasutra of Gautmama mentions the
horse among the objects that are gifted by way of penance for sins. The Satapatha
Brahmana says that he who promiuses to gift and does not do so is reduced to falling
into a deep pit or is killed. The Aitareya Brahmana says that one should not accept gifts
rejected by the priests and if one accepts it should be gifted to ones enemies. What
constitutes gift has been defined in the Sastra and accordingly there is a distinction
between Yaga, Homa and Dan. Yaga is abandoning something that belongs to oneself
and Homa is throwing into fire something that belongs to oneself. In both the cases the
offerings are made to deities along with Vedic mantras. The third kind i.e. Dana consists
of abandonment of ownership and then the transfer of that ownership in the hands of
the acceptor. The acceptances of the gifts were to be done physically and in cases
where physical acceptance was not possible like fields, its acceptance was to be effected
by enjoyment of its produce. There are various forms of acceptance defined in the
Brihatparasara. When a gift sent to the donee gets lost on the way or never reaches the
donee, then there is no acceptance and hence no complete dan. There are six angas of
dan as stated by Devala; the donor, the donee, sraddha, subject of gift, a proper time
GIFT
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and a proper place. According to the Devala the donor should be free from incurable
diseases, be religious and charitable because seeing a man willing to give up on their
hard earned property is rare. It was believed that the ones who gave gifts to people
engaged in productive services would bear them sweet fruit, but gifts given to people
engaged in harmful and irrational work would not bear any fruit. Giving food as gift
was considered to be a duty of every individual and the only consideration in such
cases was if the donee was hungry or poor. Sraddha according to Devala is a feeling of
satisfaction and relief from irritation that one experiences after helping the needy
people.
458
The Dharmasastra talks about how gifts are to be made, who is to be offered with
gifts, the consequences that the offer bear and so on and so forth.
Law of gifts deals with the transfer of property, whether immovable or movable, by
a person to another person in the life time of the person giving to a person who is alive
at the time the gift is made. The person who transfers the title of the property is known
as the donor and the person to whom the property is transferred is known as the donee.
The transfer of property or the gift should be made in good faith.
The law of transfer of property by a person in his lifetime is recorded in the Transfer
of Property Act, 1882. This Act deals with as to who can make a gift, to whom can he
make, what property can be gifted, the nature of the gift, terms and conditions to be
kept in mid while making the gift, revocation of the gift, and so on. It contains all the
rules and regulations regarding such a transfer of property.
What governs the Law of Gifts?
The Transfer of Property Act, 1882 is perhaps the only Act which is purely dedicated
to describe the Law of Gifts. This Act governs all religions except those who are governed
by a special rule of Mohammedan law. It is to say that it governs Hindus, Sikhs, Jains,
Buddhists, and not Muslims.
Essentials:
Section 122 of the Transfer of Property Act clearly postulates that a gift must have
two essential characteristics:
458
V. P. Kane, History of Dharmasastra, Vol II, pt. II, 3
rd
ed., 1997, p. 837-842.
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(1) that it must be made voluntarily, and
(2) that it should be without consideration.
Love and affection etc., may be motive for making a gift but is not a consideration
in the legal sense of the term.
459
It is true that in every gift the donor has a particular
motive and objective or a reason to part with his property in favour of the donee, the
reason being, in some cases, love and affection where the gift is in favour of a relation
or friend, or spiritual benefit in other cases but this will be the immediate motive for
making the gift and cannot be regarded as a consideration for the gift because the very
concept of gift is based on a purely gratuitous consideration.
460
Consideration:
The essence of a gift is that it is gratuitous transfer. The word consideration is
pecuniary consideration as defined under Section 2 (d) of the Indian Contract Act,
1972 and excludes natural love and affection. A transfer in consideration of an
expectation of spiritual and moral benefits, or in consideration of natural love and
affection, is a gift. It must, however, be noted that the gift must be complete in law. If
there is only an agreement of gift it is void under Section 25 of the Indian Contract Act
unless the agreement is in writing and made on account of natural love and affection
between parties.
Voluntarily:
The gift must be made voluntarily and with the free consent. The word voluntarily
signifies the exercise of the unfettered free will. A man cannot be said to be truly willing.
Unless he is in a position to choose freely, and freedom of choice predicates, not only
full knowledge of the circumstances on which the exercise of choice is conditioned so
that he may be able to choose wisely, but the absence from his mind any feeling of
constraint so that nothing shall interfere with the freedom of his will. Thus, if undue
influence and pressure have been exercised on the donor, it is clear that he has not
made the gift voluntarily.
461
If the gift are made by pardanashin ladies, it must be
established that the transaction was understood by the lady and that she had opportunity
to take independent advice and was a free agent.
462
459
S.N. Shukla, The Transfer of Property Act, 22nd ed., 1999, p. 395.
460
Sonia Bhatia v. State of U.P., AIR 1981 SC 1274.
461
Phulchand v. Lakhu, (1903) 25 All. 358.
462
Wazid Khan v. Ewa Ali 18 Cal. 541 P.C.
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Undue Influence:
Undue influence is the most common ground on which a gift is said to have been
made without free consent. It is well settled that the law as to undue influence is the
same in the case of a gift inter vivos as in the case of the contract.
463
Section 16 of the
Indian Contract Act deals with undue influence.
Essentials of Gift:
The essentials of a valid gift are as under;
(i) there must be transfer of ownership;
(ii) the ownership must relate to a property in existence;
(iii) the transfer must be without consideration;
(iv) it must have been made voluntarily;
(v) the donor must be competent person; and
(vi) the transferee must except the gift.
Transfer of ownership:
As in case of sale, there must be a transfer of all rights in the property by the donor
to the donee. It may, however, be noted that it is permissible to make conditional gifts.
The only restriction is that the condition must not be repugnant to any of the provisions
of Sections 10 to 34 of the Act.
Existence of the property:
Although a transfer may take effect in present or in future but it cannot be made to
any property which is not in existence at the date of the gift. Where a gift is made of a
property which is not in existence, Section 124 declares it to be void. The subject matter
of the gift may, however, be movable or immovable, corporeal or incorporeal, but it
must be in existence at the date of the gift and must also be transferable property within
the meaning of Section 6 of this Act. Actionable claim is an existing property and can
be validly gifted. Similarly a gift of a mortgage is a gift of immovable property within the
meaning of this Section.
463
Subhash Chandra Das v. Ganga Pd. Das, AIR 1967 SC 878.
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Competency of donor:
Donor is a person who makes the gift. In a transaction by way of gift the transferor
is called a donor and he divests his ownership in the property so as to vest it into the
transferee, the donee. The donee must be sui juris. He must, therefore, have attained
the age of majority, possess a sound mind and should not be otherwise disqualified.
Section 7 of this Act provides that only such person can effect a transfer of property who
is competent to contract. The result is therefore, that a minor cannot make the gift of his
properties. According to Halsburys Law of England
464
person in fiduciary position,
e.g., trustees cannot make gifts of property vested in them on behalf of others unless
they are authorized to do so.
Acceptance by the donee:
The donee must however, be ascertainable person to persons. A gift cannot validly
be made to the public or society at large. Where a gift is made in favour of two or more
persons, all of them take it as tenant-in-common. If a gift is made to two or more
persons one of whom is capable of taking and she other is not, it has been held that the
former will take the whole of the property.
465
The acceptance by the donee need not be express; it may be constructive as well
to be inferred the doneees possession of the property or the donee collecting the rents
of property involved or that the gift deed is in his possession. While the possession by or
on behalf of the donee may amount to acceptance, where the subject matter of the gift
was enjoyed jointly by the donor and donee, mere possession cannot be treated as
evidence of acceptance.
466
From very beginning Dan (gift) has been an important aspect of Hindu Law. The
subject has been dealt with by our sages under the title Resumption of Gifts, which is
one of the eighteen titles of law. This is also a unique feature of Hindu Law of gifts that,
while in other systems of law a gift is clothed in a grab of sale, here the sales are given
the appearance of gift. This indicates the importance of, and sanctity attached to the
gifts in Hindu Law.
467
464
Vol 15, Para 795.
465
Nandi Singh v. Sita Ram,. (1989) 16 Cal. 677.
466
Bandcha Bhol v. Saria Bewa, AIR. 1973 Ors. 18.
467
Diwan, Paras, Family Law, 5th ed., 2000, p. 479.
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The law of Gifts is governed by the Transfer of Property Act 1972; it defines a gift
as under:
Gift is the transfer of certain existing movable and immovable property made
voluntarily and without consideration, by one person, called the donor. To another,
called the donee, and accepted by or on behalf of the donee.
According to Mitakshara, a gift is defined under as:
Gift consists in the relinquishment (without consideration) of ones own
right (in property) and the creation of the another mans right which is
competed on that others acceptance of the gift, but not otherwise.
468
Under Hindu Law, no writing was necessary for the validity of gift. Hindu Law insisted
on the delivery of possession. No gift could be complete without the delivery of possession
and once possession was delivered, there remained nothing else to be done to complete
the gift. Mere registration was not enough.
469
However, if from the nature of the subject
matter of the gift delivery of the possession could not be made, it was enough to
validate the gift if the donor did all that he could do to complete it.
470
Under modern Hindu Law compliance with the provisions of the Act, irrespective of
the fact whether the possession has or has not been given, is necessary. Section 123 of
the Act provides for the formalities thus:
For the purpose of making a gift of immovable property must be effected by a
registered instrument signed by or on behalf of the donor, and attested by at least two
witnesses.
For the purpose of making a gift of movable property the transfer may be effected
either by a registered instrument signed as aforesaid or by delivery.
Delivery of Possession:
A gift under pure Hindu Law need not be in writing. However, a gift under that law
is not valid unless it is accompanied by delivery of possession of the subject of the gift
468
Ibid, p. 479
469
Vasudeo v. Narayan (1883) 7 Bom 131.
470
Kahpas v. Kanhaya Lal (1884) 11 Cal 121 (P.C.)
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from the donor to the donee.
471
Mere registration of deed of gift is not equivalent to the
delivery of possession; it is not therefore sufficient to pass the title of the property from
the donor to the donee.
472
However, where from the nature of the case physical possession
cannot be delivered, it is enough to validate a gift, if the donor has done all that he
could to complete the gift, so as to entitle the donee to obtain possession.
473
A executes a deed of gift of certain immovable property to B. At the date of the gift
the property is in the possession of C who claims to hold it adversely to A. B sues C to
recover possession of the property from him, joining A in the suit as a defendant. A by
his written statement admits Bs claim. C contends that the gift is void, inasmuch as A
was out of possession at the date of the date of the gift, and possession was not
delivered by the donor to the donee. The donor has done all that she can to complete
the gift, and is a party to the suit, and admits the gift to be completed.
474
As regards to Hindu gifts to which the Transfer of Property Act, 1882 applies, the
rule of pure Hindu Law that delivery of possession is essential to the validity of a gift is
abrogated by Section 123 of that Act. Under that Act, delivery of possession is no
longer necessary to complete a gift, nor is mere delivery sufficient to constitute a gift
except in the case of movable property. A gift under that Act can only be effected in the
manner provided by Section 123. That Section is as follows:
(i) For the purpose of making a gift of immovable property, the transfer must be
effected by a registered instrument signed by or on behalf of the donor, and
attested by least two witnesses.
(ii) For the purpose of making a gift of movable property, the transfer may be effected
by a registered instrument signed as aforesaid or by delivery.
What Property may be disposed of by Gift:
Where property is absolutely at the disposal of its owner, he may give it away as
freely as he may sell or mortgage it, subject to a certain extent to the claims of those
who are entitled to be maintained by him. For instance, a father under the Dayabhaga
Law may make a gift of his property; so can a coparcener of his share. A Hindu,
471
Harijivan v. Naran (1867) 4 Bom HCAC 31; Mst Nozi v. Mohnlal AIR 1957 Raj 128.
472
Vasudev v. Narayan (1883) 7 Bom 131.
473
Kalidas v. Kanhaya Lal (1884) 11 Cal. 121(where the gift was effected by an ikrarnama).
474
S.A Desai, (rev.), Mulla, Hindu Law, 17
th
ed., 2000, pp. 556-557.
GIFT
NALSAR Pro
362
whether governed by Mitakshara or Dayabhaga, can dispose of his separate or self-
acquired property. So too, a woman can make a gift of her stridhana.
475
Where the property is not absolutely at the disposal of a person, a transaction can
only be supported on the ground of necessity and as a general rule; a gift of it could
never be valid. Exceptions, however, are recognized by Hindu Law where gifts can be
made either for pious, religious or charitable purposes, or o occasions when, according
to the common notions of the Hindus, gifts are usually made. This exceptional power
can only be exercised properly and within reasonable limits. Where a gift consists of a
donors whole property, the donee is personally liable for all the debts due by and
liabilities of the donor at the time of the gift to the extent of the property comprised in
it.
476
Donatio mortis causa:
According to Hindu Law, a donatio mortis causa (void if the donor should recover
from his illness or survive the donee) is valid. As regards the legal requisites of such
gifts, the Hindu Law makes no distinction, as does the Mohammedan law, between
those made in contemplation of death and other gifts.
Right of Coparcener:
It is well settled that in Mitakshara School no coparcener can dispose of by gift even
his undivided interest of the joint family property, except with the consent of the other
coparceners. The authority to make a gift depends upon the donors power of disposal
over the subject matter of gift. If it was his self acquired property, he was entitled to
dispose it by gift or device at his discretion. But if it was his joint family property then his
power of disposal was necessarily limited by the rights of his coparceners.
Mullas Hindu Law provided that according to the Mitakshara Law as applied in all
States, no coparcener can dispose of his undivided interest in the coparcenary property
by gift. He may, however, make a gift of his interest, with the consent of the other
coparceners.
475
Alladi Kuppuswami (rev.), Mayne, Hindu Law and Usage, 12
th
ed., 1986, p. 1080.
476
Bapurao v. Bulaki Das, ILR (1945) Nag. 194.
GIFT
NALSAR Pro
363
In Thamma Venkatasubramma v.Thamma Rattamma
477
while considering the
question of making a gift of his undivided interest in coparcenary property by a
coparcener, it was held that a coparcener can make a gift of his undivided interest in
the coparcenary property to another coparcener or to a stranger with the prior consent
of all other coparceners. Such a gift would be quite legal and valid; otherwise such a
gift by a coparcener was void.
The personal law of the Hindus governed by Mitakshara School is that a coparcener
can dispose of his undivided interest in the coparcenary property by a will, but he
cannot make a gift of such interest.
Revocation of Unregistered Gift:
At one time there was a doubt whether the donor could revoke a gift after acceptance
in cases where the deed was not registered. The Privy Council in Kalyanasundaram v.
Koruppa
478
held that it may be regarded as setting the final law on this question. It was
decided that after the acceptance of the deed of gift and before registration, the donor
could not revoke the gift. Registration does not depend upon donors consent, but is
the act of an officer appointed by law for the purpose.
Principles of Hindu Law related to Gifts made to unborn Child:
In Hindu Law, a Hindu has full power to make a gift out of his own separate
property whether inter vivos or by will. Even female members of the family have the
right to make gifts to dispose their Stridhana. By Section 14 of the Hindu Succession
Act, 1956 the position of a woman has improved and she can now make gifts and
dispose her property for all purposes.
479
Gift as defined in Transfer of Property Act, 1972, Section 122 says, gift is the
transfer of certain existing movable and immovable property made voluntarily and
without consideration by one person, called the donor to another called the donee and
accepted by or on behalf of the donee. A Hindu belonging to both Dayabhaga and
Mitakshara Schools can dispose his separate or self acquired property as a gift, subject
to certain cases where the owner owes obligations to his/her legal heirs for maintenance.
Hindus governed by Dayabhaga School can dispose of their property by gift keeping
477
AIR 1987 SC 1775.
478
(1927) 50 Mad. 193
479
Diwan Paras, Family Law, 7
th
ed., 2005, p. 517.
GIFT
NALSAR Pro
364
aside a portion of the property for the ones who are entitled to be maintained by him.
However, in Mitakshara School one cannot dispose of their property unless provided he
is the sole surviving coparcener.
480
A female member of a family can also dispose off
her stridhana property provided she gets the consent of her husband. The widow however
on the other hand in the absence of her husband can dispose off her property as a gift.
Under Hindu Law writing was not necessary for the completion of gift. Delivery of
possession was given more importance. No gift could be complete without the delivery
of possession and once delivery was made then there was nothing that needed to be
done for completing the gift. The principle that registration alone is not sufficient for
constituting a gift was upheld in the case Nozi v. Mohanlal
481
Hindu Law did not recognize the validity of grant of gift to unborn child earlier. But,
now the Hindu Transfers and Bequests Act, 1960, which is a union law and applicable
to the whole of India except the states of Jammu and Kashmir validates gifts executed
in favor of unborn child.
482
It was held in the case Manigavri v. Narandas
483
that a gift
once made cannot be revoked under any circumstances unless the gift was obtained by
fraud or undue influence. In another case Bishan v. Asmaida Koer
484
the Court held that
a gift made with an intention of defrauding the creditor shall be revocable at the option
of the creditor.
A child who at the time of the death of the intestate was in the womb and subsequently
born alive is deemed to have the same right on the property of the intestate as he/she
would have had, had he/she been alive during the death of the intestate. The inheritance
of the property by the unborn child is to take effect from the date of the death of the
intestate. Section 20 of the Hindu Succession Act, 1956, provides this provision. The
law provides that a child even if not born and in womb will have the same rights as a
child born for the benefit of the child. An expected child in a family will be given the
same status for inheritance as a child born and present in the family. This view is not
peculiar to the ancient Hindu Law but one, which is adopted by all mature systems of
jurisprudence. It is recognized by this section that a child in womb who is subsequently
born is deemed to be born before the death of the intestate and hence inheritance is
480
S A Desai (rev.), Mulla, Hindu Law, 19
th
ed., 2005, p. 647.
481
AIR 1957 Raj 128.
482
Diwan Paras, Family Law, 7
th
ed. 2005, p. 518.
483
(1954) ILJ 1153 Guj.
484
(1884) 6 All 560 (P.C.).
GIFT
NALSAR Pro
365
deemed to be vested in the child from the date of the death of the intestate. It recognizes
the rights of not only children born out of legal marriages but also illegitimate children
by virtue of the provision given for Section 3 (1) (j) of the Hindu Succession Act, 1956.
485
Child of void and voidable marriages, who come within the purview of Section 16 of
the Hindu Marriage Act, 1955 are also entitled to inheritance. It is required that the
child should be born alive for inheritance to take effect.
486
The effect of Section 20 of the Hindu Succession Act, 1956 is that during the
period between the death of the intestate and the date of birth of the child, the inheritance
right that the unborn child has does not come into. The childs right becomes enforceable
only when the child is born and until then, the quantum of inheritance of the other heirs
is suspended
487
. In a case where the other heirs who were living during the death of the
intestate have partitioned the property before the birth of the child, the partition will be
reopened after the birth of the child. Even if the child who is born alive dies subsequently,
it will have no effect on the childs right to inheritance and the child will still be considered
as a descent. The knowledge of the other parties entitled to the property is immaterial.
Even if the other parties having a right in the property were unaware of the child in the
womb, the unborn child will still be entitled to the property.
488
In case of the death of the child after birth, the inheritance devolving on the child
will go by succession to the heirs of the child.
489
Section 2 of the Hindu Disposition of
Property Act, 1916 clearly states that a disposition of property made a Hindu whether
by inter vivos or by will, shall be not be invalid only for the reason that the gift on whose
behalf it was executed was not in existence then.
In Tagore v. Tagore
490
the Privy Council held that a gift made in favor of an unborn
child is invalid as the child during the execution of the gift deed was not in existence,
485
According to provision of Section 3 (1) (j) of the Hindu Succession Act,1956, provided that illegitimate
child shall be deemed to be related to their mother and to one another, and their legitimate descendants
shall be deemed to be related to them and to one another; and any word expressing relationship or
denoting a relative shall be construed accordingly.
486
S. A. Desai (rev.), Mulla, Hindu Law, 19
th
ed., Vol II, 2005, pp. 443-444.
487
Anasuya Bai v. Jagadish, 1977 MPLJ 7.
488
Ranganath Misra (rev.), Mayne, Hindu Law and Usage, 15
th
ed., 2006, p.1194.
489
Ibid.
490
AIR 1960 Ker 160.
GIFT
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366
but this judgment was overruled by the judgment given in the case Raman Nadar v.
Snehapoo
491
.
Post Development:
The law since Tagore v. Tagore
492
has changed to benefit the child with the interests
vested on the child before the childs birth. It was held by the Privy Council in Tagore
case in 1872, that a Hindu cannot dispose of his property by gift in favour of a person
who was not in existence at the date of the gift, nor could be dispose of his property by
will in favour of a person who was not in existence at the date of the death of the
testator. The first enactment which validated gifts and bequests in favour of unborn
person was the Hindu Transfers and Bequests Act, 1914. This was an Act of the Madras
Legislature. It applied in terms to the whole of the State of Madras and was intended so
to apply. It was followed by the Hindu Disposition of Property Act, 1916, which was an
Act of the Imperial Legislature. It applied to the whole of British India except the province
of Madras for which legislation had already been made by the local Act of 1914. After
the Act of 1916, was passed, the High Court of Madras held as to the Madras Act of
1914, that the local Legislature had no power to take away the right of a Hindu domiciled
within the local limits of the ordinary original civil jurisdiction of High Court of Madras
to be governed by the Hindu Law as it stood when the High Courts Act, 1861, was
passed. The fact, however, was that the Hindu Law as it then stood did allow gifts and
bequests in favour of unborn persons, and Tagore case had misinterpreted that law.
This led to the enactment by the Imperial Legislature of the Hindu Transfers and Bequests
(City of Madras) Act, 1921. This Act extends in effect the local Act of 1914 to Hindus
domiciled in the City of Madras-It also validates gifts and bequests made by Hindus
domiciled in the City of Madras subsequent to the 14th February, 1914 being the date
on which the local Act of 1914, came into force. The result is that as between them the
Acts of 1914, and 1921 apply to the whole State of Madras, and the Act of 1916
applies to the rest of India.
With effect from 1
st
February, 1960; the Hindu Transfers and Bequests Act, 1914;
and The Hindu Transfers and Bequests (City of Madras) Act, 1921, stand repealed: and
The Hindu Disposition of Property Act, 1960 has now been made applicable to the
whole of India including the State and City of Madras excepting the State of Jammu
and Kashmir and The resulting position is that a Hindu can make a bequest in favour of
491
AIR 1970 SC 1759.
492
AIR 1960 Ker 160.
GIFT
NALSAR Pro
367
an unborn child. The result of this is, subject to the limitations in Chapter II of the
Transfer of Property Act and Sections 113, 114, 115 and 116 of the Indian Succession
Act, no transfer inter vivos or by will of property by a Hindu shall be invalid by reason
only that any person for whose benefit it may have been made was not born at the date
of such disposition.
In Aniruddha Mitra v. The Administrator General of Bengal
493
it was held that a
Hindu can make a valid bequest in favour of an unborn person subject to the limitations
contained in Sections 113 and 114 of the Indian Succession Act, 1925 and in scrutinizing
the validity of the bequest the rules in Sections 113 and 114 have to be applied as at
the testators death. In this case the will directed that son or sons of his sons whether
natural or adopted should be entitled to the residue of the testators property with
certain conditions.
In Raman Nadar v. Rasalamma
494
the division of property had taken place before
the birth of the male child who was expected in the family. The High Court dismissed
the case on the ground that the child during the partition of the property was not in
existence, but on appeal to the Supreme Court it was held that as per Section 20 of the
Hindu Succession Act, 1956 and the Hindu Transfers and Bequests Act, 1960 a child in
womb at the time of the execution of the gift deed has every right on the property as if
he was in existence at that very instance. Anasuya Bai v. Jagadish
495
is another case
where it has been stated that the childs right becomes enforceable only when the child
is born and until then, the quantum of inheritance of the other heirs is suspended.
There have not been many cases regarding this issue and the principles stated in
the case above are the principles which stand at present. Therefore, the law of gift as
such is confined to the ancient laws, which have been deciphered and codified for
present usage. When it comes to Hindu Law there is not much change with respect to
the law of gift per se but the topic in question; that is, gift to an unborn child can be
considered as an addition to the Sastric law which is the basis for the prevailing law
essentially the Transfer of Property (Amendment) Supplementary Act, 1929. This Act
provides provisions for unborn children where in spite of their non existence during the
execution of the gift deed, gifts can be accepted on behalf of them having a general
presumption of the child being alive.
493
AIR 1949 P.C. 244.
494
AIR 1970 SC 1759.
495
1977 MPLJ 7.
GIFT
NALSAR Pro
368
CHAPTER - X
WILL
Introduction:
A will is an important document whereby any living person can
bequeath (leave behind) his property to other persons after his death
496
.
The person who makes the will is known as the testator. A will is
enforceable only after the death of the testator. An executor is the person
appointed ordinarily by the testators by his will or codicil to administer
testators property and to carry into effect the provision of the will. The
person in whose respect the property is given is called legatee. In India,
the Indian Succession Act, 1925 is applicable to Hindus, Sikhs, Jains or
Buddhists
497
. However, most of it doesnt apply to Muslims as Muslims
are largely covered by Muslim Personal Law. Some important features
of a will are as follows:
Legal declaration: Will is a legal declaration. Certain formalities
must be complied with in order to make a valid will. It must be
signed and attested, as required by law.
Disposition of property: There must be some property which is
being given to others after the death of the testator.
Operation after death: A will becomes enforceable only after the
death of the testator. It gives absolutely no rights to the legatee
(the person who inherits) until the death of the testator. It has no
effect during the lifetime of the testator. The testator can change
his will, at any time prior to his death, in any manner he deems fit.
496
S. A. Desai (rev.), Mulla, Principles of Hindu Law, 18
th
ed., 2001, Vol.1, p.551.
497
G.C.V.Subba Rao, Family Law in India, 7
th
ed.1995, p.379.
WILL
NALSAR Pro
369
Codicil:
A Codicil has been defined as an instrument, made in relation to a will that explains
alterations and additions to its disposition. It shall be deemed to form part of the will.
For instance, after a will has been made, the testator may still want to make some
changes. By means of a codicil, he may cancel the entire earlier will and make a fresh
will, incorporating the desired changes, or, he may alter only the relevant parts of the
will suitably. Such a codicil will form part and parcel of the existing will. A Codicil is
valid only if it is executed and attested in the same manner as a Will. It is a supplementary
document to the will and, cannot stand independently.
Persons Capable of making a will:
According to Section 59 of the Indian Succession Act, 1925 any person of sound
mind, who has reached the age of majority, can make a will. However, the following
persons cannot make a will:-
1. Lunatics, insane persons.
2. Minors i.e. below 18 years of age.
A Hindu woman cannot alienate the property that she receives from her deceased
husband, who is a member of Hindu Undivided Family (HUF). However, she can dispose
of by will, any property, which is part of her own earnings or which she has received by
way of gift during her life time. Persons who are deaf or dumb or blind are not, thereby,
incapacitated in making a will, if they are able to know what they do by it.
A person, who is ordinarily insane, may make a will during an interval while he is of
sound mind. No person can make a will while he is in such a state of mind, whether
arising from intoxication or, from illness or, from any other cause, so that he does not
know what he is doing.
Types of will:
A privileged or oral will can be made or executed only by a soldier, employed in an
outing or, engaged in actual war, or, by an airman, so employed or engaged, or, by a
sailor at sea, if he has completed the age of 18 years, to dispose of his property by a
will.
Such wills may be in writing or may be by word of mouth. The rules governing
privileged wills are as follows:
WILL
NALSAR Pro
370
Such wills may be written wholly by the testator with his own hand. In such a case,
it need not be signed or attested.
It may be written wholly or, in part, by another person and signed by the testator.
In such a case, it need not be attested.
In case the instrument is written wholly or, partly, by another person and, is not
signed by the testator, it shall be deemed to be the testators will only if it is shown
that it was written under the testators directions or, that he recognized it as his
will.
If it appears on the face of the instrument that its execution was not completed in
the manner, intended by the testator, the instrument shall not be invalid just for
that cause. However, non-execution must, reasonably, be ascribed to some cause
other than the abandonment of the testaments
If the soldier, airman or mariner has written instructions for the preparation of his
will, but has died before it could be prepared and executed, such instructions
shall be considered to be a valid will.
If the soldier, airman or mariner has, in the presence of two witnesses, given
verbal instructions for the preparation of his will and, they have been put to
writing in his life time, but he has died before the instrument could be prepared
and executed, such instructions shall be considered to be a valid will.
The soldier, airman or mariner may make a will by word of mouth, by declaring
his intentions before 2 witnesses present at the same time.
A will made by word of mouth shall be null and void at the expiration of one
month after the testator, being still alive, has ceased to be entitled to make a
privileged will.
Conditional or contingent wills become enforceable only on the happening of a
particular event
498
. E.g. A will be entitled to a flat at Mumbai after my death (death of
testator), only if he marries C.
Executor Executor Executor Executor Executor is the legal representative for all purposes of a deceased person (testator)
and all the property of a testator vests in him.
498
P .S.Narayana, Law of Wills, 1
st
ed., 2000,p.233.
WILL
NALSAR Pro
371
L LL LLegatee/Beneficiary egatee/Beneficiary egatee/Beneficiary egatee/Beneficiary egatee/Beneficiary is a person who inherits the property under a Will.
P PP PPro ro ro ro robate bate bate bate bate is a copy of the Will, certified under the seal of a competent Court.
Essential Characteristics of a Will:
L LL LLegal Declaration egal Declaration egal Declaration egal Declaration egal Declaration : The documents purporting to be a Will or a testament must be
legal, i.e. in conformity with the law and must be executed by a person legally competent
to make it.
499
Disposition of P Disposition of P Disposition of P Disposition of P Disposition of Property roperty roperty roperty roperty : The Declaration should relate to the property of the person
making the will. This is the second essential characteristic of a will.
500
Death of the T Death of the T Death of the T Death of the T Death of the Testator estator estator estator estator : The declaration as regards the disposal of the property must
be intended to take effect after his death.
Burden of P Burden of P Burden of P Burden of P Burden of Proof roof roof roof roof- The burden is not on person who propounds a will to establish the
same.
501
R RR RRevocability evocability evocability evocability evocability : The essence of every Will is that it is revocable during the lifetime of
the testator. People capable of making Wills are, Every person who is :
not a minor;
of sound mind; and
free from fraud, coercion or undue influence.
Forms and Formalities:
F FF FForm of a W orm of a W orm of a W orm of a W orm of a Will : ill : ill : ill : ill : There is no prescribed form of a Will. In order for it to be effective,
it needs to be properly signed and attested. The Will must be initialed by the testator at
the end of every page and next to any correction and alteration.
499
Ibid
500
Ibid
501
Prahlad v. Damodar, AIR 1958 Bom. 79. Also see, , , , , Surendranath v. Janandranath AIR 1932 Cal
574; Jotindra Nath v. Raj Laxmi, AIR 1933 Cal. 449; Gurdayal Singh v. Kulwant Kaur 1989 (2)0
HLR 82 (P&H); (1838 2 Moo P.C. 480; 1947 (2) MLJ 185; Ajit Kumar v. Mukundalal, ,, ,, AIR 1988
Cal. 196
WILL
NALSAR Pro
372
L LL LLanguage of a W anguage of a W anguage of a W anguage of a W anguage of a Will : ill : ill : ill : ill : A Will can be written in any language and no technical words
need to be used in a Will, however the words used should be clear and unambiguous
so that the intention of the testator is reflected in his Will.
502
Stamp Duty : Stamp Duty : Stamp Duty : Stamp Duty : Stamp Duty : No stamp duty is required to be paid for executing a Will or a codicil.
A Will, therefore, need not be made on stamp paper.
Attestation : Attestation : Attestation : Attestation : Attestation : A Will must be attested by two witnesses who must witness the testator
executing the Will. The witnesses should sign in the presence of each other and in the
presence of the testator.
Under Parsi and Christian law, a witness cannot be an executor or legatee. However,
according to Hindu Law, a witness can be a legatee. A Muslim is not required to have
his Will attested if it is in writing.
R RR RRegistration : egistration : egistration : egistration : egistration : The registration of a document provides evidence that the proper
parties had appeared before the registering officers and the latter had attested the
same after ascertaining their identity. In India, the registration of Wills is not compulsory
even if it relates to immoveable property. The non-registration of a Will does not lead to
any inference against the genuineness of a Will. In other words, registration therefore
does not give any special sanctity to the Will though registration of the Will by the
testator himself evidences the genuineness of the Will.
Whether registered or not, a Will must be proved as duly and validly executed, as
required by the Indian Succession Act. Once a Will is registered, it is placed in the safe
custody of the Registrar and therefore cannot be tampered with, destroyed, mutilated
or stolen.
Procedure for Registration :
A Will is to be registered with the registrar/sub-registrar with a nominal registration
fee. The testator must be personally present at the registrars office along with witnesses.
Revocation and Amendment:
A Will can be revoked, changed or altered by the testator at any time when he is
competent to dispose of his property. A person can revoke, change or alter his Will by
executing a new Will, revoking the earlier Will, registering the new Will (if the old Will is
502
Ibid
WILL
NALSAR Pro
373
registered), destroying the old Will or by making a codicil. On the marriage of a Parsi
or a Christian testator, his/her Will stands revoked, this however does not apply to
Hindus, Sikhs, Jains and Buddhists.
Property that can be bequeathed by a Will:
Prior to the coming into operation of the Hindu Succession Act, 1956, it was a rule
firmly established that a Hindu cannot by will bequeath property which he could not
have alienated by gift inter vivos. In the famous case of Vailliammai v Nagappa
Chettiar
503
, the Supreme Court laid down that a father of a Mitakshara family has a
very limited right to make a will and the mere fact that the father after making some
depositions, gave the residue to his son and the son took out the probate and carried
out the wishes of the father would not change the nature of the joint family property.
Even after the Act, a Hindu cannot by will, so dispose of his property, so as to defeat the
legal right of his wife, or any other person to maintenance
504
. Section 30 of the Hindu
Succession Act, however, permits a member of a Mitakshara coparcenary to dispose of
by will, his undivided interest in the coparcenary property.
As regards property which a Hindu could dispose off by will, the following
propositions are noteworthy:
According to all the Schools, a Hindu could dispose off by will his separate or self
acquired property.
According to Dayabhaga Law, a father could dispose off by will all his property,
whether ancestral or self acquired. Similarly a coparcener could dispose off by will, the
whole of his interest in the joint family property
505
.
A sole surviving coparcener can however bequeath the joint family property as if it
was his separate property. This however could only be done when it is not possible for
a coparcener to be added to the family. Such has been held in the case of Taoram v
Ramabai
506
. Since a will operated from the date of testators death, it was held that if a
coparcener subsequently came into existence, such as a son adopted by him, a son
subsequently born to him, including a posthumous son or the posthumous son of a
503
AIR 1967 SC 1153.
504
S.A. Desai (rev.), Mulla, Principles of Hindu Law, 18
th
ed. 2001, p.655.
505
Ibid p.656.
506
AIR 1976 Bom 315.
WILL
NALSAR Pro
374
deceased coparcener, the will so far it dealt with the coparcenary property, was inoperative
and the property passed to him by survivorship
507
. However, if the son, whether natural
born or adopted, died in the lifetime of the testator, the will stood and the devisee was
entitled to the property given to him by the will
508
. Though a father could dispose of a
small portion of ancestral movable by way of gift, he could not do so by will.
(i) A Hindu female could dispose of her stridhana by will, subject to in certain
cases with the consent of her husband. After the coming into force of the Hindu Succession
Act, 1956, her rights are considerably enlarged
509
.
The owner of an impartible estate could dispose of it by will, in the absence of a
special custom prohibiting alienation, or where the tenure of such a nature that it could
not be alienated
510
.
Form of Will:
The following Hindu wills and codicils are required to be in writing signed by the
testator and attested by at least two witnesses as held in Umakant v Bishwambhar
511
.
This is also provided in Section 63 of the Indian Succession Act, 1925:
= all wills and codicils made by any Hindu, Buddhist, Sikh or Jain, which on or
after the 1
st
day of September, 1870, within the territories which at the said date were
subject to the Lieutenant-Governor of Bengal or within the local limits of the ordinary
original civil jurisdiction of the High Courts of Judicature at Madras and Bombay.
= All such wills and codicils made outside those territories and limits so far as
relates to immovable property situated within those territories or limits; and
507
th
ed. 2001, p.657.
508
Ibid.
509
This has to be read in the light of Section 14 of the Act. It states that 1) any property possessed by a
female Hindu, whether acquired before or after the commencement of this Act, shall be held by her
as full owner thereof and not as a limited owner. Here property includes both movable and immovable
property acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu of
maintenance or arrears of maintenance, or by gift from any person, whether a relative or not,
before, at or after her marriage or by her own skill or exertion, or by purchase or by prescription, or
in any other manner whatsoever; and also any such property held by her as stridhana immediately
before and after commencement of this Act.
510
Ibid.
511
AIR 1929 Pat 401.
WILL
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= All other wills and codicils made by any Hindu, Buddhist, Sikh, or Jain, on or
after 1
st
day of January, 1927.
Before the Hindu Wills Act, 1870 no Hindu will was required to be in writing the will
could be oral or in writing
512
. If the will was in writing, it did not require be signing or
attesting. The Hindu Wills Act, 1870 was the first enactment that required Hindu wills to
be in writing. That Act, however applied to certain wills only, and the other wills could
be made orally. By the Indian Succession (Amendment) Act, 1926, all wills were required
to be in writing
513
. The result is that every Hindu will made after 1
st
January 1927, must
be in writing signed by the testator and attested by at least two witnesses as provided by
Section 63, Indian Succession Act, 1925
514
.
Unborn People and Bequests:
A person capable of taking under a will must, either in fact or in contemplation of
law, be in existence at the death of the testator. This rule still applies to cases to which
provisions of the three Acts do not apply. This rule was discussed by the Supreme Court
in Raman Nadar v S Rasalamma
515
.
A Child in Womb:
A bequest to a person not in existence at the testators death is invalid. A child in
the womb and a son adopted by a widow after the death of her husband is in
contemplation of law in existence at the death of the testator. A bequest to the wife of
the testators son in case he should marry within 10 years from the testators from the
testators death is valid, provided, the son marries a girl who was in existence at the
testators death, as the rule in this section does not apply.
516
However the rule that had been laid down in the Tagores case
517
was altered by
statute. The rules that are now in place are:
512
th
ed. 2001, p.658.
513
Ibid.
514
Ibid p.659.
515
AIR 1970 SC 1759.
516
Dinesh Chandra v Biraj Kamini (1912) 39 Cal 87, S.A. Desai (rev.), Mulla, Principles of Hindu
Law, 18
th
ed. 2001, p. 661.
517
Tagore v Tagore (1872) 9 Beng LR 377, IA Sup vol. 47.
WILL
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The rule of Hindu Law that a bequest cannot be made in favour of a person who
was not born at the date of the testators death has been altered by three Acts, namely:
the Hindu Transfers and Bequests Act, 1914, the Hindu Disposition of Property Act,
1916 and the Hindu Transfers and Bequest (City of Madras) Act, 1921. The rule as
altered by these Acts may be stated as follows:
Subject to the limitations and provisions contained in Sections 113, 114,115 and
116 of the Indian Succession Act, 1925 no bequest shall be invalid by reason only that
any person for whose benefit it may have been made was not born at the date of the
testators death.
This rule, however, is not of universal application, but is confined to the following
cases, namely to:
Wills executed on or after 14
th
February, 1914, by Hindus domiciled in the State of
Madras except the city of Madras, and in the case of wills executed before that date, to
such of the dispositions thereby made as are intended to come into operation at a time
which is subsequent to that date (Hindu Transfers and Bequests Act,1914);
Wills executed on or after 20
th
September 1916, by Hindus in any part of India
except the State of Madras (Hindu Disposition of Property Act 1916);
Wills executed on or after 27 March 1916, by Hindus domiciled within the limits of
the ordinary original civil jurisdiction of the High Court of Madras, and in the case of
wills executed before that date, to such dispositions thereby made as are to come into
operation at a time subsequent to 14
th
February 1914 (Hindu Transfers and Bequests
(City of Madras) Act 1921).
It may be noted however that with effect from 1
st
February 1960, the Hindu
Dispositions of Property Act 1916 has been extended to the whole of India and the
other two acts repealed
518
.
Wishes and Notions:
In construing the will of a Hindu, it is not improper to take into consideration what
are known, to be ordinary notions and wishes of Hindus with respect to the devolution
of property. The predilections of the class to which the testator belongs may be kept in
518
th
ed. 2001, p.658.
WILL
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519
AIR 1935 Cal 716.
520
AIR 1938 Cal 34.
521
th
ed. 2001, p. 668.
522
Section 61of the Indian Succession Act, 1925.
523
Boyce v. Rossborough, (1856) 6 HLC 2; Bur Singh v. Uttam Singh, (1911) 38 Cal 355 PC.
524
Ranganath Misra (rev.), Mayne, Hindu Law and Usage, 15
th
ed., p. 1321.
525
Tagore v. Tagore, (1872) 9 Beng LR 377, IA Sup. Vol.47.
views held in Sasanka Bhushan v Gopi Ballav
519
. Where a testator gave certain properties
to his daughters with a direction that they should enjoy the interest with their sons,
grandsons etc. and that neither the daughters nor their sons or grandsons etc. should
be entitled to give, sell or mortgage their properties, it was held in Bibha Bati Debee v
Mahendra Chandra Lahiri that the daughters and the daughters sons took only life
estates
520
.
In construing a will, made after the coming into operation of the recent legislation
and particularly the Hindu Succession Act, 1956, the Court may assume that the testator
knew of the radical changes that have been brought about in the general law of
inheritance and that women now, as a general rule, take absolute estates of
inheritance
521
.
a) Fraud and Coercion:
A will, or any part of a will, the making of which has been caused by fraud or
coercion, or by such importunity as takes away from the free agency of the testator, is
void.
522
To constitute undue influence for setting aside a will, there must be coercion.
Neither fiduciary relationship nor a dominating position which will readily raise a
presumption of undue influence in cases of gifts inter vivos, will avail.
523
The circumstance
that one person had unbounded influence over another thought it was very bad influence,
would not be undue influence so as to invalidate the others will.
524
b) Wills founded on the Law of Gifts:
Wills are not universally regarded to be gifts which take effect upon death, they are
generally so to be regarded as the property which they can transfer, and the persons to
whom it can be transferred.
525
WILL
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Bibliography
Acharya Shuklendra, HINDU UNDIVIDED FAMILY: TAXATION AND
TAX PLANNING, 1
ST
ed. 2000 (rep. 2003), Modern Law
Publications, Allahabad.
Acharya Suklendra, HINDU LAW, 1
st
ed. 2002, Modern Law
Publishers, Allahabad.
Acharya Shuklendra and M.G.Gurha, TAX PLANNING UNDER
DIRECT TAXES, 8
th
ed. 2004, Modern Law House, Allahabad.
A.G. Gupte, HINDU LAW, 1
st
ed. 2003, Premier Publishing
Company, Allahabad.
B.M Gandhi, HINDU LAW, 2
nd
ed., 2003, Eastern book company,
Lucknow.
Ganganath Jhas MANUSMRITI with the Manubhasaya of
Medhatithi; Vol.IV English Transalation Part II published by Motilal
Banarasidass Publishers Pvt. Ltd., New Delhi.
G.M. Divekar, HINDU LAW: A CRITICAL COMMENTARY, 2
nd
ed.
2002, Hind Law House, Pune.
Kusum, FAMILY LAW LECTURES: FAMILY LAW-II, 1st ed. 2003,
Lexis Nexis Butterworths, New Delhi.
K.B. Asthana, et al., (rev.), Hari Singh Gour, THE HINDU CODE,
6
th
ed. 2002, Law Publishers Pvt. Ltd., Allahabad.
Paras Diwan and Peeyushi Diwan, FAMILY LAW, 7
th
ed. 2005,
Allahabad Law Agency, Haryana.
Paras Diwan and Peeyushi Diwan, MODERN HINDU LAW, 12
th
ed. 1999, Allahabad Law Agency, Haryana.
Paras Diwan and Peeyushi Diwan JOINTT FAMILY SYSTEM, DEBTS,
GIFTS, MAINTENANCE, DAMDUPAT, BENAMI TRANSACTIONS
AND PRE- EMPTION published by Wadhwa & Company 1993.
NALSAR Pro
379
Paras Diwan and Peeyushi Diwan, LAW OF INTESTATE AND TESTAMENTARY
SUCCESSION, 3
th
ed. 2006, Universal Law Publishing Co., Delhi.
Pandurang Vaman Kanes HISTORY OF DHARMASHASTRA (Ancient and Medieval
Religious and Civil Law); Vol. III, 3
rd
edition; published by Bhandarkar Oriental
Research Institute, Pune.
Poonam Pradhan Saxena, LexisNexis Student Series Family Law Lectures: FAMILY
LAW II, LexisNexis Butterworths, 2004.
Premnath Chadha HINDU LAW published by Eastern Book Company Law
Publishers Lucknow.
Ramesh Chandra Nagpal, MODERN HINDU LAW, 2
nd
. Ed. 2008, Eastern Book
Company, Lucknow.
Ranganath Misra and Vijender Kumar, (rev), Mayne, HINDU LAW AND USAGE,
16
th
ed. 2008, Bharat Law House, New Delhi.
S.A. Desai, (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. 1, 19
th
ed.2005,
Butterworths, New Delhi.
S.A. Desai, (rev.), Mulla, PRINCIPLES OF HINDU LAW, Vol. 2, 19
th
ed.2005,
Butterworths, New Delhi.
T.V. Subba Rao and Vijender Kumar, (rev.), G.C.V.Subba Rao, HINDU LAW, 8
th
ed. 2003, rep. 2004, S.Gogia & Company, Hyderabad.
T.V. Subba Rao and Vijender Kumar, (rev.), G.C.V. Subba Rao, FAMILY LAW IN
INDIA, 9
th
ed. 2006, rep. 2007, S.Gogia & Company, Hyderabad.
U.P.D. Kesari, MODERN HINDU LAW 1
st
ed. 1996, Central Law Publishers,
Allahabad.
BIBLIOGRAPHY
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Dr. V. K. Jain
M.Com., M.Phil., LL.M. Ph.D. (Tax), F.C.S.
Corporate Law & Tax Advisor
Reader, G.S. College of Commerce & Economics,
Recipient of Best Teacher Award from RTM Nagpur University
Email: jainsir@rediffmail.com
PART IV
COMPANY LAW
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CHAPTER - I
NATURE AND KINDS OF COMPANIES
What you should know?
1.1 Nature of a company.
1.2 Characteristics of a company
1.3 Lifting the corporate veil
1.4 Kinds of companies
1.5 Conversion of companies
1.6 Illegal Association
1.7 Application of Companies Act
1.8 Administration of Companies Act
1.1 Nature of a Company
There are three major forms of business organisations; the sole
proprietorship, the partnership and the company. Companies are,
by and large, the most effective symbols of progress of a developing
nation. In a developing country like India, the corporate sector is
the most suitable form through which there could be a greater
involvement of all sections of the population and utilisation of
their resources. Corporate device is one form of associated
enterprise. It is an organisational structure run generally by
professional managers who hire capital from the investors.
There has been tremendous growth of companies in the nineties
due to the new economic policy of liberalisation, the new scheme
of taxation of partnership firms, the expanding capital market etc.
As a result the number of companies increased manifold from
about 1.25 lacs in 1980 to around 7.5 lacs by 2007.
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The first Companies Act was passed in India in the year 1850. Thereafter the
Companies Act, 1866 was enacted, followed by the Companies Act 1913, which
was replaced by the present Companies Act, 1956. The Companies Act 1956
has been amended several times. The Companies (Amendment) Act, 1999, 2000
& 2002, has drastically amended the Companies Act, 1956, to respond to the
changed economic environment and liberalisation and globalisation policies of
the Government.
In 2004 a new Ministry of Company Affairs (recently renamed Ministry of Corporate
Affairs since 9
th
May 2007) was created for the first time under the charge of an
independent Minister. A new Companies Act is in the offing and the draft company
law has already been presented for discussion and feedback.
MCA MCA MCA MCA MCA-21 -21 -21 -21 -21 This is the biggest e- governance initiative taken by the Ministry of
Corporate Affairs in 2006. All manual filing of returns and documents have been
abolished and e-filing has been introduced.
A Company provides an organisational framework. It is a means to an end. The
end /objective may be to run an industry or business or to execute a project.
However, the Companies Act also allows a company to be formed for the promotion
of commerce, art, science, religion or charity, i.e., for non-commercial purposes.
MEANING OF A COMPANY
COMP COMP COMP COMP COMPANY ANY ANY ANY ANY
IS
AN AN AN AN AN
A
FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE FOR SOME COMMON PURPOSE VIZ VIZ VIZ VIZ VIZ., BUSINESS ., BUSINESS ., BUSINESS ., BUSINESS ., BUSINESS, CHARITY , CHARITY , CHARITY , CHARITY , CHARITY, RESEARCH ET , RESEARCH ET , RESEARCH ET , RESEARCH ET , RESEARCH ETC CC CC
REGISTERED OR INCORPORA REGISTERED OR INCORPORA REGISTERED OR INCORPORA REGISTERED OR INCORPORA REGISTERED OR INCORPORATED UNDER THE COMP TED UNDER THE COMP TED UNDER THE COMP TED UNDER THE COMP TED UNDER THE COMPANIES A ANIES A ANIES A ANIES A ANIES ACT CT CT CT CT
WHERE B WHERE B WHERE B WHERE B WHERE BY IT A Y IT A Y IT A Y IT A Y IT AQUIRES CER QUIRES CER QUIRES CER QUIRES CER QUIRES CERT TT TTAIN A AIN A AIN A AIN A AIN ATTRIBUTES TTRIBUTES TTRIBUTES TTRIBUTES TTRIBUTES
common
seal
separate
legal entity
limited
liability
perpetual
succession
transferable
shares
separate
property
separation of
ownership from
management
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What is a company?
The Companies Act, 1956 defines a company as a company formed and
registered under this Act or an existing Company sec. 3(1)(i). (An existing company
is one which is formed and registered under any of the previous Companies Act).
By a company is meant an association of many persons who contribute money
or moneys worth to a common stock and employ it in some trade or business,
and who share the profit and loss (as the case may be) arising there from. The
common stock so contributed is denoted in money and is the capital of the
company. The persons who contribute it, or to whom it belongs, are members.
The proportion of capital to which each member is entitled is his share. The
shares are always transferable although the right to transfer is often more or less
restricted. (Lord Justice Lindley)
On the basis of its characteristics, a company can be defined as an incorporated
association, which is an artificial person created by law, having a separate entity,
with a perpetual succession and a common seal. (Haney)
1.2 Characteristic Features of a Company
a) Incorporated Association Incorporated Association Incorporated Association Incorporated Association Incorporated Association. . . . . A company comes into existence when it is registered
or incorporated under the Companies Act, 1956. On registration, a company
becomes a body corporate, i.e., it acquires legal personality of its own, separate
and distinct from its members.
R RR RRegistration as Company when Compulsory: egistration as Company when Compulsory: egistration as Company when Compulsory: egistration as Company when Compulsory: egistration as Company when Compulsory: Pursuant to section 11 of the
Companies Act, 1956, no company, association or partnership consisting
of more than 10 persons for the purpose of carrying on the business of
banking and more than 20 persons for the purpose of carrying on any other
business can be formed unless it is registered under the Companies Act or is
formed in pursuance of some other Indian law.
Illegal Association: Any business carried on for making gain in contravention
of section 11 will be considered illegal and the persons carrying on the said
business will be held personally liable for the debts and obligations incurred
in such business.
b) Separate L Separate L Separate L Separate L Separate Legal entity: egal entity: egal entity: egal entity: egal entity: A company has a separate legal existence, quite distinct
from the members who constitute it. The following are the implications of a company
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being a separate legal entity: 1) Perpetual succession. 2) Company can hold
property in its own name. 3) Liability of company is not liability of its members. 4)
Share holders can enter into a contract with company.
The principle of separate legal entity of a company was established in the
famous case of Salomon vs. Salomon & Co. Ltd [1895] All. ER 33 (HL). One
Salomon was a boot manufacturer. He formed a company called Salomon
vs. Salomon and Co. Ltd., The shareholders of the company consisted of
Salomon himself, his wife, daughter and 4 sons. The business was transferred
to the company. In payment Salomon took 20,000 shares of 1 pound each
and secured debentures worth 10,000 pound. One share was given to each
remaining member of his family. Later on, the company went into liquidation.
Salomon as a secured creditor (debenture holder) demanded priority in the
payment. The unsecured creditors objected on the ground that Salomon
and the company were one and the same person and that the business really
belonged to him. It was held by the House of Lords that Salomon as an
individual was quite different from Salomon and Co. and hence entitled to
priority payment.
In Lee v. Lee Air Farming Limited (1960) 3 All ER 420 PC, Lee, a qualified
pilot held all but one of the shares in the company and by the articles was
appointed director of the company and chief pilot. Lee was killed while piloting
the companys aircraft and his widow claimed compensation for his death.
The company opposed the claim on the ground that Lee was not a worker as
the same person cannot be employer and employee. Held, there was a valid
contract of service between Lee and the company and Lee was therefore, a
worker. Mrs Lees contention was upheld.
c) Limited liability of members: Limited liability of members: Limited liability of members: Limited liability of members: Limited liability of members: The liability of members of a limited liability company
is limited to the extent of the amount unpaid on the shares held by him or the
amount guaranteed by him.
d) P PP PPerpetual Succession: erpetual Succession: erpetual Succession: erpetual Succession: erpetual Succession: A company has perpetual succession i.e. continued
existence. The death, insolvency, or lunacy of any of its members does not affect
its continuity or existence. It is created by law and law alone can dissolve it.
e) Separation of ownership from management: Separation of ownership from management: Separation of ownership from management: Separation of ownership from management: Separation of ownership from management: Generally the owners manage the
business. Thus in case of sole proprietorship the proprietor, and in case of
partnership the partners manage the business. But this is not so in the case of
companies. There is separation of ownership from management. The shareholders
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who are the owners of share capital and who bear the risk do not actually manage
the company. The management is vested in the Board of Directors who are elected
by the shareholders.
f) T TT TTransferable shares: ransferable shares: ransferable shares: ransferable shares: ransferable shares: The shares of a company are movable property, transferable
in the manner provided by the articles of the company.
g) Separate P Separate P Separate P Separate P Separate Property: roperty: roperty: roperty: roperty: A company being a distinct entity, can acquire, own, enjoy
and dispose of property in its own name. The property of the company is not the
property of the share holders. Shareholders are not part owners of the company
or its property. (Bucha F Guzdar v CIT, Bombay [1955] 25 Comp. Cas. 1 (S C)
h) Common Seal: Common Seal: Common Seal: Common Seal: Common Seal: A company being an artificial person cannot sign a document as
a natural person can do. The common seal is a seal used by a company as a
substitute for a signature. In legal terms the common sea is the official signature
of the company. In terms of sec. 34 (2), the provision of a common seal is a
statutory requirement for a company. It is a metal seal on which the name of the
company is engraved. Sec. 147(1)(b). The purpose of the seal is to furnish
authenticity of a document. Common seal is to be affixed on the documents
expressly provided in the Act. Other documents need not be under common seal.
As per the provisions of the Companies Act, common seal is required on the following
documents
1. power of attorney executed by the company - Sec. 48(1)
2. share certificates - Sec.84
3. share warrant - Sec.114 & other documents provided in the articles of association.
It is to be noted that normal business documents, purchase orders, employee
appointment letters, invoices etc. need not be under common seal (sec 54). The
articles generally provide the manner in which the seal is to be affixed. Table A
provides that Common seal is to be affixed on any instrument with the authority of
a resolution passed by the Board of Directors and in the presence of atleast two
directors and of the secretary or such other person authorised by the Board.
i) Capacity to sue and being sued: Capacity to sue and being sued: Capacity to sue and being sued: Capacity to sue and being sued: Capacity to sue and being sued: The company being a legal entity, it can sue
and be sued in its own name. Since company is an artificial person it cannot be
imprisoned. However, penalty /fine can be imposed.
Disadvantages of corporate form Disadvantages of corporate form Disadvantages of corporate form Disadvantages of corporate form Disadvantages of corporate form: a) High cost of formation. b)high cost of
running the company c) Difficult to close the company
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1.3 Lifting the Corporate Veil
From the juristic point of view a company is a legal person distinct from its members
(Salomon v. Salomon & Co. Ltd.). This principle may be referred to as the veil of
incorporation. The effect of his principle is that there is a fictional veil between the
company and its members. Lifting the veil means looking behind the company as a
legal person i.e. disregarding the corporate entity and paying regard instead to the
realities behind the legal form. The corporate veil is lifted by the courts when the corporate
form is used to evade taxes or personal obligations, justify wrong, protect fraud or
defend crime. The courts ignore the company and concern themselves directly with the
persons who really control the affairs of the company.
The human beings who are engaged to manage the affairs of a company may
commit certain illegal acts or frauds in its name. It may, therefore, become necessary to
identify and hold these individuals personally liable for their deeds. In other words, the
veil of corporate personality may be pierced or lifted. The circumstances under which
corporate veil can be lifted may be grouped in the following two heads-
(a) When the statute itself contemplates lifting corporate veil. For example as per
section 179 of Income Tax Act and as per section 18 of Central Sales Tax Act,
liability of directors of private company is personal, if tax due cannot be recovered
from the company.
(b) When the courts finds that corporate device is used for some illegal or improper
purpose, for committing fraud, for evasion of taxes, for avoiding contractual
obligations etc. In all these cases the separate corporate body will be ignored
and the corporate veil lifted, so that individual shareholders managing the company
may be held liable for its acts.
Corporate veil can be lifted for the benefit of the company also Corporate veil can be lifted for the benefit of the company also Corporate veil can be lifted for the benefit of the company also Corporate veil can be lifted for the benefit of the company also Corporate veil can be lifted for the benefit of the company also- New Horizons
Ltd. v. UOI 1995, 15 SCL 148 (SC); Prem Lata Bhatia .v. UOI (2006) 71 SCL 142 (DEL
HC DB)
a. Statutory provisions for lifting the corporate veil.
The Supreme Court in LIC .v. Escorts Ltd. (1986) held that corporate veil would be
lifted when statute itself contemplates it. In the Companies Act there are specific provisions
for lifting the corporate veil.
1. R RR RReduction of membership below the statutory minimum (sec. 45) eduction of membership below the statutory minimum (sec. 45) eduction of membership below the statutory minimum (sec. 45) eduction of membership below the statutory minimum (sec. 45) eduction of membership below the statutory minimum (sec. 45): : : : : If the number
of members in a company falls below the statutory minimum i.e. below seven in
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the case of public company and below two in the case of a private company, and
the company carries on business for more than 6 months while the number is so
reduced, then every person who is member of he company during the time the
company so carries on business after those six months shall be severally liable for
the payment of company debts contracted during that time.
The unlimited liability of the members under this section will arise only if they are
aware of the fact that the number of members of the company has fallen below
statutory minimum.
2. Misrepresentations in prospectus (sec.62 & 63) Misrepresentations in prospectus (sec.62 & 63) Misrepresentations in prospectus (sec.62 & 63) Misrepresentations in prospectus (sec.62 & 63) Misrepresentations in prospectus (sec.62 & 63): In case of misrepresentation in
a prospectus, every director, promoter, or every other person who authorizes issue
of such prospectus is liable to the subscribers who subscribe for share on the faith
of untrue statement (Sec.62). Besides, these persons may be charged criminally
and fined upto Rs. 50,000 or imprisoned up to two years or may be fined as well
as imprisoned
3. F FF FFailure to return application money (sec. 69) ailure to return application money (sec. 69) ailure to return application money (sec. 69) ailure to return application money (sec. 69) ailure to return application money (sec. 69): Similarly, if minimum subscription
is not received within prescribed time limit the directors will be liable to pay interest
if they fail to return application money as per the time limit fixed by SEBI (Sec 69)
4. Misdescription of name (sec. 147) Misdescription of name (sec. 147) Misdescription of name (sec. 147) Misdescription of name (sec. 147) Misdescription of name (sec. 147): Where on officer of a company sign on
behalf of the company any contract, bill of exchange, hundi, promissory note,
cheque or order for money, such person shall be personally liable to the holder if
the name of the company is either not mentioned, or is not properly mentioned.
5. P PP PPiercing the veil in holding and subsidiary company relationships iercing the veil in holding and subsidiary company relationships iercing the veil in holding and subsidiary company relationships iercing the veil in holding and subsidiary company relationships iercing the veil in holding and subsidiary company relationships. A holding
company is required to disclose to its members the accounts of its subsidiaries.
This amounts to lifting the corporate veil since in the eyes of law a subsidiary is a
separate legal person. Moreover, the Companys Act itself provides for looking at
ownership to decide whether a company is a holding company or subsidiary
company.
(In general, a subsidiary company is treated, as altogether a separate unit enjoying
independent corporate existence and its holding company is not liable for its acts.
But under section 212-214, companies under a group are required to present a
joint picture in relation to accounts and financial position of the group and all
companies under a group are treated as part of the same entity

disregarding the
rule that each subsidiary company has a separate legal personality.)
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6. Company under investigation Company under investigation Company under investigation Company under investigation Company under investigation. Inspectors appointed u/s 239 to investigate the
affairs of the company for alleged mismanagement, or oppressive policy towards
its members or to determine its true ownership u/s 247, may investigate into the
affairs of another related company in the same management or group. In this
way the separate legal entity of the company may be regarded.
7. F FF FFraud during winding up raud during winding up raud during winding up raud during winding up raud during winding up. Where the business of the company is found to have
been carried for fraudulent purpose in the case of winding up (sec. 542). In such
a case the directors and parties responsible for fraudulent conduct can be made
personally liable.
8. F FF FFor ultra vires acts or ultra vires acts or ultra vires acts or ultra vires acts or ultra vires acts: Directors and other officers of a company will be personally
liable for all those acts which they have done on behalf of a company if the same
are ultra vires the company.
9. For violations of the provisions of statutes like Income-tax Act or Foreign Exchange
Management Act., the directors and officers in default are personally liable.
b.When courts disregard separtate legal personality of the company.
10. Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: Lifting corporate veil in tax matters: The court has power to disregard the corporate
entity if it is used for tax evasion or to circumvent tax obligations. (Sir Dinshaw
Maneckjee Petit, Re AIR 1927 Bom. 371, In this case D formed four private
companies and transferred his investments to them. D took pretended loans from
the companies which he never repaid. In a legal proceeding the corporate veils
of all the companies were lifted and the incomes of the companies treated as if
they were of D. Also, affirmed in CIT v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819.
11. Lifting corporate veil where company is used for evasion of personal and Lifting corporate veil where company is used for evasion of personal and Lifting corporate veil where company is used for evasion of personal and Lifting corporate veil where company is used for evasion of personal and Lifting corporate veil where company is used for evasion of personal and
st at ut ory obl i gat i on: st at ut ory obl i gat i on: st at ut ory obl i gat i on: st at ut ory obl i gat i on: st at ut ory obl i gat i on:In Jones v. Li pman [1962] 1 11 111 ALL ER 442, the
defendant attempted to avoid completing the sale of his house to the plaintiff by
transferring to a company formed for the purpose. The court ordered both the
defendant and the company specifically to perform the contract with the plaintiff.
12. Lifting corporate veil for determination of the enemy character of the company: Lifting corporate veil for determination of the enemy character of the company: Lifting corporate veil for determination of the enemy character of the company: Lifting corporate veil for determination of the enemy character of the company: Lifting corporate veil for determination of the enemy character of the company:
(Daimler Company Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. [1916]
2 AC 307. In this case the Daimler company was incorporated in London. Its
majority shareholders and directors were Germans. On declaration of war between
England and Germany in 1914 it was held that the company was a German
company. Accordingly, the suit filed by the company to recover a trade date was
dismissed on the ground that such payment would amount to trading with enemy.
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13. Lifting corporate veil where company is used to avoid welfare legislation Lifting corporate veil where company is used to avoid welfare legislation Lifting corporate veil where company is used to avoid welfare legislation Lifting corporate veil where company is used to avoid welfare legislation Lifting corporate veil where company is used to avoid welfare legislation: :: ::
(Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 59
Comp. Cas. 134 (SC). In this case corporate veil was lifted since the company
formed the subsidiary and transferred investments only to split the profits and
reduce liability of bonus.
14. Lifting corporate veil where body corporate is used to commit fraud or improper Lifting corporate veil where body corporate is used to commit fraud or improper Lifting corporate veil where body corporate is used to commit fraud or improper Lifting corporate veil where body corporate is used to commit fraud or improper Lifting corporate veil where body corporate is used to commit fraud or improper
conduct: conduct: conduct: conduct: conduct: In the case of fraud or improper conduct, Courts can pierce the corporate
veil and punish the persons who were actually responsible. Delhi Development
Authority v. Skipper Construction Company (P) Ltd. (1996) 4SCALE202 (SC); PNB
Finance Limited v. Shital Prasad Jain (1983) 54 Comp. Cas. 66 (Delhi).
15. Lifting corporate veil for determining technical competence of the company Lifting corporate veil for determining technical competence of the company Lifting corporate veil for determining technical competence of the company Lifting corporate veil for determining technical competence of the company Lifting corporate veil for determining technical competence of the company: :: :: In
New Horizons Ltd. v. UOI (1997) 89 Comp Cas 849 (SC) = (1997) 27 CLA56
(SC), a company was formed as joint venture by other companies for purpose of
telecom tender. The company was new but its major shareholders had vast
experience in the field. However, tender evaluation company rejected the tender
on the ground that the company has no experience in the field. Supreme Court
held that experience of major shareholders can be considered as experience of
the company, for purpose of awarding a tender or contract.
1.3a. Difference between Company and Body Corporate
Body corporate means a body of persons, which is incorporated under some statue.
It has three distinct attributes viz. separate legal personality different from the members
constituting it, perpetual succession and a common seal. A company should, however,
be distinguished from a body corporate.
The expression body corporate is a wider expression than company. According to
sec 2(7) body corporate includes besides a company, a company incorporated outside
India (foreign company), public financial institutions, nationalized banks and any other
association of persons declared as a body corporate by the Central Government. ONGC
has been notified as a body corporate by Central Government notification no. GSR
1883, 20/12/65.
Thus every company is a body corporate but every body corporate is not a company.
The term body corporate however does not include u/s 2(7) of the Companies Act:
1. A corporation sole;
2. A co-operative society.
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A society registered under the Societies Registration Act is not a body corporate.
(Board of Trustees Aurvedic & Unani Tibia College, Delhi v. State of Delhi AIR 1962 SC
458.)
A corporation sole is a single individual constituted as a corporation by virtue of
occupying a particular office or performing a particular function. It enjoys corporate
personality and status. For example the offices of President of India, Governor of State,
constitute a corporation sole.
1.3.b. Is Company a Citizen?
A company has a nationality and domicile. It is a person But it is not a citizen and
therefore can not be said to have the fundamental rights expressly conferred upon
citizens only. (State Trading Corporation of India Ltd. vs. CTO 1963, 33 Comp. Cas.
1057 (SC). However those fundamental rights which are available to all persons, whether
citizens or not, like the right to own property are available to the company.
1.3.c. Is a Company a property of the shareholders?
No. The company is not the property of its shareholders. All the property in the
name of the company is its separate property, which is controlled, managed and disposed
of by the company in its own name. Thus the company is the owner of its assets and
capital. Moreover, the company being a separate legal person, it cannot be construed
as property of the shareholders. The decision of the Supreme Court in the case, National
Textile Workers Union Vs P.R. Ramkrishnan, AIR 1993 (SC), has set at rest at the debate
which was going on this issue. According to the verdict given in this case.... a company,
according to the new socio-economic thinking is a social institution having duties and
responsibilities towards the community in which it functions. Maximization of social
welfare should be the legitimate goal of a company and shareholders should be regarded
not as proprietors of the company, but merely as suppliers of capital entitled to no more
than reasonable return and the company should be responsible not only to shareholders
but also to workers, consumers and the other members of the community and should be
guided by consideration of national economy and progress.
1.3.d. Company vs Partnership firm
A partnership firm is not a body corporate. It does not have separate legal personality.
A company differs from a partnership on the following grounds viz. mode of creation,
number of minimum and maximum members, legal status, liability of members, transfer
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of shares, agency of members, management, perpetual succession, powers, dissolution
and legal obligations.
1.4. Kinds of Companies
There are various types of companies. A broad classification can be:
A. Companies not covered by the Companies Act, 1956.
B. Companies covered by the Companies Act, 1956.
A. The companies not covered by the Companies Act are:
1. Statutory companies
2. Chartered companies
B. The companies covered by the Companies Act
These are called registered companies. Such companies on registration get a
certificate of incorporation. The two basic types of companies which may be registered
under the Act are:
Private companies
Public companies
These companies may be:
i) Companies limited by shares,
ii) Companies limited by guarantee,
iii) Unlimited companies.
Companies may also be classified on the basis of nature, form andfunctions as
i) Companies not for profit,
ii) Government companies
iii) Foreign companies,
iv) Holding and subsidiary companies.
v) Producer companies.
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1.4a. Companies not covered by the Companies Act
These are:
1. Statutory companies Statutory companies Statutory companies Statutory companies Statutory companies: :: :: Statutory companies are those, which are formed under a
Special Act of Parliament or State legislature. The constitution, powers and function
of such companies are laid down in the Special Act itself. Hence they require
some special powers and privileges. Statutory companies are formed in special
cases to carry on the work of some special public importance. They do no have
the word limited as part of their name. They are also called as corporations.
Example: Reserve Bank of India, is a statutory company since it has been formed by
a statute viz., the RBI Act 1934. Other examples are:
i) Life Insurance Corporation (established under the Life Insurance Corporation Act
1956)
ii) Indian Airlines and Air India (established under the Air Corporation Act 1953)
now converted into a company under the Companies Act.
iii) Damodar Valley Corporation (constituted under the Damodar Valley Corporation
Act 1948).
Legal status of statutory companies: Although it is a body corporate, it is not required
to have memorandum and articles of association, nor it is required to add the word
Limited after its name. Each statutory corporation is governed by the provisions of the
special Act creating it, as well as the provisions of the Companies Act 1956 in so far as
these provisions are not inconsistent with the provisions of the special Act (Sec. 616).
2. Chartered Companies: Chartered Companies: Chartered Companies: Chartered Companies: Chartered Companies: Chartered companies are those companies which are
formed by Royal Charter issued by the King or Queen of England e.g., The East
India Company, BBC (British Broadcasting Corporation). The Bank of England
etc. It is the oldest form of incorporation known to English law. A Chartered
company is regulated by its charter and the Companies Act does not apply to it.
This method of incorporation is now used in England mostly to form non-trading
corporation. A recent example is of the Institute of Cost and Management
Accountants, London, which was incorporated under the Royal Charter.
1.4b. Companies Covered by the Companies Act
These may be briefly described as follows:
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i. Private Company - Sec 3 (1) (iii)
A private company means a company which has a minimum paid up capital of one
lakh rupees or such higher paid up capital as may be prescribed and which by its
articles -
(a) restricts the right to transfer its shares.
(b) limits the number of its members to fifty.
(c) prohibits any invitation to the public to subscribe for any shares in, or debentures
of, the company.
(d) prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.
Kinds of companies
COMP COMP COMP COMP COMPANIES ANIES ANIES ANIES ANIES
COVERED BY THE
COMPANIES ACT
NOT COVERED BY THE
COMPANIES ACT
PUBLIC PRIVATE
STATUTORY CHARTERED
BASIC TYPES
BASIC TYPES
PUBLIC
THESE COMPANIES MAY BE
1. companies limited by shares
2. companies limited by guarantee
3. unlimited companies
OTHER COMPANIES
on the basis of nature, form and functions
1. companies not for profit
2. government companies
3. foreign companies
4. holding and subsidary companies
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Note 1. In computing the number of persons, the present and past employees are
not taken into account. Joint holders of shares are treated as a single member.
Note 2. The restriction on transfer of shares in case of private company can be
based on (I) Right of pre-emption i.e., the right of the existing members to purchase the
shares of outgoing members as and when sold and (ii) Directors powers to refuse to
register transfer of shares. However, this power must be exercised by the directors in
good faith and for benefit of the company. In the case of limitation of members, the
employees who are members and the ex-employees who continue to be members
should be excluded from counting the maximum limit of fifty.
ii. Public Company - Sec 3(1)(iv)
Public company means a company which-
a. is not a private company;
b. has a minimum paid-up capital of five lakh rupees or such higher paid-up capital,
as may be prescribed;
c. is a private company which is a subsidiary of a company which is not a private
company. [Introduced by Companies (Amendment) Act 2000].
Thus a public company is one which is formed by at least seven persons and
a) Which allows free transfer of its shares,
b) Which does not have a limit as regards the maximum number of members.
FEA FEA FEA FEA FEATURES OF PRIV TURES OF PRIV TURES OF PRIV TURES OF PRIV TURES OF PRIVA AA AATE COMP TE COMP TE COMP TE COMP TE COMPANIES ANIES ANIES ANIES ANIES
A PRIVATE
COMPANY
means a
company
which has
a minimum
paid-up
capital of
Rs. 1 lac
AND
1. NUMBER OF MEMBERS
2. TRANSFER OF SHARES
3. INVITATION FOR PUBLIC
SUBSCRIPTION
4. INVITATION OR
ACCEPTANCE OF DEPOSITS
Minimum 2, Maximum 50
Restricted
No public offer for
shares or debentures
Not allowed from persons
other than its members,
directors or their relatives
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c) Which allows public to purchase its shares and debentures.
d) Which has a minimum paid-up capital of five lakh five lakh five lakh five lakh five lakh rupees or such higher paid-up
capital, as may be prescribed; [introduced by Companies (Amendment) Act 2000].
e) Which is a private company which is a subsidiary of a public company.
A company registered under Section 25 before or after the commencement of the
Companies (Amendment) Act 2000, need not have to fulfil the requirement of minimum
paid up capital, as aforesaid.
Some points worth noting about private and public companies are
1. The basic distinction between a private and public company is the extent of public
participation. In a public company there is increased public participation.
Membership of the company is open to the general public at large, while in a
private company there is no public participation. It is a private affair or closed
affair of a few persons.
2. The last word in the name of a private limited company must be Private Limited
(Pvt. Ltd.) e.g. CAPS Education (India) Pvt. Ltd. In case of public company the
words Limited must be used e.g. Reliance Industries Ltd.
3. The Companies Act gives different treatment to public and private companies.
There are certain provisions in the Act which have been made applicable to
public companies only. As a result private companies have been placed in a
privileged position.
4. The formation of a private company offers combined advantages of partnership
and limited liability. On the one hand advantages of partnership are available
such as secrecy of business affairs, no control by outsiders and on the other hand
the advantages of company organization are available such as limited liability of
members, permanent existence etc. Moreover it is not required to comply with the
statutory obligations of a public limited company. For these reasons private limited
companies are very popular nowadays.
1.4c. From the point of view of liability, public and private companies may
be organized as
(i) companies with liability limited by shares
(ii) companies with liability limited by guarantee
(iii) companies with unlimited liability.
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i) Companies with liability limited by shares Companies with liability limited by shares Companies with liability limited by shares Companies with liability limited by shares Companies with liability limited by shares. A company limited by shares is one in
which the liability of the members is limited upto the nominal amount of the
shares held by them. The memorandum of association mentions whether the
liability of the members is limited or not. In these companies there is a share
capital divided into shares of fixed amount. The liability of the shareholder is
limited to the nominal amount of the shares held by him. Thus, if a person buys
100 shares of Rs. 10 each, his maximum liability is to the extent of Rs. 1,000 only.
He cannot be asked to pay more than this amount. If he has paid Rs. 6 on each
share, his remaining liability will be only Rs. 4 per share (i.e. 4 x 100 = Rs.400).
A majority of the companies in India belong to this category.
ii) Companies with liability limited by guarantee Companies with liability limited by guarantee Companies with liability limited by guarantee Companies with liability limited by guarantee Companies with liability limited by guarantee. In case of a company limited by
guarantee, the members voluntarily promise to contribute a certain amount towards
the payment of companys debt in the event of its winding up. Such an amount is
called the Guarantee. The memorandum of association lays down the guarantee
amount. No member is liable to pay more than the amount, which he has
guaranteed to contribute.
These companies may or may not have a share capital. In the case of a guarantee
company with a share capital, the members are required to purchase shares of
fixed amount and also give a guarantee for a further sum in the event of winding
up. Generally, guarantee companies are formed for non - trading purposes.
Such as promotion of commerce, art, science, sports etc., and do not aim for
profit. The Chambers of Commerce, charitable institutions, sport clubs, are
generally organized as guarantee companies.
Company Limited by Shares Company Limited by Shares Company Limited by Shares Company Limited by Shares Company Limited by Shares Company Limited by Guarantee Company Limited by Guarantee Company Limited by Guarantee Company Limited by Guarantee Company Limited by Guarantee
1. 1. 1. 1. 1. Share capital : Share capital : Share capital : Share capital : Share capital : Must have share capital May have share capital
2. 2. 2. 2. 2. Liability of members : Liability of members : Liability of members : Liability of members : Liability of members : Limited to amount Limited to amount guaranteed.
unpaid on shares.
3. 3. 3. 3. 3. Calling the amount : Calling the amount : Calling the amount : Calling the amount : Calling the amount : Unpaid amount on Amount guaranteed can be called only
shares may be called even before on winding up. If the company has a
winding up. share capital, unpaid amount on shares
can be called before
winding up.
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4. 4. 4. 4. 4. F FF FFilling of Articles : illing of Articles : illing of Articles : illing of Articles : illing of Articles : Filing of articles on Filing of articles in necessary in all
incorporation is not necessary in case cases.
of public companies.
5. 5. 5. 5. 5. R RR RRaising of funds : aising of funds : aising of funds : aising of funds : aising of funds : Raises initial Does not raise initial funds from
funds from members unless it has a share
capital also.
iii) Companies with unlimited liability (Unlimited companies) Companies with unlimited liability (Unlimited companies) Companies with unlimited liability (Unlimited companies) Companies with unlimited liability (Unlimited companies) Companies with unlimited liability (Unlimited companies). An unlimited company
is defined as a company not having any limit on the liability of its members. Thus
the members of an unlimited company have unlimited liability.
1.4d. Advantages and Privileges of Private Companies
As already pointed out a private company enjoys certain privileges and is exempted
from compliance with certain statutory requirements which are compulsory in the case
of a public company. these privileges of a private company which are its advantages as
compared to a public company are as follows:
1. Formation: It is easy to form a private company as only two members are required.
There are less legal formalities for its incorporation than in a public company.
2. Business: (i) A private company is not required to file a prospectus or a statement
in lieu of prospectus, as it is not allowed to issue shares to the public. (ii) It can
commence the business as soon as the Certificate of Incorporation is obtained.
(iii) It can allot shares immediately after incorporation. There is no restriction of
minimum subscription.
3. Meetings: It is not necessary for a private company to hold a statutory meeting
and to file a statutory report.
4. Board of Directors: (i) A private company requires a minimum of two directors, (ii)
There are no restrictions regarding remuneration of directors, (iii) The directors
can vote in contracts in which they are interested, (iv) Directors need not retire by
rotation. (v) The directors need not file their consent to act as directors with the
Registrar of companies.
However a private company which is a subsidiary of public company does not
enjoy many of the privileges mentioned above.
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1.4e. Distinction of a Private Company and a Public Limited Company
The two can be distinguished on the following lines:
1. Number of Members: A private company can be floated with a minimum number
of 2 and maximum of 50 members, while a public company can be floated with
7 persons, there being no maximum limit in their case.
2. Number of Directors: A private company requires only 2 directors, while a public
company requires at least 3 directors on its Board.
3. Transfer of Shares: Right to transfer of shares is restricted in a private company,
while there is no such restriction in case of a public company.
4. Public Subscription: A private company can not accept public subscription through
the issue of prospectus, while a public company does so.
5. Commencement of business: A private company can start its business immediately
after its incorporation, while a public company has to wait till it gets certificate to
commence business.
6. Allotment of Shares: A private company can proceed to allot shares without waiting
for minimum subscription, while a public company has to wait for such minimum
subscription. If it does not receive the stipulated amount, it has to refund the
subscription so received.
7. Statutory Meeting: A private company has not to hold a statutory meeting, which
is a must in case of a public company.
8. Managerial Remuneration: No such binding relation to maximum amount in case
of a private company but a public company has to observe the provisions of the
Act relating to managerial remuneration.
9. Index of members: A private company has not to maintain an Index of members,
which is a must in case of a public company.
1.4g. Other Companies
On the basis of nature, form and functions, companies can be further divided into
(a) Government company,
(b) Foreign company,
(c) Holding and subsidiary company,
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(d) Company not for profit,
(e) Producer Company.
(a) Government company [Sec 617]
A Government company is a company in which not less than 51% of the share
capital is held.
(i) by the Central Government , or
(ii) by one or more State Government, or
(iii) partly by Central Government and partly by State Government.
Features:
1. Basically, a Government company is a registered company. It is a company limited
by shares, in which the government is a major (51%) shareholder.
2. The Companies Act in general applies to government companies. But certain
provisions of the Act are not made applicable to them. e.g., provisions regarding
appointment of directors and their remuneration.
3. A Government company may be either a public or private company. But a
government company needs not use the word private as a part of its name.
4. The auditor of the government Company shall be appointed by the Central
Government on the advice of the Comptroller and Auditor General of India [Sec.
619(2)]. The audit and accounting procedures of Government companies are
different from those of the other companies.
5. Examples of Government companies are HMT (Hindustan Machine Tools), Bokaro
Steel Ltd., WCL.
(b) Foreign Companies [Sec 591]
A foreign company is a company, which is incorporated outside India but has a
place of business in India.
It is place of incorporation, which determines the foreign character of a company.
Thus, a company incorporated outside India but having a place of business in India
would be regarded a foreign company even though all the members might be Indian
citizens.
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The Companies Act lays down certain special provisions applicable to foreign
companies. A foreign company if it ceases to carry on business in India, may be wound
up as an unregistered company.
(c) Holding and subsidiary Companies [Sec 4]
A holding company is one which exercises control over another company, and a
subsidiary company is one, over which control is exercised. Control can be exercised
either through composition of Board of directors or through shareholding in the subsdiary.
Holding company is one
(I) Which holds more than half of the nominal value of the equity share capital of
another company (subsidiary company) For example, if H company hold 51%
of the nominal value of the equity capital of S company, then H company is
said to be a holding company and S company is a subsidiary company. or,
(II) Which controls the composition of the board of directors of another company
(subsidiary company)? The company which is so controlled by the holding company
is known as Subsidiary Company. Control involves the power to appoint all or
majority of the board of directors without the consent of some other person.
(III) A company shall be deemed to be a subsidiary company of another if it is a
subsidiary of a third company which itself is a subsidiary of the controlling company.
For example, where company S is a subsidiary of company H and company X is a
subsidiary of company S then company X shall be a subsidiary of company H .
To illustrate, company A is a subsidiary of company B if, and only if:
1. company B (holding company) controls the composition of the Board of
directors of company A (subsidiary); or
2. company B (holding company) controls more than 50% voting power of
company A (subsidiary); or
3. company B (holding company) holds more than half in the nominal value of
equity shares of company A (subsidiary); or
4. if company A (the subsidiary) is a subsidiary of company C which is subsidiary
of company B, then the company A is also a subsidiary of company B.
5. if company D is the subsidiary of company A then D will be the subsidiary of
company C and also of company B.
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(d) Companies not for profit (or Association not for profit) [Sec 25]
An association not for profit has the following features
(i) It is formed to promote commerce, art, science, religion, charity or any other
useful object.
(ii) It prohibits payment of any dividend to its members and applies its profits or other
income in promoting its objects.
(iii) It obtains a license from the Central Government to be registered as a limited
company without being required to use the word limited or private limited to
their names. (e.g., Institute of Company Secretaries of India, was originally an
association not for profit. Now it is a statutory body).
(e) Producer Company
This is a new form of company which can be formed as per the procedure laid
down under Part IXA, containing section 581A to 581ZT of the Companies Act, 1956
by Primary Producers of products of agricultural, handloom and other cottage industries
or by Multi-state Co-operative Societies or a combination of these.
Such companies shall be formed as a Private Limited Company, but will not be
subject to the maximum limit of 50 members as required for a private limited company
under section 3(1)(iii) of the Act.
Producer Company means a body corporate having objects or activities as specified
in section 581B and registered as Producer Company under the Act. Section 581A(l).
Objects of Producer Company
The objectives for which Producer Companies may be formed are laid down in
Section 581 B. These include inter alia,
Production, marketing, export/import of primary produce of members,
Processing, packaging of produce of its members;
Manufacture, sale of machinery etc. mainly to its members,
Generation and distribution of power, revitalization of land and water resources,
Insurance of producers or their primary produce.
Rendering technical/ consultancy services, training, research and development,.
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Financing of procurement, processing, marketing or other activities specified above,
which includes extending credit facilities or any other financial services to its
members.
Promoting mutual assistance, welfare measures and
Any other activity for the benefit of the members.
Public financial institutions [ Sec 4A]
Certain institutions have been specified as public financial institutions under section
4A.
These are ICICI, IFCI, IDBI, LIC, UTI, Infrastructure Development Finance Company
Limited (IDFCL), the securitisation company or the reconstruction company registered
under Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002.
Central Government has been further empowered to notify any other institution as
a public financial institution provided it has been constituted under any Central Act or
not less than 51% of its paid-up share capital is held or controlled by the Central
Government. Thirty-nine such institutions have been identified by the Central
Government.
Investment company Investment company Investment company Investment company Investment company Sec 372 (10) of the Companies Act, 1956 defines an
investment company as a a company whose principal business is the acquisition of
shares, stocks, debentures or other securities.
1.5 Conversion of company
When a Private Company becomes a Public Company?
A Private company becomes a public company in the following cases :
1. When the private company fails to comply with the essential requirements of a
private company (viz., restrictions on transfer of shares, limitation of the number
of members to 50, and prohibition of invitation to the public to buy shares or
debentures, accept deposits). [Sec 43 ]
2. When it passes a special resolution altering its articles so as to eliminate the three
restrictions on private companies. [Sec 44]
3. When it becomes a subsidiary of a public company [Sec 3(iv)]
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1.6 Illegal Association [ sec 11]
An association or partnership is an illegal association if all the following conditions
are satisfied :
(a) The number of persons carrying on business exceeds 20 (10 persons in case of
banking business).
(b) It is formed for the purpose of earning profits.
(c) It is not registered under the Companies Act or formed under any other Indian law
(e.g. Cooperative Societies Act ,Trust Act).
(d) It is not a Joint Hindu Family (i.e., an HUF is not an illegal association even if he
number of members exceed 20 or 10, as the case may be).
Thus, illegal associations are the association of persons or partnerships which are
not registered under the Act and are formed with the limited object of acquisition of
gain. An illegal association should not be construed to mean an association formed for
an illegal purpose.
Sec 11 of the Companies Act, 1956 provides that where the number of persons
exceeds 10 or 20, as the case may be, a company, association or partnership should
get itself registered under the Companies Act or is formed in pursuance of some other
Indian Law. Thus, if such an association is formed and not registered under either the
Companies Act or any other law, it will be regarded as an Illegal Association although
none of the objects for which it may have been formed is illegal.
Exceptions Exceptions Exceptions Exceptions Exceptions - However, section 11 does not apply in the following cases:
1. Associations not for profit-making - All charitable, religious, scientific, literary,
social and other associations including clubs not having as their object the
acquisition of gain are excluded from the purview of the section.
2. Joint Hindu Family - Section 11 does not apply to one joint family, that is, a joint
Hindu family may carry on any business, even for earning profits and with any
number of members without being registered or formed in pursuance of any
Indian Law as required by section 11 of the Companies Act, 1956 and yet it will
not be illegal association. But, where two joint Hindu families join hands to carry
on business, the provisions of section 11 become applicable. However, in such a
case, in reckoning the number of members of such an association, the minor
members shall not be taken into account.
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Effects of an illegal association -
Following are the effects of an association being illegal:
1. In the eyes of law it has no legal existence.
2. Every member is personally liable for all liabilities incurred in the business.
3. Members are punishable with fine, which may extend upto Rs. 10,000.
4. Such an association cannot enter into any contract in its own name.
5. Such an association cannot sue any of its members or any outsider, not even if the
association is subsequently registered as a company.
6. It cannot be sued by a member or an outsider for any debts due to it because it
cannot contract any debt.
7. It cannot be wound up even under the provisions relating to winding up of
unregistered companies.
8. The illegality of an illegal association cannot be cured by subsequent reduction in
the number of its members (Kumar Swami Chettiar v. M.S.M. Chinnathambi
Chetteiar).
9. The profits made by an illegal association are, however, liable to assessment to
income tax (Gopalji Co. v. CITA).
Defunct Company
A company which has stopped carrying on any business or which is not in operation
is termed as a defunct company. The Registrar of companies may strike off companys
name from the register of companies under the provisions of Section 560of the Act.
When the name of the company is struck off the register of companies, the company
stands dissolved. Thus, a defunct company can be dissolved without resorting to the
winding up procedure.
1.7 Application of the Act.
The Companies Act, 1956 extends to all classes of companies registered under the
Act.
In case of banking companies, insurance companies, and electric companies it
applies in a restricted manner. The provisions of the Companies Act are applicable
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to these companies to the extent they are not inconsistent with the provisions of
the Special Acts governing them.
The Companies Act does not apply to - statutory corporations established under
the Special Acts of Parliament., Trusts governed by the Indian Trust Act 1882,
Societies, Clubs and Professional Associations governed by the Societies
Registration Act, 1860 and Co-operative Societies.
1.8 Administration of Companies Act
Ministry of Corporate Affairs, Government of India, administers the Companies
Act. It has a three-tier organizational set-up: the Secretariat at New Delhi, the Regional
Directors at Mumbai, Calcutta, Chennai, Kanpur, the Registrar of Companies in each
State and Official Liquidator attached to High Court.
Central Government has established R RR RRegistrar of Companies (ROC egistrar of Companies (ROC egistrar of Companies (ROC egistrar of Companies (ROC egistrar of Companies (ROC) in each State.
The companies have to get incorporated in the State in which it has its Registered
Office. Registrar of Companies (ROC) of the State where the company is registered
gives certificate to incorporation. Annual return and other documents returns have to be
filed with respective Registrars. The ROC supervises over functioning of the companies
in that State.
R RR RRegional Directors egional Directors egional Directors egional Directors egional Directors There are four Regional Directors in Eastern, Western, Southern
and Northern region, who exercise control over the Registrars. They have offices at
Mumbai, Calcutta, Chennai and Kanpur. Central Government has delegated some
powers to Regional Directors u/s 637.
CLB CLB CLB CLB CLB The Company Law Board is a quasi judicial authority .It deals with the maters
regarding oppression and mismanagement of company, rectification of register of
members and other specified matters. Its findings in respect of facts are final. Appeal
against the order can be made to the High Court.
After the commencement of Companies (Second Amendment Act), 2002, (till April,
2008 this Second Amendment Act, has not been implemented) the Company Law
Board constituted under section 10E shall stand dissolved and all the powers of the CLB
shall be vested in the National Company Law Tribunal (NCLT)
National Company L National Company L National Company L National Company L National Company Law T aw T aw T aw T aw Tribunal (NCL ribunal (NCL ribunal (NCL ribunal (NCL ribunal (NCLT) T) T) T) T) is an independent quasi-judicial authority
formed under section 10FB to which certain powers are proposed to be transferred by
the Central Government. Its findings in respect of facts are final. Powers of Tribunal are
exercised by Benches, constituted by the President of the Tribunal.
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Appeal against orders of Company Law Tribunal will lie with National Company
Law Appellate Tribunal (NCLAT) formed u/s 10FR. Any person aggrieved by any decision
or order of the Appellate Tribunal may file an appeal to the Supreme Court. With the
emergence of Tribunals, the civil court shall have no jurisdiction of the over company
law matters which are within the jurisdiction of the Tribunals. However ,writ jurisdiction
of High Court and special petition to Supreme Court is not barred, as these powers are
given under the Constitution.
Note : National Company Law Tribunal (NCLT), National Company Law Appellate
Tribunal (NCLAT) is proposed to be formed for which the amending legislation has
already been passed. However the amendment has not been enforced. The work of
CLB will be transferred to NCLT. The jurisdiction of the High Court over Company Law
matters would cease, once the amendment is enforced.
Website of Ministry of Corporate Affairs.
The information on company law matters can be had on the WEBSITE of the Ministry
of Corporate Affairs, Gol. The website is http:/www.mca.gov.in.
Supreme Court
National Company Law
Appellate Tribunal
National Company Law
Tribunal
Central Government
Regional Director
Registrar of Companies
Ministry of Corporate Affairs
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QUESTION BANK
I. FAQs
1. Define a company. Explain its characteristics.
2. Enumerate the advantages that a business organisation enjoys through
incorporation under the Companies Act, 1956.
3. Under what circumstances can the separate personality of a company are ignored?
4. What are the restrictions of a private company?
5. Is a company property of its own shareholders? Discuss.
6. Explain clearly the meaning of lifting of the corporate veil of a company.
7. Explain the meaning of perpetual succession and common seal in the case of
a company.
8. Members of Limited liability company may nevertheless have unlimited liability.
Comment.
9. What are the consequences of the principle of separate corporate personality?
Explain.
10. What are the advantages of a company as compared to a partnership?
11. Define a private company.
12. Can a company be incorporated under the Companies Act without the word
Limited ? If so, explain.
13. State the circumstances under which a company becomes the subsidiary of another
company under the provisions of the Companies Act, 1956.
14. What type of associations are prohibited by the Companies Act, and what are the
disabilities of such associations?
15. Explain the basic characteristics of a Private Ltd. Company and state, how does it
differ from a Public Ltd. Co.
16. Why and when is a group of persons carrying on business required to be registered
under the Companies Act?
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17. Comment on the following statements.
a. A corporate personality can be used as a device to evade tax.
b. Special privileges and exemptions have been provided to a private limited
company.
c. Members of a limited company may nevertheless have unlimited liability.
d. Company can be prosecuted if law provides for compulsory imprisonment.
II. CASE STUDIES
1. X was appointed as a director in a private limited company on 10th April 2005.
He resigned on 5th May 2006. The company defaulted in payment of income
tax for the previous year 2005-2006 and 2006-2007. Can he be held liable for
payment of income tax? X takes the defence that he is no more a director in the
company and since company has a separate legal personality, the company is
liable and not the director. What will be the position if it is a Public Limited company?
( Hint : The corporate veil will be lifted and under section 179 of the Income Tax
Act 1961, the directors of private company are liable. However the directors are
not liable )
2. A firm M/s A & sons has five partners, there is another firm M/s B & sons, which
has seven partners. They join together and form M/s A & B sons, in which all the
partners of A & sons and B & sons join to carryout the business of Banking. Is
M/s AB and sons required to be registered under Companies Act?
(Hint : Yes; Where two joint Hindu families join hands to carry on business, the
provisions of section 11 become applicable.)
3. An H.U.F. consisting of 21 members, is carrying on the business of manufacturing
iron-rods. It has four units of Delhi, Mumbai, Chennai and Kolkata. Each unit is
looked after by four brothers and their sons, who are residents of these places. Is
this group of persons required to be registered under the Companies Act?
(Hint : No; section 11 does not apply to HUF )
4. Two companies X Ltd. and Y Ltd., registered under Companies Act decide to
form a joint venture. Both the companies have more than 100 members. Is the
Joint Ventures of X & Y Ltd. required to be registered under Companies Act They
decide to share profit equally.
(Hint : No ; The joint venture need not be registered under Companies Act )
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5. Some of the creditors of Get Rich Quick Ltd. have complained that the company
was formed by the promoters only to defraud the creditors and circumvent the
compliance of legal provisions of the Companies Act, 1956. In this context they
seek your advice as to the meaning of corporate veil and when the promoters can
be made personally liable for the debts of the company.
(Hint : The corporate veil can be lifted and the promoter can be liable)
6. ABC is a private limited company in which 40% of the paid-up share capital of
Company is held by the Central government and 11% by Public Financial
Institutions like the Life Insurance Corporation of India and the Unit Trust of India.
Is Company ABC private limited, a government Company?
(Hint : No ; Since the PFIs shares are excluded)
7. Two joint Hindu families carry on together a business as joint owners. The first
family consists of 3 brothers and their respective sons, being 12 in number one of
the brothers son is a minor. The second family consists of the father, 4 major sons
and 2 minor sons. Is the business illegal?
(Hint : No; the total no of members are 20 excluding minors )
8. On March 31, 2000, the income tax authorities hit almost all the FIIs which have
routed investments through Mauritius with nose-bleeding demands amounting to
few hundred crores. By issuing the notices, the tax department sought to lift the
corporate veil to find the real beneficial owner. The investors who are not people
of Mauritius origin (Americans, Japanese etc.) route their investments through
Mauritius by setting up wholly owned subsidiary there. This subsidiary then invests
in India. In this way such FIIs are taking advantage of Indo-Mauritius tax treaty
under which capital gains on securities can be taxed. only in the country of residence
(Mauritius) and Mauritius does not levy capital gains tax. Is the IT department
correct in seeking to lift corporate veil.
(Hint: Yes).
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CHAPTER - II
FORMATION OF A COMPANY
2.1 Promotion Stage
2.2 Incorporation Stage
2.3 Raising of Capital Stage
2.4 Commencement of Business Stage
2.5 Pre-incorporation Contracts and Provisional
Four Stages of Company Formation
Relevant Sections of Companies Act, 1956: 12 to 40,146,266,303.
Promotion Stage
Incorporation Stage
Raising of Capital Stage
Commencement of Business Stage.
A private company has to pass through only two stages, namely, the
promotion stage and the incorporation stage. However the formation of
a public company involves all the four stages.
2.1 Promotion Stage
The term promotion in the context of company formation refers to
the process by which a company is brought into existence brings a
company into existence. The promotion work is done either by a person
or by a group of persons who are called promoters. It is the promoters
who conceive the idea of forming the company and it is they who take
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the necessary steps to incorporate it. After incorporating the company, they handover
the control to its directors, who are often promoters themselves.
The promotion stage comprises of conceiving a scheme or a project, investigating
the feasibility of the project; organizing the resources (men, material and money) and
to take all necessary steps to float a company. A company provides an organisational
framework. It is a means to an end. The end/objective may be to run an industry or
business or to execute a project. The promoters by organizing funds, property and
managerial ability develop and execute the project under the corporate form.
Preliminary preparations incidental to the incorporation are done in the
promotion stage. This includes-
a. Type of company:
The decision regarding the type of the company to be floated, viz., public company
or private company.
b. Selection / Approval of name of a company:
The following points should be noted in this connection:
The name should be indicative of the main object of the proposed company. For
example the name TATA STEEL Ltd. indicates that the company is in steel business.
The significance of the key or coined word(s), if any, in the proposed name(s)
should be stated.
The name of the company should not be UNDESIRABLE (i.e. it should not be
identical with or too nearly resemble the name of any existing company.) Sec. 20.
Offensive name or name suggesting unlawful activity is not permissible.
The provisions of the Emblems and Names (Prevention of Improper Use) Act,1950
should be kept in view. The Act prohibits the use of the words UNO, WHO,
President, Prime Minister of India, Mahatma Gandhi etc
The guiding instructions of the Department of Company Affairs regarding availability
of new names should be observed. For e.g. the word Corporation is permitted
when authorised capital is Rs. 5 crore. The words like international, Global, Asia
is permitted if the authorised capital is Rs. 1 crore
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Procedure for availability of name.
An application to the Registrar of Companies (ROC) concerned shall be made
electronically in e-Form No 1A of the Companies (Central Government ) General
Rules and Forms,1956.Application fee is Rs. 500.
Six names in order of preference should be submitted to afford flexibility to the
Registrar. Applicant will get SRN (Service Request Number) which can be used to trace
the status about the approval of name. If none of the names is available , further new
names may be suggested.
The ROC shall inform the approval / rejection of name within 7 days of the receipt
of the application. The name approval status can also be viewed from the website of
MCA. The approved name shall remain available for adoption by the promoters for 60
days from the date of intimation by the ROC. This period may, however, be extended
by the ROC.
As per section As per section As per section As per section As per section 12(1) of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more of the Companies Act, 1956, (i)any seven or more
persons in case of P persons in case of P persons in case of P persons in case of P persons in case of Public Company or two or more persons in case of a ublic Company or two or more persons in case of a ublic Company or two or more persons in case of a ublic Company or two or more persons in case of a ublic Company or two or more persons in case of a
P PP PPrivate Company rivate Company rivate Company rivate Company rivate Company, (ii) associated for lawful purpose may form an , (ii) associated for lawful purpose may form an , (ii) associated for lawful purpose may form an , (ii) associated for lawful purpose may form an , (ii) associated for lawful purpose may form an
incorporated company incorporated company incorporated company incorporated company incorporated company, (iii) by subscribing their names to Memorandum , (iii) by subscribing their names to Memorandum , (iii) by subscribing their names to Memorandum , (iii) by subscribing their names to Memorandum , (iii) by subscribing their names to Memorandum
of Association and (iv) otherwise complying with requirements of the of Association and (iv) otherwise complying with requirements of the of Association and (iv) otherwise complying with requirements of the of Association and (iv) otherwise complying with requirements of the of Association and (iv) otherwise complying with requirements of the
Companies Act in respect of registration. Companies Act in respect of registration. Companies Act in respect of registration. Companies Act in respect of registration. Companies Act in respect of registration.
Conversion of Proprietorship / Partnership into Company: It is possible to It is possible to It is possible to It is possible to It is possible to
convert a P convert a P convert a P convert a P convert a Proprietorship concern or P roprietorship concern or P roprietorship concern or P roprietorship concern or P roprietorship concern or Partnership concern into a company artnership concern into a company artnership concern into a company artnership concern into a company artnership concern into a company. .. ..
As per Section 47 of the Income T As per Section 47 of the Income T As per Section 47 of the Income T As per Section 47 of the Income T As per Section 47 of the Income Tax Act, such conversion will not attract ax Act, such conversion will not attract ax Act, such conversion will not attract ax Act, such conversion will not attract ax Act, such conversion will not attract
capital gains if all assets and liabilities of proprietary concern / partnership capital gains if all assets and liabilities of proprietary concern / partnership capital gains if all assets and liabilities of proprietary concern / partnership capital gains if all assets and liabilities of proprietary concern / partnership capital gains if all assets and liabilities of proprietary concern / partnership
firm are transferred into a company and proprietor/ partners holds atleast firm are transferred into a company and proprietor/ partners holds atleast firm are transferred into a company and proprietor/ partners holds atleast firm are transferred into a company and proprietor/ partners holds atleast firm are transferred into a company and proprietor/ partners holds atleast
50% shares in new company 50% shares in new company 50% shares in new company 50% shares in new company 50% shares in new company. The consideration for transfer should be . The consideration for transfer should be . The consideration for transfer should be . The consideration for transfer should be . The consideration for transfer should be
received in shares only received in shares only received in shares only received in shares only received in shares only. .. ..
A Co-operative Society can also be converted into a Producer company :
Under P Under P Under P Under P Under Part IX art IX art IX art IX art IX- -- --A, a Multi State Co A, a Multi State Co A, a Multi State Co A, a Multi State Co A, a Multi State Co- -- --operative society can be converted into operative society can be converted into operative society can be converted into operative society can be converted into operative society can be converted into
a P a P a P a P a Producer Company roducer Company roducer Company roducer Company roducer Company. .. ..
c. Preparation of Memorandum and Articles of Association.
The memorandum defines the nature and objects of the company. It constitutes the
charter of the company. The promoters have to take special care while drafting the
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object clause. In case of object oriented names like Nagpur Coolers Ltd., the main
object should constitute only that objects (like coolers in case of Nagpur Coolers
Ltd.),while in case of non-object oriented names (like Tata Sons Limited)there is no
restriction as to the number of main objects. The objects specified in the Memorandum
of Association should be those specified against column 5 of Form IA. Particular attention
should be given to see that the following objects/powers are included: a) making loans,
b) borrowing power c) making investments, d) donations, e) amalgamation with another
company.
Likewise, the articles of association, containing the rules and regulations relating to
the internal management of the company have also to be prepared. A public company
limited by shares may have articles or alternatively adopt the articles given Table A of
Schedule I to the Companies Act,1956.As per section 26 registration of articles is
necessary in the case of the following companies: a) Unlimited company ; b)a company
limited by guarantee c) a private limited company limited by shares.
Who is a Promoter?
The person who initiates promotion of a company is known as the promoter.
The Companies Act, 1956 does not define a promoter. The term promoter,
said Bowen, L.J., in Whaley Bridge Calico Printing Co. v. Green and Smith,
(1880) 5 Q.B.D. 109, is a term not of law but of business usually summing
up in a single word a number of business operations familiar to the
commercial world by which a company is generally brought into existence.
Whether a person is a promoter or not in a particular case, depends on the
facts and circumstances having regard to the persons action and his
relationship to the company that is formed. Any one who assists in the
formation for consideration payable if the company is floated is a promoter.
Duties: Duties: Duties: Duties: Duties: The Companies Act, contains no provisions regarding the duties of
promoters, it merely imposes liability on promoters for untrue statements in
prospectus and for fraudulent trading.
Until a company is formed the promoter stands in a fiduciary capacity towards
the company and its prospective shareholders. The two fiduciary duties of
promoter are
i) Not to make any secret profit out of promotion and
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ii) To disclose to the company any interest, which he has in, a transaction
entered into by it.
What is important is proper disclosure and full transparency. The companies
act, does not prohibit making of any profit by any promoter, provided it is
properly disclosed. Disclosure may be made either to an independent board
or by means of a prospectus to the prospective shareholder.
2.2 Incorporation Stage
Section 12, which states the mode of forming an incorporated company, enables
any seven persons (two for private company)to associate for any lawful purpose and to
get themselves incorporated into a company with or without limited liability. They can
do so by subscribing their names to a memorandum of association and by complying
with other requirements.
To obtain the registration of a company an application has to be filed with the
Registrar of Companies of the State in which the company is proposed to be incorporated,
along with the requisite documents, and the prescribed registration and filing fees.(Sec
33).The documents to be filed with the Registrar are:
1. Memorandum of Association Memorandum of Association Memorandum of Association Memorandum of Association Memorandum of Association duly signed by the minimum number of subscribers,
stamped and witnessed.
2. Articles of Association Articles of Association Articles of Association Articles of Association Articles of Association, which should be similarly signed, stamped and witnessed.
3. A Statutory Declaration A Statutory Declaration A Statutory Declaration A Statutory Declaration A Statutory Declaration stating that all the provisions of Companies Act, 1956
with regard to registration have been complied with. Section 33(2). The declaration
should be in eF eF eF eF eForm No 1 orm No 1 orm No 1 orm No 1 orm No 1 on a non-judicial stamp paper of appropriate value.(Rs
100/ in Maharashtra). Alternatively, non-juducial special adhesive stamps may
be affixed to the declaration.
4. The particulars of Directors The particulars of Directors The particulars of Directors The particulars of Directors The particulars of Directors, Manager, etc., in eF eF eF eF eForm No. 32 orm No. 32 orm No. 32 orm No. 32 orm No. 32. This Form 32 can
be filed either at the time of registration of a company or within 30 days of
incorporation. Together with Form 32 one passport size colour photograph is
required to be submitted.
5. Notice of registered Notice of registered Notice of registered Notice of registered Notice of registered address of the company in eF eF eF eF eForm No. 18 orm No. 18 orm No. 18 orm No. 18 orm No. 18 This Form 18 can
be filed either at the time of registration of a company or within 30 days of
incorporation.
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6. P PP PPower of attorney ower of attorney ower of attorney ower of attorney ower of attorney signed by all the subscribers, authorising one or more persons
to act as their representative (s) to make amendments and/or alterations in
memorandum and articles of association and other forms and papers file before
ROC, for incorporation and also to collect the certificate of incorporation.
7. Consent to act as director Consent to act as director Consent to act as director Consent to act as director Consent to act as director. In case of both public and private company consent
letter is required from all those persons who have agreed to act as directors.
8. Directors Identification Number (DIN) Directors Identification Number (DIN) Directors Identification Number (DIN) Directors Identification Number (DIN) Directors Identification Number (DIN) This number has to be procured by the
proposed directors from Ministry of Corporate Affairs and mention the number in
Form 32.
How to obtain DIN ?
Apply online for obtaining provisional DIN.
Take the print of the DIN 1 form and
Affix photograph and take the signature and get it certified by the CS/CA.
Attach the address proof (like telephone bill, passport, driving license etc.)
and Identity proof (pan card, driving license, passport etc) duly attested. And
pay Rs100
Send these documents to the DIN Cell , Ministry of Corporate Affairs, Noida.
For registering a private / public company the above documents are required. The The The The The
documents are to be submitted electronically as scanned attachment to e documents are to be submitted electronically as scanned attachment to e documents are to be submitted electronically as scanned attachment to e documents are to be submitted electronically as scanned attachment to e documents are to be submitted electronically as scanned attachment to e-F -F -F -F -Form no 1. orm no 1. orm no 1. orm no 1. orm no 1.
After submission, a SRN (Service R After submission, a SRN (Service R After submission, a SRN (Service R After submission, a SRN (Service R After submission, a SRN (Service Request Number) will be generated by the system. equest Number) will be generated by the system. equest Number) will be generated by the system. equest Number) will be generated by the system. equest Number) will be generated by the system.
Documents which are also required to be submitted in physical form to ROC are
M/A; A/A; POA; Consent letters; e-Form 1( first page).
F FF FFiling of documents for registration: iling of documents for registration: iling of documents for registration: iling of documents for registration: iling of documents for registration: The above-mentioned documents are filed
along with the prescribed fees with the Registrar of Companies of the State in which the
company is proposed to be incorporated. The amount of Registration Fees to be paid
by the company varies with the amount of authorised capital and is given in Schedule
X to the Companies Act. The fees are payable electronically or by challan generated by
the system. Stamp Duty to be paid on documents viz. Memorandum & Articles are as
per the relevant State Laws on stamp duty.
Certificate of incorporation: Certificate of incorporation: Certificate of incorporation: Certificate of incorporation: Certificate of incorporation: After scrutinizing the documents and on being satisfied
that they are in order, the R.O.C. issues the certificate of incorporation. The certificate
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of incorporation is conclusive is conclusive is conclusive is conclusive is conclusive as to all the requirements of the Act with respect to
registration and matters precedent and incidental thereto having been duly complied
with. (Specimen certificate of incorporation is given in Annexure 1 Annexure 1 Annexure 1 Annexure 1 Annexure 1)
Effect of Certificate of Incorporation: Effect of Certificate of Incorporation: Effect of Certificate of Incorporation: Effect of Certificate of Incorporation: Effect of Certificate of Incorporation: Section 34 Section 34 Section 34 Section 34 Section 34. : When a company is registered
and a certificate of incorporation is issued by the Registrar, three important consequences
follow:-
1. The company becomes a distinct legal entity distinct legal entity distinct legal entity distinct legal entity distinct legal entity. Its life commences from the date
mentioned in the certificate of incorporation.
2. It becomes a body corporate and it acquires a perpetual succession perpetual succession perpetual succession perpetual succession perpetual succession and a common a common a common a common a common
seal seal seal seal seal.
3. It is capable of suing and be sued in its corporate name .
4. Its property is not the property of the shareholders. The shareholders have a right
to share in the profits of the company when realised and divided. Likewise any
liability of the company is not the liability of individual shareholders.
Conclusiveness of the Certificate of Incorporation: Conclusiveness of the Certificate of Incorporation: Conclusiveness of the Certificate of Incorporation: Conclusiveness of the Certificate of Incorporation: Conclusiveness of the Certificate of Incorporation: Section 35 Section 35 Section 35 Section 35 Section 35 - The Certificate of
Incorporation is conclusive evidence that
A) The requirements of the Companies Act have been complied with and that
everything is in order as regards registration.
B) The association is a company authorised to be registered and duly registered
under the Companies Act
THE TERM CONCLUSIVE EVIDENCE means that no one can question the regularity
of the incorporation once a certificate of incorporation has been granted .After, the
certificate of incorporation is issued,it cannot be challenged in any court on any grounds
what so ever .
2.3 Raising of Capital Stage
When a public company has been incorporated, it is ready for floatation; that is to
say, it can go ahead with raising capital sufficient to commence business. A private
company is prohibited from inviting public to subscribe to its share capital and it can
commence business immediately after getting Certificate of Incorporation.
A public company, in actual practice, does not immediately issue prospectus to
raise the capital from the public. Normally, the prospectus is issued at a later stage
when the resources are required to implement the project or for running the business.
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Section 70 makes it obligatory for every public company to take either of the following
steps:
1. Issue of a prospectus in case public is to be invited to subscribe to its capital or
2. Deliver a statement in lieu of prospectus statement in lieu of prospectus statement in lieu of prospectus statement in lieu of prospectus statement in lieu of prospectus where the company has either not
issued a prospectus or though it has issued a prospectus it has not proceeded to
allot any of the shares offered to the public for subscription.
Generally second procedure is followed.
2.4 Commencement of Business Stage
In order to commence its business and exercise its borrowing powers a public
company must procure a certificate called the certificate to commence business. In
order to obtain this certificate the company must comply with the provision of Section
149 of the Companies Act.
In the case of a company In the case of a company In the case of a company In the case of a company In the case of a company, which has issued a prospectus, the R , which has issued a prospectus, the R , which has issued a prospectus, the R , which has issued a prospectus, the R , which has issued a prospectus, the Registrar will grant egistrar will grant egistrar will grant egistrar will grant egistrar will grant
the certificate only when: the certificate only when: the certificate only when: the certificate only when: the certificate only when:
a. the minimum subscription has been allotted.
b. the directors have taken up and paid for their qualification shares.
c. no money is repayable to the applicants by reason of failure to obtain stock
exchange recognition for the shares, when such recognition was promised.
d. a statutory declaration of compliance signed by the Directors or the Secretary in
the prescribed form. (e (e (e (e (e-F -F -F -F -Form No. 19) orm No. 19) orm No. 19) orm No. 19) orm No. 19) the clauses (a), (b) and (c) mentioned
above have been complied with.
Where the company has not issued a prospectus, section 149(2) requires that it
shall not commence business unless:
a. it has filed with Registrar a statement in lieu of prospectus.
b. the directors have taken up and paid for their qualification shares.
c. there has been filed with the Registrar, a duly verified declaration by one of the
directors or the secretary in the prescribed form (e (e (e (e (e-F -F -F -F -Form no. 20 orm no. 20 orm no. 20 orm no. 20 orm no. 20) that clause (b)
stated above has been complied.
When the company has complied with aforesaid conditions, the ROC will issue a
certificate to commence business. (Specimen certificate of commencement of business
Annexure 2 Annexure 2 Annexure 2 Annexure 2 Annexure 2)
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P PP PPenalty enalty enalty enalty enalty: : : : : If any public company having share capital commences business or exercise
borrowing power without obtaining the certificate to commence business, then every
person at fault shall be liable to a fine which may extend to Rs. 500 for every day of
default.
Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN). To uniquely identify every company registered
with the ROC a new investor friendly CIN has been introduced w.e.f. 1
st
November
2000. For details see Annexure 3 Annexure 3 Annexure 3 Annexure 3 Annexure 3.
2.5 Pre-incorporation Contract and Provisional Contract
P PP PPre re re re re-incorporation contract: -incorporation contract: -incorporation contract: -incorporation contract: -incorporation contract: Contracts made on behalf of a company before it is
incorporated is called pre-incorporation contract. Contracts prior to incorporation are
void unless the company adopts the same after incorporation and the contract is
warranted by the terms of incorporation. (section 15 & 19 Specific Relief Act, 1963).
Section 15(h) of the Specific Relief Act, 1963 provides that where the promoters of
a public company have made a contract before its incorporation for the purpose of the
company, and if the contract is warranted by the terms of its incorporation if the contract is warranted by the terms of its incorporation if the contract is warranted by the terms of its incorporation if the contract is warranted by the terms of its incorporation if the contract is warranted by the terms of its incorporation, the company
may enforce it. Warranted by the terms of incorporation means within the scope of
the companys objects as stated in the memorandum.
Section 19 of the Specific Relief Act also allows the other party to enforce the
contract against the company of, (i) the company had adopted the same after
incorporation, and (ii) the contract is warranted by the terms of incorporation. Contracts
like preparation and printing of the memorandum, and articles, remunerating the
professionals, if any, for securing the registration of the company, renting premises,
hiring secretarial staff are envisaged under the Act.
Provisional Contracts
A contract made by a public company after incorporation but before it is entitled to
commence business is provisional and is not binding on the company. But as soon as
the certificate to commence business is obtained the contract becomes binding
automatically [Section 149 (4)].
If, therefore, a public company is wounds up before it is entitled to commence
business the persons who have rendered services or supplied goods or materials to the
company can have no claim against it [In Re. Electrical Manufacturing Co., (1906) 2
Ch. 390] :
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Annexure-1
Specimen certificate of incorporation
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Annexure-2
Certificate of Commencement of Business
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Annexure-3
Corporate Identity Number (C I N )
A new investor friendly Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) is being introduced to
uniquely identify every company registered with the Registrar of Companies w.e.f. 1
st
Nov 2000. Currently, the present registration number assigned to a company does not
reflect the activity or the State or ownership of the company. The CIN assigned to a
company indicates the following:
Listing status
Economic activity (industry)
State
Year of incorporation
Ownership
Sequential Number assigned by ROCs
The CIN is explained schematically below:
U 855110 MH 2000 PTC 130151
1 2 3 4 5 6
This the Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) Corporate Identity Number (CIN) allotted to POORVI ENTERPRISES PRIVATE
LIMITED registered with RoC Maharashtra on 20/12/2000. The Corporate Identity Corporate Identity Corporate Identity Corporate Identity Corporate Identity
Number (CIN) Number (CIN) Number (CIN) Number (CIN) Number (CIN) can be explained as follows:
Step 1: First place in CIN represents the listing status of a company. The listing
status code is represented by an alphabet. If company is listed, then assign L; otherwise
assign U for unlisted company.
Step 2: The next five places represent the economic activity of the company according
to the standard National Industrial Classification (NIC) 98. Select the economic activity
code of the company from NIC98 Manual and assign the code. In case, if a company
is operating in a diverse field, then assign 00000 as a diversified company. The
Manual/ Document on NIC98 can be obtained from CSO.
Step 3: The next two places represents the state in which the companys registered
office is located. All States are represented by a two-alphabet code.
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Step 4: The next four places represent the year of incorporation of the company.
Assign the year of incorporation of a company in YYYY format. Example, if a company
is incorporated on 20 December, 2000. Then assign 2000 as year of incorporation.
Step 5: The next three places represent the ownership of a company. Whether the
company is Union Government company or State Government company, private limited
or public limited company. Ownership code is represented by three alphabet code.
The list of code with their description is presented in Annexure I to this note. Assign
the ownership code from the list presented in below.
Codes Codes Codes Codes Codes Ownership Ownership Ownership Ownership Ownership
GOI Union Government company
SGC State Government company
PLC Public limited Indian non-Government company
PTC Private limited Indian non-Government company
FLC Public limited foreign company incorporated in India
FTC Private limited foreign company incorporated in India
ULL Unlimited liabilities public
ULT Unlimited liabilities private
GAP Guarantee and association public
GAT Guarantee and association private
NPL Section 25 company
Step 6: The last six places represents the unique sequential number assigned to
every company by the concerned RoCs office of the State. This unique six digit sequential
number is assigned by the respective RoCs.
Note that there is no space, hyphen, oblique sign, etc. between the various code
components.
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QUESTION BANK
I. FAQs
1. Who is a Prmoter. ? what is Promotion stage?
2. What are the consequences that follow when a company is registered and a
certificate of incorporation is issued by the Registrar.
3. What documents are required to be filed with the Registrar of Companies under
the provisions of the Companies Act, 1956, prior to incorporation of a company?
4. State the conditions to be satisfied, by a public company for obtaining Certificate
to commence business.
5. What is the meaning of Certificate of Incorporation? When may a public company
commence business?
6. What is meant by Promoter? Explain in brief the position of a promoter.
7. State the usual steps to be taken in the formation of a company under the
Companies Act, 1956.
8. Comment on a) A certificate of incorporation is conclusive evidence that all the
requirements of the Companies Act, 1956 have been complied with. b) A public
company cannot commence business immediately after incorporation.
9. Explain the meaning of Pre-Incorporation Contract. Is the company bound by
such contract? How do such contracts differ from provisional contracts?
10. State the circumstances under which a company can be incorporated without
using the word Limited or Private Ltd. at the end of its name.
11. What is CIN?
12. Write Short Notes on
i) Consequences of incorporation of a company.
(ii) Promoter and his role in the incorporation of a company.
II. CASE STUDIES
1. Though six, out of the seven signatories to the Memorandum of Association were
forged, the company was registered and the Certificate of Incorporation issued.
Can the registration of the company be challenged subsequently on the ground
of forged signatures?
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(Hints: No; Registration cannot be challenged. Section 35 declares that a Certificate
of Incorporation once issued is conclusive with respect to every thing prior thereto).
2. Registrar of Companies issued a Certificate of Incorporation actually on 8
th
January,
2008. However, by mistake, the certificate was dated 5
th
January. The allotment
of shares was made on 7
th
January. Could the allotment declared void?
(Hints: No; Certificate of Incorporation being conclusive with respect to everything
contained therein, the company is deemed to have been incorporated on 5
th
January)
3. XYZ Co. Ltd. was in the process of incorporation. Promoters of the company
signed an agreement for the purchase of certain furniture for the company and
payment was to be made to the suppliers of furniture by the company after
incorporation. The company was incorporated and the furniture was used by it.
Shortly after incorporation, the company went into liquidation and the debt could
not be paid by the company for the purchase of above furniture. As a result
suppliers sued the promoters of the company for the recovery of money. Examine
whether promoters can be held liable for payment under the following situations:
(i) When the company has already adopted the contract after incorporation? (ii)
When the company makes a fresh contract with the suppliers in terms of pre-
incorporation contract?
(Hint: If the pre-incorporation contract is adopted by the company after its
incorporation and if it is within the terms of incorporation, the other party can
enforce the contract against the company. In such a case, promoters will not be
liable.)
4. The promoters of your company, incorporated on 9
th
April, 2008, had entered
into contract with M on 8
th
March, 2008 for supply of goods. After incorporation,
your company does not want to proceed with the contract. Advise the management
of your company.
(Hints: Unless the company adopts the contract, the other party cannot enforce
the same against the company. However, promoters can be held personally liable.)
5. Mr. A prepared the necessary documents, incurred all fees and expenses and
registered a company as per the instructions of the promoters. From whom can
he recover the amount spent?
(Hints: From the promoters)
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CHAPTER - III
MEMORANDUM OF ASSOCIATIONS
3.1 Meaning and Definition
3.2 Purpose of Memorandum of Association.
3.3 Form of Memorandum of Association
3.4 Contents of Memorandum
3.5 Doctrine of Ultra Vires
3.6 Alteration of Memorandum
3.1 Meaning and Definition
The Memorandum of Association is a document of great importance.
It contains the basic conditions on the strength of which a company is
incorporated, namely, the name of the company, the place of its registered
office, the objects within which it can operate, the nature of liability of its
members and capital structure. Having regard to these basic conditions,
it has also been described as the charter or constitution of the company the charter or constitution of the company the charter or constitution of the company the charter or constitution of the company the charter or constitution of the company.
It defines as well as confines the powers of the company defines as well as confines the powers of the company defines as well as confines the powers of the company defines as well as confines the powers of the company defines as well as confines the powers of the company. It states what
the company can do, what are its powers and at the same time sets out
the limit outside which the company cannot function. It also regulates
the affairs of the company in relation to the outsiders.
Definition Definition Definition Definition Definition: : : : : According to sec. 2(28) of the Companies Act,
memorandum of association means the memorandum of association
of a company as originally framed or as altered from time to time. This
definition is not satisfactory, as it does not tell us what a memorandum of
association is. We can define memorandum of association as the basic
document of a company. It states positively the range of activities range of activities range of activities range of activities range of activities of the
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company and what the company can do and it also states negatively the limitation of
the powers of a company i.e., what the company cannot do.
3.2 Purpose
The purpose of memorandum is two-fold: First, to enable the prospective investors
to know the purpose for which their money is going to be used and what risk they are
taking in making the investment. The second, to inform the outsiders dealing with the
company as to what is its permitted range of activities in which it may lawfully engage.
P PP PPublic document : ublic document : ublic document : ublic document : ublic document : The memorandum of association is a public document, which
can be inspected by anybody at the Office of the Registrar of Companies(Section 610).
Every person dealing with the company is presumed to have sufficient knowledge of its
contents. Thus, memorandum helps in regulating the external affairs of the company in
relation to the outsiders. Outsiders after reading the contents of memorandum can
know whether the contract, which they wish to make, is within the object of the company.
3.3 Form of Memorandum of Association
As per section 15 of the Companies Act, the memorandum of association should
be
a) printed,
b) divided into paragraphs numbered consecutively and,
c) signed by seven (two in case of a private company) subscribers in the presence of
at least one witness.
Section 14 of the Companies Act provides that the memorandum of association
should be in any one of the four model forms which are specified in Tables B, C, D, E
of Schedule I. They relate to the following four types of companies.
Table B is applicable to company limited by shares.
Table C is applicable to company limited by guarantee and not having a share
capital.
Table D is applicable to company limited by guarantee and having a share capital.
Table E is applicable to unlimited company.
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The memorandum of association should be as per the model forms as may be
applicable in the case of the company.
3.4 Contents of Memorandum
The basic conditions, which the memorandum of association should state, as per
section 13 are as follows:-
A. Name Clause: Name Clause: Name Clause: Name Clause: Name Clause: This clause states the name of the company. The name of a
company establishes its identity and is the symbol of its existence. The following
points should be noted in connection with the name clause.
F FF FFirstly irstly irstly irstly irstly, ,, ,, the name of the company should not be undesirable. That is to say it
should not be similar to the name of another company and it should not be
misleading. (For example one cannot form a company by the name of New Bajaj
Auto Ltd. as it resembles the name of an existing company Bajaj Auto Ltd.).
Secondly Secondly Secondly Secondly Secondly. .. .. The name of a company must end with the word limited if it is a public
limited company or with the words private company if it is a private limited
company. This enables the outsiders to know which type of company it is; whether
public limited or private limited. However companies not for profit (to promote
science, art, commerce, etc.) are permitted by the Central Government to drop
the word limited from its name.
Every company is required to paint or affix its name and address of its registered
office outside of every office or place of business in a conspicuous position and in
letters which are easily legible and in the language in general use in the locality.
B. Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): Situation Clause (Domicile clause or registered office clause): The second clause
of the memorandum specifies the State in which the registered office of the company
is to be situated. It is not necessary to give the exact address of the registered
office in the situation clause. The companies are required to communicate to the
Registrar within 30 days of the date of incorporation, the complete address of the
registered office. (e-form no 18)
Registered office is the permanent address of the company. All the communications
and notices to the company must be addressed to its registered office (Sec. 51).
The various registers, books and other records of the company are kept here
(Sec. 163). Jurisdiction of High Court, Company Court, Registrar of Companies
is decided on the basis of registered office of the company.
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C. Object Clause: Object Clause: Object Clause: Object Clause: Object Clause: The third clause in the memorandum of association states the
objects of the company. It is the most important clause since it defines the area of
operations of the company. A company can engage itself in only those types of
business which are expressly included in the objects clause or which are incidental
to the main objects. It cannot carry on any other business or activity, which is
beyond the objects clause. Any act done beyond the powers of the company is
ultra vires and is void (i.e., it is has no legal effect).
The objects clause of the memorandum of association of a company is split up as
follows:
i) main objects of the company,
ii) objects incidental or ancillary to the attainment of main objects.
iii) other objects not included in (a) and (b) above.
Apart from the powers expressly provided in the objects clause, a trading company
also has some implied powers such as the power to borrow money, draw and accept
bills of exchange etc. Moreover, the objects of the company must not be illegal, or
against the public policy.
D. Liability Clause: Liability Clause: Liability Clause: Liability Clause: Liability Clause: The liability clause states the nature of liability of the members.
The memorandum of a company limited by shares must state that the liability is
limited. This means that the members liability is limited to the face value of
shares. In the case of a guarantee company, this clause shall state the amount,
which each member undertakes to contribute to the assets of the company in the
event of being wound up.
SPECIMEN OF MEMORANDUM OF ASSOCIA SPECIMEN OF MEMORANDUM OF ASSOCIA SPECIMEN OF MEMORANDUM OF ASSOCIA SPECIMEN OF MEMORANDUM OF ASSOCIA SPECIMEN OF MEMORANDUM OF ASSOCIATION OF A COMP TION OF A COMP TION OF A COMP TION OF A COMP TION OF A COMPANY ANY ANY ANY ANY
LIMITED B LIMITED B LIMITED B LIMITED B LIMITED BY SHARES Y SHARES Y SHARES Y SHARES Y SHARES
I . NAME CLAUSE The name of the company is UTKARSH BUILDERS PRIVATE
LIMITED.
II. SITUATION CLAUSE The Registered office of the company will be situated
in the State of Maharashtra.
III. OBJECTS CLAUSE The objects for which the company is established
are:
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A. MAIN OBJECT OF THE COMPANY TO BE PURSUED BY THE COMPANY
ON ITS INCORPORATION:To carry on the business of builders, contractors,
directors, to purchase for investment of resale, houses, lands, real property
and generally to deal in, sell, lease, exchange, or otherwise deal property,
whether real or personal.
B. OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE
MAIN OBJECT:C. OTHER OBJECTS:
IV. LIABILITY CLAUSE The liability of members is limited.
V. CAPITAL CLAUSE The authorised Share Central of the company is
Rs.10,00,000/- (Rupees ten lacs only) divided into 1,00 ,000 (one lac)
Equity Shares of Rs. 10/- (Rupees ten only) each.
VI. SUBSCRIPTION CLAUSE We, the several persons whose names and
addresses are subscribed, are desirous of being formed into a company in
pursuance of this memorandum of association, and we respectively agree
to take the number of shares in the capital of the company set opposite our
respective names.
Names, addresses, description and Number of shares taken by each
subscriber. Witness of the signatures
occupation of subscribers.
1. A.B. of (Place) Merchant 100 Name, address, description 2. C.D. of
Industrialist 100 and occupation of witness.
3. E.F. of Merchant 100 signature of witness.Total shares taken
300
Dated at Nagpur this 1
st
day of Jan, 2008.
E. The Capital Clause: The Capital Clause: The Capital Clause: The Capital Clause: The Capital Clause: This clause states the amount of share capital with which the
company is to be registered and its subdivision into shares of fixed amounts. The
share capital so stated in the memorandum is usually called the authorised or
nominal capital of the company. The authorised capital is the maximum limit
share capital which a company is authorised to raise. If it wants to raise share
capital in excess of the limit so set it will have to alter the capital clause.
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After the passing of the Companies (Amendment) Act 2000, the definitions of
public and private companies have been modified with reference to the paid-up
capital. Hence, in case of a private company it must be mentioned that the
subscribed and paid-up capital is minimum rupees 1 lac and in case of public
company it is rupees 5 lac.
F. Subscription Clause: Subscription Clause: Subscription Clause: Subscription Clause: Subscription Clause: The memorandum concludes with this clause. It contains a
declaration by the subscribers to the memorandum that they are desirous of forming
themselves into a company and that they agree to take up shares stated against
their names. Each subscriber must take atleast one share. There must be atleast
seven subscribers in the case of public company and atleast two in the case of a
private company. The signature of each subscriber must be attested by atleast
one witness who is not a subscriber.
The Statutory requirements regarding Subscription of Memorandum Are:-
a) the memorandum must be signed by each subscriber in the presence of at least
one witness who must attest the signature;
b) each subscriber must take at least one share;
c) each subscriber must write opposite his name the number of shares he takes [Sec.
13(4)(c)]
3.5 Doctrine of Ultra Vires
The word ultra means beyond and the word vires means the powers. Ultra vires,
therefore, means beyond the powers. Any act beyond the objects stated in the
memorandum is ultra vires the company and thus void.
To be ultra vires, a transaction has to be outside the capacity of the company. It
does not bind the company. Neither the company nor the other contracting party can
sue on it. It is absolutely void. The company cannot make it valid, even if every member
approves it.
The rule is meant to protect shareholders and the creditors of the company. But if
the act is ultra vires (beyond the powers of) the directors only, the shareholders can
ratify it. Or if it is ultra vires the articles of association, the company can alter its articles
in the proper way.
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The doctrine of ultra vires was laid down in the case of Ashbury Rly Ashbury Rly Ashbury Rly Ashbury Rly Ashbury Rly. Carriage & Iron . Carriage & Iron . Carriage & Iron . Carriage & Iron . Carriage & Iron
Company V Company V Company V Company V Company V. Riche . Riche . Riche . Riche . Riche (1875). LR 7 HL 653. In this case the company was formed to make
and sell, or lend or hire, railways carriages and wagons and to carry on the business of
the mechanical engineers and general contractors. The directors of the company
entered into contract with Riche for financing the construction of a railway line in Belgium.
The company subsequently ratified the act of directors by passing a special resolution
at a general meeting. Later, the company repudiated the contract on the ground that it
was ultra vires. Riche filed a suit against the company for breach of contract and claimed
damages.
The House of Lords held that the contract was ultra vires the company and therefore
void ab initio. It was further held that it cant be made valid by ratification on the part of
the shareholders, and so the company was not liable for breach of contract.
The doctrine has been upheld in a large number of Indian cases. (L Mudaliar vs.
LIC AIR 1963 SC 1185)
This doctrine now days have been rendered to some extent ineffective due to the
practice of enumerating all objects possible under the sun in the objects clause. Section
13(1)(d) of the Companies Act, 1956 now provides that the incidental or ancillary to
the main objects be stated in the memorandum.
After the Companies (Amendment) Act 1996, it is possible for a company to change
its objects clause by passing a special resolution alone. Thus, now it is possible to
change the objects clause without approaching Company Law Board and the procedure
of amending the objects clause is relatively easy. (In England, the doctrine of ultra vires
has been diluted and rendered irrelevant by the English Companies (Amendment) Act,
1989 and a contract entered on behalf of the company, is now binding against the
company in England even if it is beyond the powers of the company).
Under section 149 a public company can commence business under other objects
by passing a special resolution.
Effects of Ultra Vires transactions:
i) Ultra vires contracts are void ab initio. They do not have any legal effect and are
not binding on the company.
ii) Injunction: The members can get an injunction to restrain the company wherein
ultra vires act has been or is about to be undertaken [Attorney General v. Gr.
Eastern Rly. Co., (1880) 5 A.C. 473].
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iii) Personal liability of Director: It is one of the duties of directors to ensure that the
corporate capital is used only for the legitimate business of the company and
hence if such capital is diverted to purposes other than the companys objectives
(ultra vires) the director will be personally liable.
iv) Where a companys money has been used ultra vires to acquire some property
the companys right over such property is held secure.
v) Ultra vires borrowing does not create the relationship of creditor and debtor.
vi) Ultra vires act cannot be ratified by the members.
3.6 Alteration of Memorandum of Association
The contents of a memorandum can be altered only in the manner and to the
extent provided in the Companies Act. (Section 16)
I. Change of name:
Section 21 provides that the name of a company may be changed at any time by
passing a special resolution at a general meeting of the company and with the written
approval of the Central Government
The powers of the Central Government to accord approval to change of name
have now been delegated to R delegated to R delegated to R delegated to R delegated to Registrar of Companies (ROC) egistrar of Companies (ROC) egistrar of Companies (ROC) egistrar of Companies (ROC) egistrar of Companies (ROC) w.e.f. 1.7.85. For changing
the name, the company is required to apply to ROC in FORM 1A to ascertain the
availability of name.
However, no approval of the Central Government is necessary if the change of
name involves only the addition or deletion of the word private (i.e., when public
company is converted into a private company or vice versa).
The Registrar will enter the new name on the Register in place of the old name and
shall issue a fresh certificate of incorporation with necessary alterations [Sec. 23(1)].
The change of name becomes effective on the issue of fresh certificate of
incorporation.
Effect of change of name : :: :: The change of name shall not affect any rights/obligations
of the company or render the same defective in legal proceedings by or against it.
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II. Change of Registered Office
Change of Registered Office
IIa. Within the same city
IIb. Within the same State
(i) Within the jurisdiction of the existing RoC in the same State.
(ii) Within the jurisdiction of another RoC in the same State
IIc. From one State to another State
IIa. Change of registered office from one Premises to another Premises in the
Same City, Town or Village. (Sec. 146 )
A company can change its registered office from one place to another within the
local limits of the city, town or village where it is situated, by passing a resolution in the
meeting of Board of Directors. However, notice of the change should, within 30 days of
the change, be given to the Registrar who shall record the same. The notice shall be
given in e-Form No. 18.
II b(i). Change of registered office from one town to another town and within the
jurisdiction of existing RoC in the same State.
In this case, the following procedure is to be followed:
i) a special resolution is required to be passed at a general meeting of the
shareholders;
ii) a copy of it is to be filed with the Registrar within 30 days of the passing of special
resolution in e-Form No. 23;
iii) within 30 days of the shifting of the registered office, the notice of the new location
has to be given to the Registrar in e-Form no. 18, who shall record the same.
II b(ii). Change of registered office from one town to another town in the same
state and within the jurisdiction of another RoC. [Sec. 17a].
Procedure
If a company wants to change the place of its registered office from jurisdiction of
one RoC to jurisdiction of another RoC within the same State, it needs to go through the
following procedure:
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Special Resolution: The company will convene the General Meeting for approving
the change in the Registered office from jurisdiction of one RoC to jurisdiction of
another RoC within the same State.
Obtain confirmation from Regional Director: The company will make an application
in the prescribed form (1 AD) to the Regional Director for confirmation. The
confirmation or otherwise shall be communicated to the company within four
weeks from the date of receipt of application for such change.
Filing of confirmation with RoC. After the confirmation by the Regional Director,
the company will file the certified copy of the confirmation, within two months to
the Registrar under whose jurisdiction the registered office is being shifted, together
with a printed copy of the memorandum as altered.
Registration: The Registrar shall register the same and certify the registration under
his hand within one month from the date of filing of such document. The certificate
shall be conclusive evidence that all the requirements of this Act with respect to
the alteration and confirmation have been complied with and henceforth the
memorandum as altered shall be the memorandum of the company.
IIb. Change of registered office from one state to another state -
Section 17 provides for the shift of the registered office from one State to another
and such shift involves alteration of memorandum.
a) Grounds for shifting Grounds for shifting Grounds for shifting Grounds for shifting Grounds for shifting. .. .. A company can shift its registered office from one
State to another for certain purposes only as specified in sec. 17(1). These
are :
a. To carry on its business more economically and more efficiently [ Section
17(1)(a)].
b. To attain its main purpose by new or improved means [ Sec.17(1)(b)]
c. To enlarge or change the local area of its operation [Sec.17(1)(c)]
d. To carry on some business which under existing circumstances may be
conveniently or advantageously combined with the business of the company
[Sec. 17(1)(d)]
e. To restrict or abandon any of the objects specified in the memorandum
[Sec.17(1)(e)]
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f. To sell or dispose of the whole or any part of the undertaking [Sec.17(1)(f)].
g. To amalgamate with any other company or body of persons [Sec.17(1)(g)].
b) Special R Special R Special R Special R Special Resolution. esolution. esolution. esolution. esolution. Registered office of a company can be shifted from one State
to another by passing special resolution in the general meeting of shareholders.
Form 23. should be filed for registering the special resolution.
c) Confirmation by the Company L Confirmation by the Company L Confirmation by the Company L Confirmation by the Company L Confirmation by the Company Law Board*. aw Board*. aw Board*. aw Board*. aw Board*. The company should file a petition
to the Company Law Board for confirmation of the change.
d) Notice to affected parties. Notice to affected parties. Notice to affected parties. Notice to affected parties. Notice to affected parties. Before confirming the change, the Company Law
Board will satisfy itself that sufficient notice has been given to -
a) every creditor and all other persons whose interests are likely to be affected
by the alteration including
b) the Registrar of Companies and the
c) Government of the State in which the registered office is situated.
Also, the Company Law Board will give an opportunity to members and creditors
of the company, the Registrar and other persons interested in the company to be heard.
d) Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. Copy of the CLB order to be filed with ROC. The CLB may confirm the alteration
and may impose such terms and conditions as it may deem fit .The company shall
file with Registrar of each State (The State where it was registered and the
new state)
- A certified copy of the CLB order within three months from the date of such
order .
- Copy of memorandum as altered.
If it is not filed within the prescribed time, then the alteration shall, at the expiry of
such period, become void and inoperative. However the CLB may grand extension of
time for filing upto 3 months.
- The Registrar shall register the change and give a certificate of registration within within within within within
1 month 1 month 1 month 1 month 1 month from date of filing of such documents.
A notice in e-Form no 18 of the new location of the registered office must be given
to the Registrar of the State to which the office has been shifted, within thirty days after
the change of the office (Sec. 146).
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Case Study - Case Study - Case Study - Case Study - Case Study - A company proposes to shift its registered office from Cuttack to
Kolkata. The government of Orissa gave objection to the Company Law Board as it
would loose huge revenue if the registered office is shifted. Can it succeed?
The contention of the Government of Orissa is not sustainable because loss of
revenue is not a proper ground for preventing a company from shifting its registered
office from one State to another State.
The powers of CLB have been given to the Central Government by the
Companies (Second Amendment) Act, 2002 However the Act has not been
made effective.
III. Change of objects.
The grounds for altering objects are the same as required for shifting of registered
office. For altering the objects the company is required to pass a special resolution at a
meeting of the shareholders.
a) Grounds for change. Grounds for change. Grounds for change. Grounds for change. Grounds for change. A company can change its objects clause for certain purposes
only as specified in sec. 17(1). These are:
1. To carry on its business more economically and more efficiently
[Section 17(1)(a)].
2. To attain its main purpose by new or improved means [ Sec.17(1)(b)]
3. To enlarge or change the local area of its operation [Sec.17(1)(c)]
4. To carry on some business which under existing circumstances may be
conveniently or advantageously combined with the business of the company
[Sec. 17(1)(d)]
5. To restrict or abandon any of the objects specified in the memorandum
[Sec.17(1)(e)]
6. To sell or dispose of the whole or any part of the undertaking [Sec.17(1)(f)].
7. To amalgamate with any other company or body of persons [Sec.17(1)(g)].
A Board Meeting should be called to decide on the change in objects clause. In the
Board Meeting, the time and place of the general meeting should be fixed up and the
notice for calling the general meeting for alteration of objects clause should be approved.
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b) Special R Special R Special R Special R Special Resolution. esolution. esolution. esolution. esolution. The company should pass a special resolution in the general
meeting of shareholders for changing the objects clause. Section 18 provides
that a special resolution passed by the company in relation to clauses (a) to (g) of
sub-section (1) of section 17 shall be filed by the company with the Registrar
within one month of the date of such resolution, together with a printed copy of
the memorandum as altered.
c) ROC to certify the R ROC to certify the R ROC to certify the R ROC to certify the R ROC to certify the Registration. egistration. egistration. egistration. egistration. The Registrar will register the documents and
issue, within one month, a certificate which will be conclusive evidence that all
the requirements of the Act, with respect to the alteration of the objects clause in
the memorandum has been complied with (section 18). If the required documents
are not filed within the prescribed time, the alteration shall, at the expiry of such
period, become void and inoperative (Sec. 19).
Shifting of objects from other objects to main objects or Commencement Shifting of objects from other objects to main objects or Commencement Shifting of objects from other objects to main objects or Commencement Shifting of objects from other objects to main objects or Commencement Shifting of objects from other objects to main objects or Commencement
of new business of an existing company of new business of an existing company of new business of an existing company of new business of an existing company of new business of an existing company. . . . . According to sec. 149(2A), a
company can commence any business stated under other objects only after
obtaining the prior approval of the share holders in general meeting by a
special resolution. Where the resolution is passed with simple majority, an
application will be made to the Central Government for its approval. The
procedure involved is
The proposal to commence a new business should be considered and
approved by the Board.
A special resolution should be passed approving commencement of
new business. If ordinary resolution is passed approval of Central Government
is required.
E-Form no. 23, should be filed within 30 days of passing of the special
resolution.
A duly verified declaration signed by one of Directors or the Secretary
in Form no 20A should be filed with the ROC either within 30 days of the
passing of the special resolution or before commencement of new business,
whichever is earlier.
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IV. Alteration of liability clause.
The liability of a member of a company cannot be increased unless the members
agree in writing (Sec 38).
Section 32 permits an unlimited company to register as a limited company. On
alteration, the Registrar shall close the former registration of the company and the new
registration shall take effect as if it were the first registration. The registration of an
unlimited company as a limited company shall not, however, affect any debts, liabilities,
obligations or contracts incurred or entered into, before the conversion.
Can the liability of the directors be made unlimited in a limited company? If the
articles of a limited company so authorize, the liability clause in its memorandum of
association may by a special resolution, be altered making the liability of all of its
directors, or of any director or manager, unlimited. Such an alteration however, shall
not affect the liability of any existing director or manager before the expiry of his present
term of office, unless he gives his consent to making his liability unlimited (Section
323).
V. Alteration of Capital Clause. (Sec. 94)
Alteration of capital clause may involve the following types of alterations -
a) Increase of authorised capital of the company, or
b) Consolidation of shares
c) Sub-division of shares into shares of smaller amount.
d) Cancellation of shares not taken or agreed to be taken by any person.
These alterations can be done by passing an ordinary resolution, if authorised by
the articles (Sec. 94).
a aa aa. Increase of authorised share capital . Increase of authorised share capital . Increase of authorised share capital . Increase of authorised share capital . Increase of authorised share capital - A company, limited by shares, if the
articles authorise, can increase its authorised share capital by passing an ordinary
resolution.
Within 30 days of the passing of the resolution, a notice in Form 5, of increase in
the share capital must be filed with the Registrar of Companies. On receipt of the
notice, the Registrar shall record the increase and also make any alterations which may
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be necessary in the companys memorandum or articles or both. If default is made in
filing the notice, the company and every officer of the company who is in default shall
be punishable with fine upto Rs. 50 per day during which the default continues (Sec.
97).
b. Consolidation and sub b. Consolidation and sub b. Consolidation and sub b. Consolidation and sub b. Consolidation and sub- -- --division of shares division of shares division of shares division of shares division of shares - Consolidation is the process of
combining shares of smaller denomination. For instance, 10 shares of Rs. 10 each may
be consolidated into one share of Rs. 100. Sub-division of shares is just the opposite of
consolidation e.g., one share of Rs. 100 may be dividend into 10 shares of Rs. 10
each.
Once a resolution has been passed, e-Form no. 5 which is notice of consolidation,
sub-division is required to be sent within thirty days to the Registrar of Companies.
c. Conversion of shares into stock and vice versa c. Conversion of shares into stock and vice versa c. Conversion of shares into stock and vice versa c. Conversion of shares into stock and vice versa c. Conversion of shares into stock and vice versa - Section 94 empowers a company
to convert its fully paid-up shares into stock by passing a resolution in general meeting,
if its articles authorise such conversion. A notice is to be filed with the Registrar within
thirty days of the passing of the resolution specifying the shares so converted.
When shares are converted into stock, the shareholders are issued stock certificates.
In the Register of Members, the amount of stock is written against the name of a
particular member in place of number of shares. The stockholder is as much a member
of the company as a shareholder.
d. Diminution of share capital d. Diminution of share capital d. Diminution of share capital d. Diminution of share capital d. Diminution of share capital If the company has issued the shares for subscription
but are not taken up by the investors then naturally the shares cannot be allotted.
Section 94(1)(e) provides that a company may, if its articles authorise, by resolution in
general meeting, cancel shares which have not been taken or agreed to be taken by
any person and diminish the amount of the share capital by the amount of the shares so
cancelled. This constitutes diminution of capital and it does not amount to reduction of
capital. It involves only reduction of authorised capital.
Reduction of share capital vs. Diminution of share capital: Section 94(3) specifically
states that diminution does not constitute a reduction within the meaning of the
Companies Act. The expression diminution of share capital and reduction of share
capital differ from each other. Refer Chapter 7 for distinction.
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Procedure for alteration of capital clause
a) The articles should authorize the alteration of capital clause
b) The company must pass an ordinary resolution.
c) Notice of alteration must be given to the ROC within 30 days of alteration in e-
form no. 5.
QUESTION BANK
I. FAQs
1. Explain clearly the meaning of Memorandum of Association.
2. State the requirements which must be stated in the memorandum of association.
3. Explain the circumstances under which the object clause of the memorandum of
association may be altered.
4. Can a company act beyond the powers of its Memorandum of Association? If no,
why?
5. Explain the doctrine of ultra vires.
6. When shall the shifting of registered office of a company require alteration of
Memorandum of Association? State the procedure for effecting such an alteration.
7. Explain the importance of registered office of a company.
8. What are the circumstances under which the alteration of objects as stated in the
Memorandum of association is permissible by the Companies Act?
9. When and how can a company change its registered office from one State to
another?
10. Explain the extent to which the Objects for which a company was incorporated
may be amended. State the procedure, as prescribed by the Companies Act,
1956, a company has to follow for giving effect to the above.
11. XY Ltd. has its registered office in Bihar. For better administrative control the
company plans to shift its registered office from Bihar to Delhi. The Bihar
government opposes such shifting on the ground that such transfer will cause
revenue loss to the State. Discuss the validity of such opposition with reference to
the case law on the subject.
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12. Write Short Notes on:
(i ) Doctri ne of Ul travi res (i i ) Excepti ons to Doctri ne of Ul travi res
(iii) Procedure for alteration of Capital
13. Doctrine of ultra vires is a dark cloud for adventurous directors and careless creditors.
Discuss the statement.
II. CASE STUDIES
1. The object clause of the Memorandum of Association of the Alphanso (Pvt.) Ltd.,
New Delhi, authorised to do trading in mangoes. The company, however, entered
into partnership with Mr. A and traded in mangoes and incurred liabilities to Mr.
A. The Company, subsequently, refused to admit the liability to A on the ground
of ultra vires the Company Advice, whether stand of the company is legally
valid and if so, give reasons in support of your answer
(Hints: Alphanso Pvt. Ltd. is authorised to trade directly on mangoes. It has no
power to enter into a partnership with Mr. A. Such act can never be treated as
express or implied powers of the company. Mr. A who entered in to partnership
is deemed to be aware of the lack of powers of Alphanso (Pvt.) Ltd. Mr. A cannot
enforce the agreement or liability against Alphanso Pvt. Ltd. Mr. A should be
advised accordingly. This conclusion is supported by the decision reported in the
case of The Ganga Mata Refining Company (Pvt.) Ltd. vs. Commissioner of Income
-tax reported in 1968(38) Companies Cases 117.)
The object clause of the Memorandum of a company empowers it to carry on
distillery business and any other business that is allied to it. The company wants to
alter its Memorandum so as to include the cinema business in its object clause.
Advise the company.
(Hints :The company has to comply with Sec.17 and pass a special resolution)
M Ltd. has its registered office at Nagpur in the State of Maharashtra. For better
administrative convenience the company wants to shift its registered to Pune.
Advice.
( Hints: Special resolution plus confirmation from Regional Director)
XYZ Ltd. wishes to shift their registered office from Hyderabad to Secundrabad.
State the procedure.
(Hints: Special resolution and file Form 18).
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CHAPTER - IV
ARTICLES OF ASSOCIATION
4.1 Meaning of Articles and its relationship with memorandum
4.2 Contents of Articles of Association
4.3 Alteration of Articles
4.4 Doctrine of constructive notice
4.5 Doctrine of Indoor Management
4.6 Binding Effect of Memorandum and Articles
4.1a. Meaning
Articles of Association are another important document of a company.
It contains the bye-laws or rules and regulations regarding the internal
management of the company. In it are found rules for the conduct of the
corporate affairs e.g., rules regarding allotment of shares, transfer and
transmission of shares, company meetings, appointment of directors,
their powers, accounts and audit etc. Articles define the powers of its
officers. They also establish a contract between the company and the
members and between members inter se.
In relation to memorandum, article occupies a position subordinate
to Memorandum. It is the memorandum that prevails in the event of a
conflict between the two.
b. Relationship between Articles and Memorandum of
Association
Articles of association are subordinate to and controlled by the
memorandum. The memorandum lays down the scope and powers of
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the company and the articles govern the ways in which the objects of the company are
to be carried out.
The articles constitute a contract between the company and its members defining
their respective rights and duties and are binding upon the members and the company.
Unlike the memorandum, they have nothing to do with the outsiders. As Lord Cairns
observes The memorandum is the area beyond which the action of the company
cannot go; inside that area the shareholders may make such regulations for their own
government as they think fit.
c. Registration of Articles
It is compulsory to get the articles of association registered, along with the
memorandum of association in case of
a) an unlimited company
b) a company limited by guarantee and
c) a private company limited by shares (sec 26)
Is it legally compulsory for a company to have its own A/A?
It is not compulsory for public company limited by shares to prepare and register
the articles of association. If it does not register its own articles then all the regulations
in Table A of schedule I of Companies Act, will apply to it.
Tables A, C, D and E to Schedule I give the model form of articles for various types
of companies. A public limited company having share capital may-
a) frame its own set of articles or
b) straightway adopt Table A and thus need not have separate articles.
c) partly frame its own articles & partly incorporate some of the regulations contained
in Table A.
But if does not register any Articles, Table A applies. (sec 28)
Unlimited companies, companies limited by guarantee and private companies limited
by share capital must have their own articles.
Difference between Memorandum of Association and Articles of Association.
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Nature Nature Nature Nature Nature
Memorandum of association contains the
basic conditions on which the company
is incorporated. It provides for Name,
situation objects, capital and liability of
the company.
Scope Scope Scope Scope Scope
a) It determines the objects, scope and
extent of the activities of the company.
b) It is the charter and constitution of the b) It is the charter and constitution of the b) It is the charter and constitution of the b) It is the charter and constitution of the b) It is the charter and constitution of the
company company company company company. .. ..
Alteration Alteration Alteration Alteration Alteration
Memorandum of association cannot be
altered easily.
R RR RRegistration egistration egistration egistration egistration
Every company must have i ts own
memorandum. It must be compulsorily
filed for registration.
Ultra-vires Ultra-vires Ultra-vires Ultra-vires Ultra-vires
Acts done by a company beyond the
scope of the memorandum are absolutely
void (ineffective). They cannot be ratified
even by unanimous vote of all the
shareholders.
Memorandum of Association Articles of Association
1.
2.
Articles of association can be altered if it
is desired by 3/4ths, majority.
Articles of association are the rules
governing the internal management of the
company. It provides for rules and
procedures for the conduct of its business.
a) It governs the ways in which the objects
of the company are to be carried out.
b) The articles are subordinate to the
memorandum. If there is conflict between
the two, memorandum shall prevail.
A company limited by shares need not
have articles of its own. In such a case it
may adopt Table A. The articles need not
be compulsorily filed for registration.
Acts done by the company beyond its
Arti cl es can be rati fi ed by the
shareholders.
Articles of association govern the internal
relationship between the company and its
members.
5.
3.
4.
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d. Statutory Requirements
i) Form and signature: According to sec. 30 the articles of association of every
company shall be
a) printed
b) divided into paragraphs numbered consecutively, and
c) signed by each subscriber of the memorandum of association in the presence
of atleast one witness.
It should be stamped and filed along with the memorandum of association.
ii) The articles of association should not contain anything, which is inconsistent with
the memorandum or contrary to the provisions of the Companies Act.
iii) The articles of a private company must contain the four restrictions (viz., restriction
on the transfer of shares, limitation of the number of members to 50, prohibition
of invitation to the public for the purchase of shares, debentures and deposits).
4.2 Contents of Articles of Association
The matters with which the articles of association of a company usually deal with are:
1. Applicability of Table A
2. Share capital and its subdivision into different classes of shares, rights of
shareholders..
3. The provisions and procedures regarding:
a) Allotment of shares, b) lien on shares c) calls on shares d) transfer and
transmission of shares e) forfeiture and surrender of shares f) conversion of
shares into stock h) share warrants g) share certificates.
4. Alteration of capital and reduction of capital.
5. General meetings - a) proceedings at general and other meetings b) Voting rights
of members and proxies
6. Board of Directors - Powers of Board, proceedings of Board and its committees
7. Borrowing powers.
8. Accounts & Audit
9. Dividends and reserves; Capitalization of profits
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10. Common seal
11. Winding up
12. Indemnity
4.3 Alteration of Articles of Association
Sec. 31 of the Companies Act, 1956, provides that a company may by passing a
special resolution special resolution special resolution special resolution special resolution, alter regulations contained in its Articles any time subject to
a) the provisions of the Act and
b) conditions contained in the Memorandum of Association [Section 31(1)]. Any
new regulations in the Articles may be adopted which could have been lawfully
included in the original Articles. However, no alteration made in the articles which
has the effects of converting a public company into private company shall have
effect unless such alteration has been approved by the Central Government.
A copy of every special resolution altering the Articles shall be filed in Form no 23,
with the Registrar within 30 days its passing and attached to every copy of the Articles
issued thereafter.
Limitations to alteration
The fundamental right of a company to alter its articles is subject to the following
limitations:
1) The alteration must not exceed the powers given by the Memorandum of
Association of the company or conflict with the provisions thereof.
2) It must not be inconsistent with any provisions of the Companies Act, listing
agreement or any other statute.
3) It must not be illegal or against public policies
4) The alteration must be bona fide for the benefit of the company as a whole.
5) It should not be a fraud on minority, or inflict a hardship on minority without any
corresponding benefits to the company as a whole.
6) The alternation must not be inconsistent with an order of the court. Any subsequent
alteration thereof which of inconsistent with such an order can be made by the
company only with the leave of the court.
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7) The alteration cannot have retrospective effect. It can operate only from the date
of amendment. [Pyarelal Sharma v. Managing Director, J & K Industries Ltd. [1989]
3 comp. L.J. (SL) 70].
8) An alteration that has the effect of increasing the liability of a member to contribute
to the company is not binding on a present member unless he has agreed thereto
in writing.
9) An assumption by the Board of Directors of a company of any power to expel a
member by amending its Articles is illegal or void.
Effect of altered articles: Effect of altered articles: Effect of altered articles: Effect of altered articles: Effect of altered articles: Any alternation so made in the Articles shall be as valid as
if originally contained in the Articles [Sec. 31(2)].
SPECIMEN OF AR SPECIMEN OF AR SPECIMEN OF AR SPECIMEN OF AR SPECIMEN OF ARTICLES OF ASSOCIA TICLES OF ASSOCIA TICLES OF ASSOCIA TICLES OF ASSOCIA TICLES OF ASSOCIATION OF A PRIV TION OF A PRIV TION OF A PRIV TION OF A PRIV TION OF A PRIVA AA AATE LIMITED TE LIMITED TE LIMITED TE LIMITED TE LIMITED
COMP COMP COMP COMP COMPANY ANY ANY ANY ANY
I. PRELIMINARY Subject as hereinafter otherwise provided the regulations
contained in Table A in Schedule I of the Companies Act, 1956, (hereinafter
called Table A) shall apply to the company so far as the same are applied to
Private Company.
II. PRIVATE COMPANY The company is a Private Company within the
meaning of Section 3(1)(iii) of the Companies Act, 1956, and accordingly:
i ) No invitation shall be issued to the public to subscribe for any
shares in or debentures of the company.
ii) The number of members of the company shall not exceed fifty.
iii) The right to transfer the shares is restricted in the manner and to
the extent hereinafter provided.
iv) No invitation shall be issued to the public for acceptance of deposit
from persons other than its members, directors or their relatives.
III. OTHER CONTENTS Such as capital and shares, transfer, and transmission
of shares, voting rights, Directors, Borrowing powers, Management,
Meetings, Common seal, Audit, Secrecy clause, indemnity clause, winding
up. We, the several persons whose names and addresses are subscribed,
are desirous of being formed into a company in pursuance of this Articles of
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Association, and we respectively agree to take the number of shares in the
capital of the company set opposite our respective names.
Names, addresses, description and number of shares taken by each
subscriber. Occupations of the subscribers.
4.4 Doctrine of Constructive Notice
Section 610 provides that the memorandum and articles when registered with
Registrar of Companies become public documents become public documents become public documents become public documents become public documents and then they can be inspected
by any one on payment of a nominal fee. Therefore, any person who contemplates
entering into a contract with the company has the means of ascertaining the powers of
the company and is thus, presumed to have read these documents and understood
them in their true perspective. This is known as doctrine of constructive notice. doctrine of constructive notice. doctrine of constructive notice. doctrine of constructive notice. doctrine of constructive notice.
Even if the party dealing with the company does not have actual notice of the
contents of these documents it is presumed that he has an implied (constructive) notice
of them. Consequently, if a person enters into a contract which is beyond the powers of
the company, as defined in the memorandum, or outside the limit set on the authority
of the directors as per the memorandum or articles, he cannot, as a general rule,
acquire any rights under the contract against the company.
However, the aforesaid rule of constructive notice has been held to be subject to
the rule of indoor management indoor management indoor management indoor management indoor management. The rule of indoor management was first laid down
in the case of Royal British Bank v. Turquand. The rule of indoor management offers
protection to those dealing with the company through its officers who fail to follow the
procedures prescribed under the article before exercising those powers. This doctrine
laid down that the persons dealing with the company are not bound to inquire into the
regularity of internal proceedings.
4.5 Doctrine of Indoor Management
The doctrine of Indoor Management constitutes an exception to the doctrine of
constructive notice. According to the doctrine of constructive notice people entering
into contracts with a company is presumed to have read and have notice of the contents
of the companys memorandum and the articles. The doctrine of Indoor Management
on the other hand allows all those who deal with the company to assume that the
provisions of the articles have been observed by the officers of the company. In other
words, the persons dealing with the company are not bound to inquire into the regularity
of internal proceedings.
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While the doctrine of constructive notice seeks to protect the company against the
outsiders, the principle of indoor management operates to protect the outsiders against
the company. The doctrine of indoor management was laid down in the case of Royal
British Bank v. Turquand, (1986) 119 E.R. 886. In this case, the directors of a banking
company were authorised by the articles to borrow on bonds such sums of money as
should from time to time, by resolution of the company in general meeting, be authorised
to borrow. The directors gave a bond to Turquand without the authority of any such
resolution. It was held that Turquand could sue the company on the strength of the
bond, as he was entitled to assume that the necessary resolution had been passed.
Lord Harthely observed: Outsiders are bound to know the external position of the
company, but are not bound to know its indoor management.
Exceptions to the Doctrine of Indoor Management
However, the relief under indoor management cannot be availed of by the directors
who have the means of verifying the truth or those who did not read articles at all.
Again, it is not available in case of forgery or even negligence
The doctrine of indoor management is not applicable in the following cases:
a) Knowledge of irregularity: Knowledge of irregularity: Knowledge of irregularity: Knowledge of irregularity: Knowledge of irregularity: The rule does not protect any person who has actual
or constructive notice of the internal irregularity. [Howard v. Patent Ivory Mfg. Co.,
(1888)38 Ch. D. 156]. Obviously then the presumption that every internal
proceeding has been conducted regularly shall stand rebutted, i.e., they cannot
assume that everything has been done regularly. Therefore, the benefit of doctrine
of indoor management shall not be available in such a case.
[Howard v. Patent Ivory Mfg. Co., (1888)38 Ch. D. 156]. The directors of a
company could borrow upto 1,000 without the sanction of members in
General Meeting. The consent of the shareholders was required to borrow
in excess of 1,000. The directors themselves lent 3,500 to the company.
It was held that the directors had the notice of the internal irregularity and
therefore the company was liable to them only for 1,000.
b) No knowledge of the articles: No knowledge of the articles: No knowledge of the articles: No knowledge of the articles: No knowledge of the articles: The rule cannot be invoked in favour of a person
who did not in fact consult the companys memorandum and articles and
consequently did not act in reliance of those documents.
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Rama Corporation v Proved Tin & General Investment Company Ltd. [1952]1
All ER 554.The articles of the investment company provided that the directors
could delegate their powers to one of them. T was a director in this investment
company. T, purporting to act on behalf of the company, entered into a
contract with Rama Corporation and received a cheque from it. Rama
Corporation had never read the articles. Later, it was found that the directors
of the company have not delegated their powers to T. It was held that Rama
Corporation could not rely on the nature of irregularity as it did not know
that the power could be delegated. Accordingly, the benefit of the doctrine
of indoor management was not available.
c) Negligence: Negligence: Negligence: Negligence: Negligence: The doctrine is not applicable incase of negligent persons. If an
officer of the company acts in a manner, which would not ordinarily be within his
powers, the person dealing with him must make proper inquiries and satisfy himself
as to the officers authority. If he fails to make enquiry, he cannot rely on the rule.
In Anand Biharilal v. Dinshaw & Co., A.I.R. 1942 Oudh 417, an accountant of a
company transferred some property of the company in favour of Anand Bihari,
who brought an action for the breach of contract. The transfer was held by the
Court to be void, since the power of transferring property could not be considered
as within the apparent authority of an accountant.
d) F FF FForgery: orgery: orgery: orgery: orgery: The protection under this rule is not available where the outsider is
found to have relied upon the document, which is a forged one.
Where a person is cheated upon a forged document the company cannot be
held liable. In Ruben v. Great Fingall Consolidated Ltd., (1906) A.C. 439, the
secretary of the company issued a share certificate in favour of Ruben, which
apparently complied with the companys articles, as it was purported to be signed
by two directors and the secretary and it had the companys common seal affixed
to it. In fact, the secretary had forged the signature of the directors and affixed the
seal without any authority.
It was held that the certificate was not binding upon the company. Lord Loreburn
held : It is quite true that personal dealing with limited liability companies are not
bound to inquire into their indoor management ........ but this doctrine which is
well established, applied to irregularities which otherwise might affect genuine
transaction. It cannot apply to a forgery.
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e) Illegal T Illegal T Illegal T Illegal T Illegal Transactions: ransactions: ransactions: ransactions: ransactions: The rule does not apply to transactions which are illegal or
void ab initio. The benefit is available only if there is some procedural or internal
irregularity. If the contract is ultra vires, it is not, and can never be made, enforceable
against any of the parties to the contract.
4.6 Binding effect of Memorandum and Articles
Section 36 provides that the memorandum and articles, when registered, bind the
company and its members to the same extent as if they have been signed by the company
and by each member. The company and each of its members are to observe and be
bound by all the provisions of the memorandum and of the articles.
Members bound to the company - Members bound to the company - Members bound to the company - Members bound to the company - Members bound to the company - The M/A and A/A constitute a binding contract
as between the members and company. Each member must observe the provisions of
the articles and memorandum as if each member had signed the same.
Company bound to members - Company bound to members - Company bound to members - Company bound to members - Company bound to members - A company is bound to members by whatever is
contained in its memorandum and articles of association. An individual member can
make the company fulfil its obligation to him, such as to send the notice for the meetings,
to allow him to cast his vote in the meeting. If the company violates the provisions of its
memorandum and articles, a member can bring action against the company.
Members bound to members Members bound to members Members bound to members Members bound to members Members bound to members - - - - - As between the members inter se, each member is
bound by the articles. However this does not mean that the memorandum and articles
create an express contract among the members of the company. A member has no
right to bring a suit to enforce the articles in his own name against the members. It is the
company, alone which can sue the offender.
Whether company or members bound to outsiders? - Whether company or members bound to outsiders? - Whether company or members bound to outsiders? - Whether company or members bound to outsiders? - Whether company or members bound to outsiders? - The memorandum or articles
do not confer any contractual rights upon outsiders against the company or its members,
even though the name of the outsider is mentioned in the articles. An outsider (i.e., a
non-member) cannot rely on articles of association for his action against the company.
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QUESTION BANK
I. FAQs
1. Explain the meaning of the term Articles of Association.
2. Distinguish between Memorandum of Association & Articles of Association?
3. Which type of companies must register Articles of Association with the Registrar of
Companies?
4. Discuss, whether it is legally compulsory for a company to have its own Articles of
Association?
5. What restrictions should the Articles provide to give a company the status of a
private company?
6. In what manner the Articles of Association of a company be altered under the
provisions of the Companies Act, 1956? What are the limitations for such an
alteration?
7. The power of altering the Articles is wide, yet it is subject to a large number of
limitations. Comment.
8. Explain clearly the doctrine of indoor management, as applied in the case of
joint stock companies. Under what circumstances the doctrine of indoor
management is not applicable? Illustrate.
9. Briefly explain the doctrine of Constructive notice under the Companies Act,
1956. are there any exceptions to the said doctrine?
10. Doctrine of Indoor Management is a silver lining to strangers dealing with the
company. Comment
11. Every Person dealing with the company is deemed to have notice of the contents
of its Memorandum & Articles of Association. Comment
II. CASE STUDIES
1. The authorised signatory of a company issued a share certificate in favour of X,
which apparently complied with the companys articles as it was purported to be
signed by two directors and the secretary and it had the companys common seal
affixed to it. In fact, the secretary had forged the signatures of the directors and
affixed the seal without any authority. Will the certificate be binding upon the
company?
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(Hint: No)
2. The Articles of a company provided that the shares of a member who became
bankrupt would be offered for sale to other shareholders at a certain price. Is the
provision binding on the shareholders?
(Hint: Yes)
3. The Articles of Association of a Limited company provided that X shall be the
Law officer of the company and he shall not be removed except on the ground of
proved misconduct. The company removed him even though he was not guilty of
misconduct. Decide, whether companys action is valid?
(Hint: : : : : Articles of Association is a document which does not bind the company with
outsiders. It is a document for the internal management of the Company. There
was no contract between X and the company. No outsiders can enforce the Articles
against the company even if they are given some rights. X is an outsider and not
a 7member of the company. As such the provisions of the Articles do not bind him.
(Brown v La Trinidad. (1887) 37 Ch. D 1) Even if he is a member, he cant succeed
because a member also cant enforce the provisions of the Articles for his benefit
in some other capacity than that of a member as was held in Eley V Positive Govt
Security Life Association Co. (1867) 1 EXD 88.)
4. Discuss the validity of a provision in the Articles depriving itself of the power to
alter its Articles of Association.
(Hints: Statutory powers cannot be curtailed. Hence, such provision will not be
valid. However reasonable restriction may be placed).
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CHAPTER - V
PROSPECTUS
5.1 Prospectus: What it is and why it is issued?
5.2 Various methods of raising of share capital
5.3 Types of Prospectus
5.4 What are the statutory requirements for the issue of prospectus?
5.5 Contents of prospectus
5.6 Statement in lieu of prospectus
5.7 Shelf prospectus
5.8 Book Building
5.9 Information memorandum
5.10 Is there any liability for mis-statement in prospectus?
5.1 Prospectus: What it is and why it is issued?
Unlike a private company, a public company can raise its capital by
issue of prospectus. Section 2(36) of the Companies Act defines the
prospectus as any document, described or issued as a prospectus and
includes any notice, circular advertisement or other document inviting
deposits from the public or inviting offers from the public for the
subscription or purchase of any shares, or debentures of, a body
corporate.
A document would be considered a prospectus only if it meets the
following requirements, viz.
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i. it should be in writing
ii. it should be issued by or on behalf of a body corporate
iii. it should be issued to public
iv. it should contain invitation to public for making deposits or for subscription of
shares in or debentures of a body corporate.
A prospectus contains vital information about the operational and financial A prospectus contains vital information about the operational and financial A prospectus contains vital information about the operational and financial A prospectus contains vital information about the operational and financial A prospectus contains vital information about the operational and financial
performance of the company performance of the company performance of the company performance of the company performance of the company, its track record and future prospects and the purposes , its track record and future prospects and the purposes , its track record and future prospects and the purposes , its track record and future prospects and the purposes , its track record and future prospects and the purposes
for which money raised from the public will be utilized. On the basis of this document for which money raised from the public will be utilized. On the basis of this document for which money raised from the public will be utilized. On the basis of this document for which money raised from the public will be utilized. On the basis of this document for which money raised from the public will be utilized. On the basis of this document
the investors make their investment decisions the investors make their investment decisions the investors make their investment decisions the investors make their investment decisions the investors make their investment decisions.
What constitutes an offer to the public? What constitutes an offer to the public? What constitutes an offer to the public? What constitutes an offer to the public? What constitutes an offer to the public? Section 67 lays down the following criteria
as to what shall constitute an invitation to public:
a. An invitation to the public shall include an invitation to any section of the public,
[Section 67(2)]. Thus public includes any section of the public whether
selected as.
members or debenture holders of the company; or
clients of the person issuing the prospectus; or
In any other manner.
b. In the following circumstances, it will not be regarded as an offer made to public:
If the offer or invitation can be accepted only by persons to whom it is made.
If it is the domestic concern of those making and receiving the offer. This is
the reason why the companies resort to the practice of writing Private and
Confidential, on the offer document.
If it is offered to the existing shareholders of the company.
It is offered to less than 50 persons.
It is not necessary that a company should issue a prospectus. It is not necessary that a company should issue a prospectus. It is not necessary that a company should issue a prospectus. It is not necessary that a company should issue a prospectus. It is not necessary that a company should issue a prospectus. Its agents may issue
it on behalf of the company. An offer of sale of shares in or debentures of a company
by an issuing house(merchant banker) is an instance in point.
Prospectus Invitation to offer
Application for shares Offer
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Allotment of shares Acceptance of the offer, resulting in a binding contract.
5.1a. Is the issue of prospectus compulsory?
If a company can raise the capital by private channels/sources then there is no
need to issue a prospectus. It will operate as an unlisted company. Prospectus is necessary
when offer of shares is to public. The issue of a prospectus by a company is not
compulsory in the following cases:
1. Where there is a bona fide invitation to a person to enter into an underwriting
agreement. [Section 56(3)(a)].
2. When the shares or debentures are privately placed, i.e., when shares or debentures
are not offered to the public [Section 56(3) (b)]. If offer is made to 50 or more
persons it will be treated as offer to public and prospectus will be required.
3. Where rights issue is made to existing members/ debenture holders. [Section
56(5) (a)].
4. Sweat equity to directors and employees does not require prospectus.
5. Issue of shares under Employees Stock Option Scheme or Employees Stock
Purchase Scheme does not require prospectus
6. A private company cannot issue shares to public and hence cannot issue
prospectus.
Note Note Note Note Note- -- -- In case of (3) as the securities issued are of the same class for which Prospectus
has been already been issued and filed , fresh prospectus need not be issued for the
same
Offer of securities to more than 50 persons will be treated as public offer section
[proviso to section 67(3)]. This proviso is not applicable to (a) NBFC and PFI (public
financial institution)
5.1b. SEBIs powers under new section 55A in respect of listed companies
Securities and Exchange Board of India (SEBI) was established with the following
objectives:
(i) Investor protection,
(ii) Promotion, development and regulation of securities market.
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SEBI has taken a number of steps from time to time in the pursuit of accomplishing
the aforesaid objectives. It has made Disclosure and Investor Protection Guidelines and
has made a large number of Rules and Regulations for the market intermediaries.
Section 55A confers power on the SEBI to deal exclusively in respect of listed public
companies and those public companies which are proposed to be listed, so far as they
relate to matters of issue and transfer of securities and non-payment of dividend:
What is SEBIS Role in an issue?
Any company making a public issue or a listed company making a rights issue of
value or more than Rs. 50 lakhs is required file a draft offer document with SEBI for its
observation. The company can proceed further on the issue only after getting observations
from SEBI. The validity period of SEBIs observation letter is three months only i.e. the
company has to open its issue within three months period.
5.2 Apart from the issue of prospectus, what are the other ways of raising
of capital?
In a bought-out deal the shares of an unlisted company are first purchased by a
merchant banker and then off loaded to the public within an agreed time frame. This
system is popular in OTC Exchange of India.
In private placement the shares are directly offered to the financial institutions,
mutual funds or high worth investors. The first proviso to section 67(3) as inserted by
the Companies (Amendment) Act, 2000 provides that if a private offer is made to
subscribe for shares/ debentures, such offer will be treated as public issue if the offer or
invitation to subscribe for shares/ debentures is made to 50 persons or more. This
provision shall be not apply to non-banking financial companies or Public Financial
Institutions. This means that these institutions will be free to offer securities on private
placement.
R RR RRaising Capital aising Capital aising Capital aising Capital aising Capital
Private Placement
Bought-out Deal
(Offer for Sale)
Issue of Prospectus
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What are the different kinds of issues?
Primarily, issues can be classified as a Public, Rights or Preferential issues (also
known as private placements). While public and rights issues involve a detailed
procedure, private placements or preferential issues are relatively simpler. The
classification of issues is illustrated below:
Public issued can be further classified into Initial Public offerings and further public
offerings. In a public offering, the issuer makes an offer for new investors to enter its
shareholding family. The issuer company makes detailed disclosures ad per the DIP
guidelines in its offer document and offers it for subscription The significant features are
illustrated below:
Initial P Initial P Initial P Initial P Initial Public Offering (IPO) ublic Offering (IPO) ublic Offering (IPO) ublic Offering (IPO) ublic Offering (IPO) is when an unlisted company makes either a fresh
issue of securities or an offer for sale of its existing securities or both for the first time to
the public. This paves way for listing and trading of the issuers securities.
A follow on public offering (FPO) A follow on public offering (FPO) A follow on public offering (FPO) A follow on public offering (FPO) A follow on public offering (FPO) Is when an already listed company makes either
a fresh issue of securities to the public or an offer for sale to the public, through an offer
document. An offer for sale in such scenario is allowed only if it is made to satisfy listing
or continuous listing obligations.
Rights Issue (RI) Rights Issue (RI) Rights Issue (RI) Rights Issue (RI) Rights Issue (RI) is when a listed company which proposes to issue fresh securities
to its existing shareholders as on a record date. The rights are normally offered in a
particular ratio to the number of securities held prior to the issue. This route is best
suited for companies who would like to raise capital without diluting stake of its existing
shareholders unless they do not intend to subscribe to their entitlements.
ISSUES ISSUES ISSUES ISSUES ISSUES
Public Rights Preferential Public
Initial Public
Offering (IPO)
Further Public
Offering (FPO)
Fresh Issue Offer for Sale Fresh Issue Offer for Sale
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A P A P A P A P A Preferential Issue referential Issue referential Issue referential Issue referential Issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act, 1956
which is neither a rights issue nor a public issue. This is a faster way for a company to
raise equity capital. The issuer company has to comply with the Companies Act and the
requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP)
guidelines which inter-alia include pricing, disclosures in notice etc.
5.3 TYPES OF PROSPECTUS
1. Abridged prospectus (section 2(1)):
The prospectus is a bulky document and to supply prospectus with each application
form is economically not feasible. In order to reduce the cost of public issue, the concept
of abridged prospectus has been introduced by the Companies (Amendment) Act,
2000.
Abridged prospectus means a memorandum containing such salient features of
a prospectus as may be prescribed (section 2(1)). It has to be in FORM NO. 2A.
It contains all the salient features of a prospectus. It accompanies the application
form of public issues.
A company cannot supply application forms for shares or debentures unless the
form is accompanied by abridged prospectus (Section 56(3)).
Penalty for failure to comply with this provision can be upto Rs. 50,000.
When is such an Abridged Form of Prospectus not required to be
accompanied with the share application form? Ans: Ans: Ans: Ans: Ans: Where a bona fide
invitation is made to a person to enter into an underwriting agreement with
respect to the shares or debentures. b. If shares or debentures are not offered
to the public.
2. Deemed prospectus (section 64):
In order to avoid the expenses of issue of prospectus, which are quite exorbitant
(approximately 10% of the capital raised through public issue) one practice is that the
company may allot or agree to allot shares to an issue house (merchant banker or
financial institutions) without issuing the shares to the public through issue of prospectus.
The issue house in turn makes an offer for sale to the public. This offer for sale or
advertisement of such issue house is called deemed prospectus. The following two
conditions must be satisfied in order to construe offer for sale:
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a. the company should have received the full consideration for the shares or
debentures.
b. the offer for sale to the public should be made within 6 months after the allotment
or agreement to allot .
Therefore, offer of shares or debentures through the medium of Issue Houses shall
require the provisions relating to prospectus to be duly complied with. Provisions of
responsibility of directors and promoters remain the same. In addition, Issuing House
incurs its own liability regarding disclosures. They incur the same civil and criminal
liability as the directors of the company will incur [section 64(4)].
Offer document Offer document Offer document Offer document Offer document means Prospectus in case of a public issue or offer for
sale and Letter of Offer in case of a rights issue which is filed Registrar of
Companies (ROC) and Stock Exchanges. An offer document covers all the
relevant information to help an investor to make his/her investment decision.
Draft Offer Document Draft Offer Document Draft Offer Document Draft Offer Document Draft Offer Document means the offer document in draft stage. The draft
offer documents are filed with SEBI, atleast 21 days prior to the filing of the
Offer Document with ROC/ SEs. SEBI may specifies changes, if any, in the
draft offer Document and the issuer or the Lead Merchant banker shall
carry out such changes in the draft offer document before filing the Offer
Document with ROC/SEs. The Draft Offer document is available on the
SEB website for public comments for a period of 21 days from the filing of
the Draft Offer Document with SEBI.
3. Shelf prospectus (section 60A): refer para 5.6.
4. Red herring prospectus (RHP) (section 60B):
A red-herring prospectus means a prospectus which does not have complete
particulars on the price of the securities offered and the quantum of securities offered.
It contains all other contents of prospectus. Red-herring prospectus will have to be filed
with Registrar of Companies and must contain the information as per schedule II except
the price and quantity of the securities offered, it shall also be filed with SEBI for its
vetting and comments. Information memorandum need not be filed with ROC.
This is used in book building issues only. In the case of book built issues, (it is a
process of price discovery) the price cannot be determined until the bidding process
is completed. Hence, such details are not shown in the Red Herring prospectus
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filed with ROC in terms of the provisions of the Companies Act. Only on completion
of the bidding process, the details of the final price are included in the offer
document. The offer document filed thereafter with ROC is called a prospectus.
When the public issue is through book building process the red herring prospectus
is filed with the ROC atleast three days before the opening of the offer an must
contain and all the features of a prospectus as per schedule II of the Companies
Act. It should be signed by all the directors of the company or their constituted
attorney.
Who are the intermediaries in an issue?
Merchant Bankers to the issue or
Book Running Lead Managers (BRLM), syndicate members,
Registrars to the issue, Bankers to the issue,
Auditors of the company, Underwriters to the issue, Solicitors, etc. are the
intermediaries to an issue. The issuer discloses the addresses, telephone/fax numbers
and email addresses of these intermediaries. In addition to this, the issuer also discloses
the details of the compliance officer appointed by the company for the purpose of the
issue.
5.4 What are the statutory requirements for the issue of prospectus?
Three set of regulations which govern the issue of prospectus are -
Sections 55 to 79 of the Companies Act, 1956.
Requirements of Stock Exchange, AND the provisions of the Securities Contract
(Regulation) Act.
SEBI guidelines relating to disclosures in prospectus, and vetting of prospectus.
1. Contents of P Contents of P Contents of P Contents of P Contents of Prospectus: rospectus: rospectus: rospectus: rospectus: (Section 56) Every prospectus must state the matters
specified in Schedule II to the Companies Act 1956. The prospectus must also
contain the information as given in the consolidated new SEBI guidelines for
Disclosure and Investor Protection, 2000. It must also fulfill the listing requirements
of stock exchange.
2. Dating and signing of P Dating and signing of P Dating and signing of P Dating and signing of P Dating and signing of Prospectus: rospectus: rospectus: rospectus: rospectus: Section 55 requires that a prospectus should
be dated and that date shall be taken as the date of publication of the prospectus.
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All directors should sign the prospectus personally or through authorised
representative to whom they have given power of attorney. This is required, as
Directors are responsible for mis-statements in prospectus.
3. V VV VVetting/Checking of prospectus: etting/Checking of prospectus: etting/Checking of prospectus: etting/Checking of prospectus: etting/Checking of prospectus: The issuer company must appoint a Merchant
Banker to manage the public issue. SEBI guidelines stipulate that the draft
prospectus complete in all respects along with Due Diligence Certificate (of Lead
Merchant Banker to the issue) should be forwarded to SEBI for vetting. Apart from
SEBI the prospectus should also be vetted by (a) legal advisers, (b) stock exchange,
(c) lead financial institution.
Draft prospectus should be made public Draft prospectus should be made public Draft prospectus should be made public Draft prospectus should be made public Draft prospectus should be made public. .. .. The Lead Managers shall
simultaneously file copies of draft prospectus with the stock exchanges,
where the issue is to be listed. Draft prospectus should be made available
to the public by the Lead Managers/ Stock Exchanges on payment.
IPO grading IPO grading IPO grading IPO grading IPO grading: :: :: In the year 2007-08, SEBI has made grading of IPO mandatory.
No unlisted company shall make an IPO of equity shares unless it has
obtained grading for the IPO from at least one credit agency. Disclosures of
all grades obtained, along with description should be made in the prospectus
(in case of fixed price issue) or red herring prospectus in case of book built
issue. IPO grading will facilitatethe assessment of equity shares offered to
public.
4. R RR RRegistration of prospectus with ROC egistration of prospectus with ROC egistration of prospectus with ROC egistration of prospectus with ROC egistration of prospectus with ROC: :: :: After the prospectus is checked by SEBI,
companies can file prospectus for registration with Registrar of Companies (Sec.60).
The registration of prospectus must be done before the prospectus is issued to the
public.
The prospectus must contain a statement that a copy has been delivered for
registration, also indicating the requisite documents (giving names) delivered with it.
The following documents must be attached to the copy of prospectus filed with the
Registrar:
a) the consent of the expert mentioned in the prospectus, if his report is included in
the prospectus;
b) a copy of every contract relating to the appointment or remuneration of a managing
director or manager;
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c) a copy of every material contract not being a contract entered into in the ordinary
course of business of the company entered into within two years of the issue of the
prospectus;
d) a written statement relating to the adjustments, if any, in respect of figures of any
profits or losses, and assets and liabilities.
e) the consent in writing of the person, if any, named in the prospectus as the auditor,
legal adviser, attorney, and solicitor, Issue House, banker managers to the issue
or broker of the company to act in that capacity;
f) the consent of director under section 266 in respect of new directors, if any,
named therein;
g) a copy of the underwriting, agreement if any, should also be filed as required by
section 76 (1)(b)(v).
The company and every person who knowingly issues a prospectus without
delivering a copy thereof to the Registrar for the registration shall be punishable
with fine up to Rs. 50,000.
5. Issue of prospectus: Issue of prospectus: Issue of prospectus: Issue of prospectus: Issue of prospectus: [Section 60(4)] The prospectus must be issued within 90
days of its registration.
6. T TT TTerms of contract cannot be varied: erms of contract cannot be varied: erms of contract cannot be varied: erms of contract cannot be varied: erms of contract cannot be varied: [Section 61] A company shall not vary, the
terms of contract referred to in the prospectus, except subject to the approval of
members in general meeting.
7. The expert The expert The expert The expert The experts consent to the issue of prospectus s consent to the issue of prospectus s consent to the issue of prospectus s consent to the issue of prospectus s consent to the issue of prospectus. (Section 57, 58 & 59.) A prospectus
may contain a statement purporting to be made by an expert.
Meaning of expert: Meaning of expert: Meaning of expert: Meaning of expert: Meaning of expert: The term expert includes an engineer, a valuer, an
accountant, and any other person whose profession gives authority to a
statement made by him. The reports from an expert must not be included in
a prospectus unless:
(i) such expert is unconnected unconnected unconnected unconnected unconnected with the formation or management of the
company (section 57).
(ii) he gave his written consent written consent written consent written consent written consent to the issue of the statement in the form
and context in which it appears and had not withdrawn the consent
until the prospectus is delivered to the Registrar for registration.
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(iii) he is competent competent competent competent competent to make the report, valuation or statement.
(iv) a statement that he has given and not withdrawn given and not withdrawn given and not withdrawn given and not withdrawn given and not withdrawn his consent thereto
appears in the prospectus (section 58).
If the report of the expert is published in contravention of the above
mentioned provisions, every person who is knowingly a party to the issue of
the prospectus shall be punishable with fine up to Rs.50,000 (section 59).
8. Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Abridged prospectus must accompany application forms Section 56(3) requires
that every application for shares in or debentures of a company is required to be
accompanied with F FF FForm 2A (Memorandum containing salient features of orm 2A (Memorandum containing salient features of orm 2A (Memorandum containing salient features of orm 2A (Memorandum containing salient features of orm 2A (Memorandum containing salient features of
prospectus) prospectus) prospectus) prospectus) prospectus). However a copy of prospectus shall be furnished to a person who
makes a request before the closing of the subscription list. This provision has
been made to reduce cost of issue, as detailed prospectus is a very bulky document
and hence costly. As per SEBI guidelines , an investor who wants to have detailed
copy of prospectus will be required to pay Rs. 100 to the company.
5.5 Contents of Prospectus
A. Contents as per Section 56
B. Disclosures as per SEBI Guidelines
A. Contents as per Section 56
Under section 56 every prospectus must state the matters and reports mentioned in
Schedule-II to the Companies Act.. The present format requires the prospectus to be
divided into three parts:
Part-I to Schedule-II contains the following information:-
I. General information about the name and address of the company, name of stock
exchange where application for listing is made, date of opening and closing of
the issue, name and address of the Auditors and Lead Managers, Underwriters.
II. Capital Structure of the company.
III. Terms of the present issue.
IV. Particulars of the issue, stating object of the issue, project cost and means of
financing.
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V. Company, Management and project. This will include history and main objects
and present business, promoters and back-ground location of the project, nature
of the product, name and address of the directors, schedule of implementation of
the project, approach marketing, future prospects.
VI. Stock market data regarding high/low price during the last six months including
particulars of other listed companies in the same management.
VII. Outstanding litigations and particulars of defaults in respect of statutory
compliances.
VIII. Management perception of risk factors with regard to the successful implementation
of the proposed project.
Part-II to Schedule-II contains the following information divided into three parts viz.,
a) General information,
b) Financial information and
c) Statutory and other information.
General information includes information on matters like consent of Directors,
Auditors, Managers to the issue, Registrar to the issue, Bankers of the Company, names
& addresses of Company Secretary, Legal Advisors, Lead Managers, Brokers, authority
for the issue, procedure and time schedule for allotment and issue of certificates.
In the financial information are given report by the auditors of the company about
the profits/loss, assets and liabilities, rates of dividend paid in respect of each class of
shares, during the preceding five financial years. If the company has subsidiaries similar
information about them should also be given.
The statutory and other information includes:
1. Details of minimum subscription
2. Particulars of underwriting and brokerage including the full particulars of
underwriters and brokers
3. The extent of underwriting by the underwriters
4. Details of previous issues during the last five years.
5. If the company proposes to purchase any property out of the proceeds of the
present issue, the details of the vendors and the properties.
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6. Any benefits paid to the promoters during the previous two years.
7. Details of interest of promoters and directors in any property acquired by the
company during the previous two years.
8. Rights of members regarding voting, dividend lien and transfer of shares.
9. Revaluation of assets if any during the previous five years.
10. Particulars of material contracts and inspection of documents by the prospective
investors.
11. Minimum subscription amount, expenses of the issue, underwriting commission
and brokerage, details of directors and managing directors, material contracts
and inspection of documents.
Part-III to Schedule-II gives explanations of certain terms and expressions used
under Part-I and Part-II of the schedule Section 56(3). The prospectus ends with a
declaration signed by the Directors that all the relevant provision of the Companies Act
1956 and the guidelines issued by the Government have been complied with.
B. Disclosures as per SEBI Guidelines
After the repeal of Capital Issue Control Act, 1992 the Securities and Exchange
Board of India (SEBI) has issued a set of guidelines to regularize the capital market in
the country. These guidelines aim at investor protection through disclosures in prospectus.
These guidelines which were issued by SEBI with effect from 11.6.92 and have been
amended several times in line with market dynamics and requirements.
It is mandatory for all companies issuing shares, debentures or other instruments to
public to make appropriate disclosures in the prospectus or other document, in addition
to the requirements of schedule to of the Companies Act. The guidelines have since
been replaced by consolidated SEBI (Disclosure and Investor Protection) Guidelines,
2000, w.e.f. 27.1.2000.
As per the revised disclosures of SEBI the prospectus shall contained following
information :-
The cover page. i) The cover page of the prospectus shall be white and
shall contain the following information
i) name and address of issuer company, the nature number, price and
amount of the shares offered.
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ii) Risk in relation to the first issue, general risk factors, and issuers absolute
responsibility clause shall be disclosed on the front page.
iii) On the cover page the following information is also mentioned - the
name of the stock exchange where listing of the securities is proposed,
the name and address of Lead Manager to the issue and Registrars to
the issue, and issue opening date and closing date.
a) Front inside cover page index i.e. table of contents of prospectus
shall appear.
b) Inner cover pages
i) abbreviations and glossary and technical terms
ii) internal and external risk factors and management perception thereof.
iii) highlights of the issue.
iv) The prospectus contents are divided into three parts.
P PP PPart I art I art I art I art I gives information about management of company and its project,
capital structure, cost of the project and means of finance, promoters and
their background, issue management team and other prescribed information.
There is also a disclaimer clause, stating that SEBI/stock exchange does not
take any responsibility either for the financial soundness of the project or for
the correctness of statements made or opinions expressed in the prospectus.
P PP PPart II art II art II art II art II contains general information, financial information, statutory and
other information, main provisions of the articles of association, and material
contracts and documents for inspection.
P PP PPart III art III art III art III art III contains a declaration of compliance of the legal provisions and
guidelines.
c) Back inside cover page and back outside cover page shall be in
white.
5.6 Statement in lieu of prospectus Sec 70
A public company having a share capital is required to file a statement in lieu of statement in lieu of statement in lieu of statement in lieu of statement in lieu of
prospectus prospectus prospectus prospectus prospectus with the Registrar of Companies in the following cases
a) where it does not issue a prospectus or
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b) where it issued a prospectus but did not proceed to allot any of the shares offered
thereunder, because of failure to raise the minimum subscription.
c) When a private company is converted into a public company by deletion of the
restrictions contained in section 3(1)(iii) of the Companies Act, 1956.
The statement in lieu of prospectus must be filed at least three days before any
allotment of shares or debentures is made. The statement has to be in form prescribed
under Schedule-III.
Consequences of non-filing SLP
a) if allotment of shares is made without filing statement in lieu of prospectus, the
allottee may avoid the allotment.
b) the person to authorised the delivery of SLP may be punishable with imprisonment
upto two years or with fined upto Rs. 50,000 or with both.
Integrated Power Pvt. Ltd. became a public company by altering its Articles
so that it no longer includes the provisions of section 3(1)(iii) of the Companies
Act, 1956. Is it required to file a prospectus with the Registrar of Companies?
Ans : Ans : Ans : Ans : Ans : As per section 44 of the Companies Act, 1956, if a private company alters its
Articles in such a manner that it no longer contains the provisions of section 3(1)(iii) of
the Companies Act, 1956, it shall within 30 days after the date of such change file with
the Registrar a statement in lieu of prospectus.
5.7 Shelf prospectus (Section 60A)
a) Need. a) Need. a) Need. a) Need. a) Need. The public financial institutions like IDBI, SBI, etc. tap the capital market
more than once in a year. Under the Act, a Company must issue a full-fledged prospectus
each time it accesses the capital market. While this is good in principle, its certainly
leads to needless repetition more so when a company takes recourse to capital
markets more than once in a year. A way out is through shelf prospectus for a specified
time period. Such a prospectus has a limited life during which it remains on the shelf
and is updated for any changes that have occurred between two successive offerings.
Section 60A has been inserted with a view to minimize the procedural burden on
public financial institutions, public sector banks or scheduled banks whose main object
is financing. The new provisions will help in reducing the expenses of preparation and
issue of prospectus and will also give the investors upto date information.
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b) Shelf prospectus, meaning b) Shelf prospectus, meaning b) Shelf prospectus, meaning b) Shelf prospectus, meaning b) Shelf prospectus, meaning. . . . . Shelf prospectus means a prospectus issued by
any financial institution or bank for one or more issues of the securities or class of
securities specified in that prospectus.
c) c) c) c) c) Who shall file a shelf prospectus. Who shall file a shelf prospectus. Who shall file a shelf prospectus. Who shall file a shelf prospectus. Who shall file a shelf prospectus. Any public financial institutions, public sector
bank or scheduled bank whose main object is financing shall file a shelf prospectus.
The explanation to section 60A provides that financing would mean making loans to or
subscribing in the capital of private industrial enterprise engaged in infrastructural
financing or other companies as Central Government may notify.
d) d) d) d) d) R RR RRegistration of Shelf P egistration of Shelf P egistration of Shelf P egistration of Shelf P egistration of Shelf Prospectus. rospectus. rospectus. rospectus. rospectus. A shelf prospectus should be filed with the
Registrar of Companies. Validity period of shelf prospectus is one year from the issue
date i.e. the date of opening of the offer. A company filing shelf prospectus with the
Registrar shall not be required to file prospectus afresh at every stage of offer of securities
by it within a period of validity of such shelf prospectus.
e) e) e) e) e) R RR RRequirement of filing information memorandum. equirement of filing information memorandum. equirement of filing information memorandum. equirement of filing information memorandum. equirement of filing information memorandum. In subsequent issues,
information memorandum is to be filed to update the shelf prospectus. In such case
shelf prospectus along with information memorandum shall constitute a prospectus.
A company filing a shelf prospectus shall be required to file an information
memorandum on all material facts and updations before the ROC, before second and
each subsequent offer of securities. The information memorandum must contain the
information
- relating to new charges created,
- changes in the financial position as have occurred since the first offer.
An information memorandum shall be issued to the public along with shelf prospectus
filed at the stage of the first offer of securities and such prospectus shall be valid for a
period of one year from the date of opening of the first issue of securities under that
prospectus.
Where an update of information memorandum is filed every time an offer of securities
is made, such memorandum together with the shelf prospectus shall constitute the
prospectus.
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5.8 Book Building
Book Building is basically a capital issuance process used in Initial Public Offer
(IPO) which aids price and demand discovery. It is a process used for marketing a
public offer of equity shares of a company. It is a mechanism where, during the period
for which the book for the IPO is open, bids are collected from investors at various
prices, which are above or equal to the floor price. The offer/issue price is then determined
after the bid closing date based on certain evaluation criteria.
As per SEBI definition, book building means a process undertaken by which a
demand for securities proposed to be issued by a body corporate is elicited and built-
up and the price of securities is assessed for the determination of quantum of such
securities to be issued by means of a notice, circular, advertisement, document,
information memoranda or offer document.
Public Issue Through Book Building Process
Advantages of book building are (a) Minimum cost (b) Fast (c) Realistic and fair
price.
5.9 Information Memorandum (Section 60B)
For facilitating the raising of capital through book building process the Companies
(Amendment) Act, 2000 has introduced section 60B
a) Meaning of Information Memorandum :- Meaning of Information Memorandum :- Meaning of Information Memorandum :- Meaning of Information Memorandum :- Meaning of Information Memorandum :- For the purposes of book building
issue, information memorandum is issued. Section 2(19B) defines information
memorandum as a process undertaken prior to the filing of a prospectus by
Circulation of information memorandum to the public prior
to filing of Prospectus
Filing of red herring prospectus with ROC and SEBI
Variation between information memorandum
and red herring prospectus to be intimated to applicants
Filing of final prospectus
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which a demand for the securities proposed to be issued by a company is elicited,
and the price and the terms of issue for such securities is assessed. Information
memorandum could be in the form of a notice, circular, advertisement or
document.
b) Who may circulate Information Memorandum Who may circulate Information Memorandum Who may circulate Information Memorandum Who may circulate Information Memorandum Who may circulate Information Memorandum : - A public company making an
issue of securities may circulate information memorandum to the public prior to
filing of a prospectus. It serves the purpose of an offer document but cannot be
called a prospectus as it does not contain the price structure or the offer price of
securities. It contains all other major information as may be necessary to make
investment decision. The purpose is to ascertain the quantum and acceptable
price of securities.
c) F FF FFinal prospectus to be filed after closing of the offer of securities inal prospectus to be filed after closing of the offer of securities inal prospectus to be filed after closing of the offer of securities inal prospectus to be filed after closing of the offer of securities inal prospectus to be filed after closing of the offer of securities:- Upon the
closing of the offer of securities, a final prospectus stating therein the total capital
raised, whether by way of debt of share capital and the closing price of the
securities and any other details as were not complete in the red-herring prospectus
shall be filed in a case of a listed public company with the Securities and Exchange
Board and Registrar, and in any other case with the Registrar only.
Used i n book bui l di ng
process
Used i n book bui l di ng
process after i ssue
of i nformati on
memorandum
To be made i n book
building process or any
other method of issue
It is a process undertaken
prior to the filing of a
prospectus by whi ch a
demand for the securities
proposed to be issued by a
company is elicited and the
price and the terms of issue
for such securi ti es i s
assessed, by means of a
noti ce, ci rcul ar,
advertisement or document
It means a prospectus,
whi ch does not have
complete particulars on the
pri ce of the securi ti es,
offered and the quantum of
securities offered. It has to
be filed with the ROC prior
to the openi ng of the
subscription list as a red
herring prospectus.
Prospectus i s ' any
document, described or
issued as a prospectus and
includes any notice, circular
adverti sement or other
document inviting deposits
from the public or inviting
offers from the public for the
subscription or purchase of
any shares, or debentures
of, a body corporate.'
1
2
Information Information Information Information Information
memorandum memorandum memorandum memorandum memorandum
R RR RRed herring prospectus ed herring prospectus ed herring prospectus ed herring prospectus ed herring prospectus
P PP PProspectus rospectus rospectus rospectus rospectus
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It must contain particulars
as per schedule II of the Act
and should be signed by all
the di rectors of the
company. Must be
approved i n a board
meeting
It must contain all contents
of a prospectus as per
Schedul ed II of the
Companies Act but does
not have information on
price of securities offered
and number of securities
offered through such
document. All the directors
of the company must also
sign it. Must be approved
in a board meeting.
4
5 Need not be filed with SEBI Must be filed with SEBI
Must be filed with SEBI
It shal l carry same
obl i gati ons as are
appl i cabl e to the
prospectus.
6 It shal l carry same
obl i gati ons as are
appl i cabl e to the
prospectus.
Civil and criminal liabilities
are attached in case of mis-
statement in the prospectus.
No such requirement 7
Vari ati on between
i nformati on memora-
ndum and red herri ng
prospectus to be inti-mated
to the applicants.
Not applicable
Information Information Information Information Information
memorandum memorandum memorandum memorandum memorandum
R RR RRed herring prospectus ed herring prospectus ed herring prospectus ed herring prospectus ed herring prospectus P PP PProspectus rospectus rospectus rospectus rospectus
Need not be filed with ROC Red herring will have to be
filed with ROC atleast three
days before the opening of
the offer.
Prospectus to be filed after
finalization of price and
quantum of securities.
3
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Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Section 68B
provides that every listed public company, making initial public offer of any security
for a sum of rupees ten crores or more, shall issue the same only in dematerialised
from by complying with the requisite provisions of the Depositories Act, 1996 (22
of 1996) and the regulations made thereunder
5.10 Is there any Liability for Mis-statement in Prospectus?
The prospectus should contain true statements and accurate disclosures. There
should not be any omission of material facts. This is known as golden rule for framing
of prospectus laid down in Kindersley in New Brunswick & Canada Rly. & Land Co. v.
Muggeridge (1860). It is the duty of those who issue the prospectus to be truthful in all
respects.
The following are the implications of the golden rule for framing of prospectus :
The prospectus must present the whole picture of the company
The prospectus must disclose all material facts truly, honestly and accurately.
All facts which are likely to influence the decision regarding applying for shares
must be disclosed.
It should not contain any untrue or misleading statement.
No fact should be omitted, the existence of which might, in any degree, affect the
nature or quality of privileges and advantages disclosed by the prospectus.
Example : Example : Example : Example : Example : A prospectus stating that the company is regularly paying dividend, but
not disclosing that the company is incurring losses and that the dividend was paid out
of reserves, is misleading.
A. Civil Liabilities for mis-statements in prospectus
B. Criminal Liabilities for mis-statements in prospectus
A. Civil Liabilities for mis-statements in prospectus
a. Remedies against the company.
b. Remedies against directors.
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a. Remedies against the company.
Rescission of contract : The first remedy against the company is to rescind the
contract. A person who takes shares on the faith of a prospectus containing false
statement, may apply to the court for the contract to be set aside, and his name to be
struck off from the register of members. He may also claim his money back. But the
allottee must act within a reasonable time and before he does anything, which is
inconsistent with his right to rescind e.g., attends general meeting or receives dividend.
Suit for damages: The second remedy against the company has to sue for damages
for deceit. The company shall be liable to pay compensation to every person who
subscribes on the basis of prospectus for any loss or damage he may sustain because
of mis-statement in the prospectus.
The allottee cannot both retain the shares and get damages against the company.
b. Remedies against directors
A person who subscribed for shares on the faith of a false prospectus may claim
from directors or promoters:
i. damages for fraudulent misrepresentation,
ii. compensation under section 62 of the Act,
iii. damages for non-compliance with the requirements of section 56 of the Act.
i) Damages for fraudulent mis-representation: An allottee may sue the director for
damages for deceit, if there are fraudulent misrepresentation in the prospectus.
But the directors will not be liable for damages for mis-statement if they believed
them to be true [Derry v. Peek, (1889) 14 AC 337].
ii) Compensation under section 62 of the Act: An allottee is also entitled to claim
compensation from directors, promoter and any other persons who authorised
the issue of the false prospectus, for damages sustained by reason of any untrue
statement in it. This civil liability of directors is provided in section 62.
iii) Damages for non-compliance with the requirements of section 56 of the Act: An
omission from a prospectus of a matter required to be stated under section 56
may give rise to an action for damages at the instance of a subscriber for shares,
who has suffered loss thereby, even if the omission does not make the prospectus
false or misleading. But the plaintiff must prove that he has sustained damage by
reason of the omission of a matter required to be stated in the prospectus.
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A director or other person sued under section 56 may defend himself by showing:
a) that he had no knowledge of the matter not disclosed; or
b) that the contravention arose out of an honest mistake of fact; or
c) in the opinion of the Court, non-acceptance or contravention was not material or
that the person sued ought reasonably to be excused, having regard to all the
circumstances of the case.
Defences available to directors/ promoters against claim for damages u/s 62.
A director/ promoter sought to be made liable may escape his liability, if he proves
that
(i) Withdrawal of consent. Having consented to become a director, he withdrew his
consent before the issue of prospectus and that it was issued without his authority
or consent.
(ii) Issue without knowledge. Prospectus was issued without his knowledge or consent
and that on becoming aware of its issue, he forthwith gave public notice that it
was issued without his knowledge or consent.
Liability for false statements in a P Liability for false statements in a P Liability for false statements in a P Liability for false statements in a P Liability for false statements in a Prospectus rospectus rospectus rospectus rospectus
Civil Liability (Secs. 62 & 56) Criminal Liability (sec. 63)
Against the
Company
Against the
Promoters,
Directors, other
Officers and Experts
Against the
Company
Against the
Promoters,
Directors, other
Officers (not
available
against experts)
Rescission of
Contract
Claim for
damages
fine upto
Rs. 50,000
Damages
Compensation
under Section 62
and 56
Imprisonment
upto 2 years
Fine upto
Rs. 50,000
both
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(iii) Public notice of withdrawal of consent. After issue of prospectus and before
allotment, he on becoming aware of the misstatement withdrew his consent to the
prospectus and gave public notice of the withdrawal.
(iv) True statement. He had reasonable grounds to believe that the statements were
true and believed them to be true.
(iv) Experts report. The statement was a correct and fair summary or copy of an
experts report.
(v) Official document. The statement was a correct and fair representation from an
official document.
When an expert is not liable:
An expert who would be liable by reason of having given his consent to the issue of
prospectus containing a statement made by him will not be liable if he proves:
a) Withdrawal of consent. He withdrew his consent before the issue of prospectus
and that it was issued without his authority or consent.
b) Issue without knowledge. Prospectus was issued without his knowledge or consent
and that on becoming aware of its issue, he forthwith gave public notice that it
was issued without his knowledge or consent.
c) that he was competent to make the statement and he had reasonable grounds to
believe, and did up to the time of allotment of the shares or debentures believed
that the statement was true. [Section 62(3)].
B. Criminal Liabilities for mis-statements in prospectus
a) Section 63 provides for criminal liability for misstatement in the prospectus. Where
the prospectus includes any untrue statement, every person who authorised the
issue of the prospectus, shall be punishable:
with imprisonment for a term which may extend to two years or
with fine which may extend to Rs.50,000 or
with both unless he proves that the statement was immaterial or he had
reasonable ground to believe that the statement was true.
However an expert is not subject to criminal liability.
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b) Penalty for Fraudulently Inducing Persons to Invest Money. Under section 68 any
person who, either knowingly or recklessly makes any statement, promise or forecast
which is false, deceptive or misleading, or by any dishonest concealment of material
facts induces or attempts to induce another person to enter into-
(1) Any agreement for, or with a view to acquiring, disposing of, subscribing for
or underwriting shares or debentures.
(2) Any agreement the purpose of which is to secure a profit, shall be punishable
with imprisonment for a term which may extend upto 5 years or fine upto
Rs.1,00,000 or both.
c) Prohibition of allotment of shares in fictitious name. Section-68A prohibits making
of an application for acquiring shares of a company under a fictitious name. The
section makes the act punishable with imprisonment for a term, which may extend
upto 5 years.
QUESTION BANK
I. FAQs
1. Define Prospectus.
2. Discuss briefly the contents of Prospectus. What guidelines have been issued by
SEBI in this regard?
3. Mention cases in which a prospectus is not required to be issued by a public
company.
4. When is a company not required to issue prosecutes in connection with issue of
shares or debentures?
5. When can the invitation of offer to subscribe for shares be treated as not having
been made to the public?
6. In what way does the Companies Act, 1956, regulate the furnishing of an Abridged
Form of Prospectus by a company, along with the share application form
7. Explain the provisions of the Companies Act, 1956 with regard to the registration
of a prospectus of a public company going for public issue of equity share. What
are the documents required to be submitted by the company to the Registrar of
Companies for the above purpose?
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8. A company issued a prospectus containing material mis-statements of fact. Relying
on the prospectus Mr. Gullible purchased shares from the market. Would the
company be liable in damages to him? Can he rescind the contract?
9. State the remedies available to a person who has been deceived by a false and
misleading prospectus.
10. When a director of a company is not liable to an aggrieved party for the issue of
a prospectus containing a Mis-statement? In what manner he can defend himself
for non-compliance of the provisions of section 56 of the Companies Act?
11. What is prospectus? Who are liable for mis-statements in a prospectus? Explain
the remedies available to a shareholder against the company, who has been so
induced.
12. What do you understand by the term Golden Rule? Explain the legal remedies
available to the aggrieved parties when representation is made in the prospectus.
13. Examine the defences available to a Director, who is held liable for issue of a
Prospectus containing an Untrue statement, in a suit filed against him by an
aggrieved Party.
14. Write short note on a) Information Memorandum
b) Deemed prospectus
c) Shelf prospectus
d) Red-herring prospectus
15. The Board of Directors of Reckless Investments Ltd. have allotted shares to the
investors of the company without issuing a prospectus or filling a statement in lieu
of prospectus with the Registrar of Companies, Mumbai. Explain the remedies
available to the investors in this regard
16. What is book building? Explain the process of raising capital through book building.
II. CASE STUDIES
1. A company issued a prospectus. All the statements contained there were literally
true.. It also stated that the company had paid dividends for a number of years,
but did not disclose the fact that the dividends were not paid out of trading profits,
but out of capital profits. An allottee of shares want to avoid the contract on the
ground that the prospect was false in material particulars. Decide.
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(Hints: Yes the allotee can rescind the contract as there is misrepresentation.
Concealment of a material fact is fraudulent. He can also claim compensation
u/s 62 of the Companies Act)
2. The directors of a company issued prospectus inviting subscription for debentures
stating the object of the issue of the debenture as expansion of a project. Actually
the money was spent for paying off other liabilities. Are the directors liable?
(Hints: Yes, the directors are liable because the prospectus was issued by them
and contained misstatements and tried to deceive the investors. It misrepresented
the state of mind of the investors which is as much as a fact as the state of his
defection. A person who lends money must know the purpose for which the money
shall be used. A similar decision was made in Edington v Fitzmaurice (1885) 29
Ch D 459.)
3. A company issued a prospectus containing material mis-statements of fact. Relying
on the prospectus Mr. Gullible purchased shares from the market. Would the
company be liable in damages to him? Can he rescind the contract?
(Hints: Yes the allotee can rescind the contract as there is misrepresentation. He
can also claim compensation u/s 62 of the Companies Act.)
4. An allottee of shares in the company has brought an action against Director Q in
the company in respect of false statements in the prospectus. The director has
contended that the statements were prepared by promoters and he had relied on
them. Is the director liable under the circumstances?
(Hints:Yes, director shall be held liable. A director can escape liability for mis-
statements in a prospectus only on grounds specified under section 62(2). Relying
on statements prepared by promoters is not a ground included there under.
Accordingly, no defence shall be available to the director.)
5. ABC Ltd. issued a prospectus containing false information. X, an investor received
a copy of the prospectus from the company. But he did not apply for any shares.
After the listing of the shares, X purchased shares through the stock exchange at
higher price which later on fell sharply. X sold these shares at a heavy loss. X
claims damages from the company for the loss suffered on the ground that the
prospectus issued by the company contained false
(the shares were purchased through stock exchange. The purpose of prospectus
is over after the shares are subscribed. There is no liability on the company since
he did not purchased shares on the basis of prospectus.)
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6. BPL Co. Ltd. issued a prospectus on 20
th
November 2007 for issue of debentures
but a copy of the same was delivered to the Registrar on 21
st
November 2007.
What is the liability of the Company?
(Hint : As per section 60 of the Act no prospectus shall be issued unless a copy
thereof is delivered to the Registrar for registration on or before such issue. As per
clause 5 of the said section if any prospectus is issued without a copy thereof
being delivered to the Registrar, every person who is a party to the issue of the
prospectus, shall be punishable with fine which may extend to Rs. 50,000.)
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CHAPTER - VI
SHARE CAPITAL
6.1 What is share capital?
6.2 Nature of shares & Kinds of shares.
6.3 New types of share.
6.4 Rights shares and Bonus Shares.
6.5 Share Certificate and Share Warrant.
6.6 Reduction of Share Capital.
6.1 What is share capital?
In modern company law, the word capital is used to cover:
1. Share capitalthe funds subscribed by members;
2. Loan capital the fund provided by commercial finance providers
and investors holding debentures or giving fixed deposits.
3. All funds whether provided by member, creditors or by retention of
profits; and
4. The assets in which all the funds have been invested.
However in relation to a company limited by shares, the word capital
generally means share-capital, i.e. the capital in terms of rupees divided
into shares of fixed amount. In other words, the contributions of persons
to the common stock of the company form the capital of the company.
The proportion of the capital to which each member is entitled, is his
share. A share is not a sum of money; it is rather an interest measured by
a sum of money and made up of various rights contained in the contract.
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Types of capital
According to Section 86, the share capital of a company limited by shares shall be
of two kinds only, namely:
a) equity share capital
i) With voting rights; or
ii) With differential rights as to dividend, voting or otherwise in accordance with
such rules and subject to such conditions as may be prescribed;
b) preference share capital
Equity share capital Equity share capital Equity share capital Equity share capital Equity share capital consists of equity shares.
P PP PPreference share capital reference share capital reference share capital reference share capital reference share capital consists of preference shares
Thus share capital of a company can be either equity share capital consisting of
equity shares or preference share capital consisting of preference shares. The Companies
(Amendment) Act, 2000 allows the issue of equity shares with differential rights. Earlier
under section 90 only a private limited company, which is not a subsidiary of a public
company, could issue shares with disproportionate rights.
The term capital is used in the following senses in the Company Law:
1. Nominal or authorised or registered capital: Nominal or authorised or registered capital: Nominal or authorised or registered capital: Nominal or authorised or registered capital: Nominal or authorised or registered capital: It is the sum stated in the
memorandum as the capital of the company with which it is to be registered. It is
the maximum amount, which a company authorised to raise by issuing shares.
2. Issued capital: Issued capital: Issued capital: Issued capital: Issued capital: It is that part of authorised capital, which is offered by the company
for subscription. It is obligatory to disclose issued capital in balance sheet - Part I
of Schedule VI.
For e.g. A company may have total authorised share capital of Rs. 10 lacs divided
into 1 lac shares of Rs. 10 each. It may decide to issue 80,000 shares of Rs. 10
each. In that case the issued capital shall be Rs. 8,00,000.
3 Subscribed capital: Subscribed capital: Subscribed capital: Subscribed capital: Subscribed capital: It is that part of the issued capital for which applications have
been received from the investors. In the above example out of 80,000 shares
issued by the company, if applications are received for only 70,000 shares of Rs.
10 each, the subscribed capital will be Rs. 7,00,000.
4. .. .. Called up capital: Called up capital: Called up capital: Called up capital: Called up capital: It is that part of the subscribed capital, which has been called
up or demanded by the company. A company may call the amount due on shares
SHARE CAPITAL
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in two or three instalments. In the above example if the company has called up
Rs. 5 per share, then its called up capital shall be 70,000 x 5 = 3.5 lacs.
5. P PP PPaid up capital: aid up capital: aid up capital: aid up capital: aid up capital: It is the total amount actually paid up on shares by the subscribers.
Sometimes a few subscribers fail to pay the full amount called up. Thus paid up
capital is equal to called - up capital less calls in arrears. In the example given
above, if only Rs. 3,00,000 is actually received by the company, then the paid up
capital shall be to Rs. 3,00,000.
6. R RR RReserve capital eserve capital eserve capital eserve capital eserve capital it is that part of the uncalled capital of the company which can be
called up only in the event of winding up. The company can determine this by
passing special resolution. The company cannot demand the payment of money
on the shares to that extent during its lifetime. When once the reserve capital has
been so created, it cannot be charged or mortgaged as security for any loan
raised by the company and it cannot be called up.
The reserve capital is different from capital reserve, which is created out of profits.
6.2 Nature of shares and kinds of shares
A share is bundle of rights and obligations
a) Meaning and nature of share:
The capital of a company is divided into a number of units of a fixed amount. These
units are known as shares. According to section 2(46) of the Companies Act, a share
is a share in the share capital of a company, and includes stocks except where a distinction
between stock and share is expressed or implied.
In Boreland Trustees v. Steel Bros. & Co., Justice Farewell defined the shares as the
interest of the shareholder in the company measured by a sum of money, for the purpose
of liability in the first place, and of dividend in the second also consisting of series of
mutual covenants entered into by all the shareholders inter se in accordance with the
Companies Act.
According to section 82, the share or other interest of any member in a company
shall be movable property, transferable in the manner provided by the Articles of the
company. Shares are treated as goods under the Sale of Goods Act and they can be
transferred to other persons. It may, however, be noted that a share certificate is not a
negotiable instrument.
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To sum-up, a share signifies the following:
i. the interest of the shareholders in the company;
ii. the right to receive dividend;
iii. the right to attend and vote at the meeting;
iv. the right to share in the surplus assets of the company, if any, in the event of the
company being wound up;
v. the liability of the shareholder in the company to pay calls on shares until fully
paid up;
vi. the right of the shareholder to transfer the shares subject to the Articles of
Association;
vii. binding covenant on the part of the company as well as the shareholder, as given
in the Articles of the company.
Thus, a share of a company in the hand so of a shareholder signifies a bundle of
rights and obligations. Section 83 requires each share to bear a distinctive number
(except those which are with a depository).
Stock: Stock: Stock: Stock: Stock: A share should be distinguished from a similar term stock stock stock stock stock A stock may be
defined as the aggregate of fully paid -up shares of a member merged into one fund of
equal value. It is a set of shares put together in a bundle. The stock is expressed in terms
of money and not as so many shares. Stock has the convenience of being divided into
fractions of any amount.
However, no company can make an original issue of stock. It is only a company
limited by shares, which, if authorised by its Articles, may by passing a resolution in the
general meeting convert all, or any of its fully paid-up shares into stock (section 94). A
stock is thus always fully paid up as against shares, which may also be partly paid -up.
On conversion into stock, the register of members must show the amount of stock held
by each member instead of the number of shares. The conversion does not affect the
rights of the members in any way.
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Share Share Share Share Share
A share has a nominal value
Stock Stock Stock Stock Stock
A stock has no nominal value
A share has a distinctive number
(except those which are with a
depository)
A stock bears no such number
Shares can be issued originally to
the public
A company cannot make an original
issue of stock. Stock can be issued
by existing company by converting
its fully paid-up shares.
A share may either be fully paid-up
or partly paid-up
A stock can never be partly paid-
up, it is always fully paid-up.
A share cannot be transferred in
fractions. It is transferred as a whole
A stock may be transferred in any
fractions.
1
2
3
4
5
All the shares are of equal
denomination
Stock may be of di fferent
denominations
6
b) Types of shares
T TT TTypes of shares ypes of shares ypes of shares ypes of shares ypes of shares
Equity Shares Equity Shares Equity Shares Equity Shares Equity Shares
P PP PPreference shares reference shares reference shares reference shares reference shares
With voting rights With differential
rights as to
dividend, voting
(non voting
shares etc.)
(a) Cumulative - non cumulative
(b) Participating - non participating
(c) Convertible - non convertible
(d) Redeemable preference shares
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Equity Shares: Equity Shares: Equity Shares: Equity Shares: Equity Shares: Equity Shares, with reference to any company limited by shares, are
those, which are not preference shares [Section 85(2) of the Companies Act, 1956].
The important characteristics of equity shares are as follows:
1. Equity shares carry voting rights at the general meetings of the company and
have the right to control the management of the company.
2. Equity shares carry the right to share in the profits of the company in the form of
distribution of dividend and bonus shares.
3. In the event of winding up of the company, equity share capital is repayable only
after repayment of the claims of the creditors and preference shareholders.
4. Equity shareholders enjoy various rights as members, which include, inter alia,
the following rights:
(a) Right of pre-emption in the matter of fresh issue of capital (Section81).
(b) Right to apply to the NCLT /CLB to have any variation of their rights set
aside (Section 107)
(c) Right to receive a copy of the statutory reports (Section 165).
(d) Right to apply to Central Government to call an annual general meeting
when the company fails to call such a meeting (Section 167).
(e) Right to apply to CLB/NCLT for calling an extraordinary general meeting of
the company (Section 186).
(f) Right to receive copies of annual accounts along with auditors report (Sections
210 & 219).
Equity shares constitute the permanent capital of the company. However the equity
shares are to be repaid (a) in case of buyback of shares u/s77A (b) in case of reduction
of capital u/s 100 (c) winding up.
F FF FFreedom to issue shares in any denominations: reedom to issue shares in any denominations: reedom to issue shares in any denominations: reedom to issue shares in any denominations: reedom to issue shares in any denominations: Till recently the companies
were permitted to issue shares only in two standard denominations Rs. 10/
- or Rs. 100/-. In June 1999 on the recommendation of SEBI the Central
Government has issued notification allowing the freedom to companies to
issue shares in any denominations. Accordingly many companies in the
Stock Exchange have reduced the face value of shares. Thus the par value
of shares can be rupees 2,5, 10, 100 or rupee 1. However it should not be
less than rupee one or being other than multiple of rupee one.
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For example the par value of Infosys is Rs 5 (Market value in NSE on 2
ND
May, 2008 is Rs 1789), face value of DLF Ltd. is Rs 2 (Market value in NSE
on 2
ND
May, 2008 is Rs 720), face value of Tata Steel Ltd is Rs.10 (while
market value in NSE is Rs 797 on 2
nd
May, 2008), par value of Reliance
Industries is Rs 10/ (while market value is Rs 2674 in NSE on 2
nd
May,
2008).
c) Preference Shares:
A preference share is defined to mean a share which fulfils the following two
requirements:
i) During the life of the company it must be paid preferential dividend either of fixed
amount or at a fixed rate;
ii) On the winding up of the company it must carry a preferential right to be repaid
the capital in preference to the equity shareholders.
Kinds of Preference Shares:
1. Cumulative preference shares: Cumulative preference shares: Cumulative preference shares: Cumulative preference shares: Cumulative preference shares: They carry the right to cumulative dividends if the
company fails to pay the dividend in a particular year. All preference shares are
always presumed to be cumulative unless the contrary is stated in the terms of
issue.
Non- Non- Non- Non- Non-cumulative preference shares: cumulative preference shares: cumulative preference shares: cumulative preference shares: cumulative preference shares: Such shares do not carry the right to receive
the arrears of dividend in a particular year, if the company fails to declare dividend.
if no dividend is paid in a particular year, it lapses.
2. P PP PParticipating preference shares articipating preference shares articipating preference shares articipating preference shares articipating preference shares They are entitled to a fixed rate of dividend plus
participate in surplus profits along with the equity shares after a certain fixed
percentage has been paid to equity shareholders
Non-participating preference shares Non-participating preference shares Non-participating preference shares Non-participating preference shares Non-participating preference shares Such shares are entitled only to the fixed
dividend and do not have the right to further participate in the surplus profits
3. Convertible preference shares Convertible preference shares Convertible preference shares Convertible preference shares Convertible preference shares They are converted into equity shares at a later
date. The holder of such shares is given the right of conversion of his shares into
equity shares at a later date.
Non- Non- Non- Non- Non-Convertible preference shares Convertible preference shares Convertible preference shares Convertible preference shares Convertible preference shares The holder of such shares does not get a
right to convert such shares into equity shares at a later date.
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4. R RR RRedeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) Redeemable preference shares are
those shares which are to be redeemed (paid back) to the shareholders. They
have to be redeemed within a period of 20 years from the date of issue.
Irredeemable preference shares cannot be issued. A company limited by shares
may, if so authorised by its Articles, issue preference shares which are redeemable
at the option of the company. Redemption of preference shares does not amount
to reduction of companys authorised share capital.
Conditions for the issue and redemption.
a. Such shares can be issued only if it is authorised by the Articles of Association.
b. Redeemable preference shares can be redeemed I) out of profits of the company
or ii) out of proceeds of a fresh issue of shares made for this purpose. General
reserves need not be used for the purposes of redeeming the preference shares
so long as there is a debit balance in the profit and loss account.
c. No such shares shall be redeemed unless they are fully paid-up.
d. Premium, if any, payable on redemption should be provided from the profits or
from the companys share premium account.
e. An amount equal to redemption amount must be transferred to capital redemption
reserve account where the redemption is effected out of profits, which would
otherwise be available for distribution as dividend. Such capital redemption reserve
will be utilised for redemption of redeemable preference shares. It may also be
utilised for issue of fully paid bonus shares (sub-section 5)
f. On redemption of preference shares, the payment is to be made in cash, unless
the terms of the issue provide for an option to convert them into equity shares.
g. Whenever, preference shares are redeemed, a notice is required to be given to
the Registrar of Companies within 30 days of the redemption [section 95(1)].
Meaning of Securities Meaning of Securities Meaning of Securities Meaning of Securities Meaning of Securities
As per section 2(45AA) of Companies Act, Securities means securities as
defined in section 2(h) of Securities Contracts (Regulation) Act, 1956 and
includes hybrids. .. ..
As per section 2(h) of Securities Contracts (Regulation) Act, Securities include
4. R RR RRedeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) edeemable preference shares (section 80) Redeemable preference shares are
those shares which are to be redeemed (paid back) to the shareholders. They
have to be redeemed within a period of 20 years from the date of issue.
Irredeemable preference shares cannot be issued. A company limited by shares
may, if so authorised by its Articles, issue preference shares which are redeemable
at the option of the company. Redemption of preference shares does not amount
to reduction of companys authorised share capital.
Conditions for the issue and redemption.
a. Such shares can be issued only if it is authorised by the Articles of Association.
b. Redeemable preference shares can be redeemed I) out of profits of the company
or ii) out of proceeds of a fresh issue of shares made for this purpose. General
reserves need not be used for the purposes of redeeming the preference shares
so long as there is a debit balance in the profit and loss account.
c. No such shares shall be redeemed unless they are fully paid-up.
d. Premium, if any, payable on redemption should be provided from the profits or
from the companys share premium account.
e. An amount equal to redemption amount must be transferred to capital redemption
reserve account where the redemption is effected out of profits, which would
otherwise be available for distribution as dividend. Such capital redemption reserve
will be utilised for redemption of redeemable preference shares. It may also be
utilised for issue of fully paid bonus shares (sub-section 5)
f. On redemption of preference shares, the payment is to be made in cash, unless
the terms of the issue provide for an option to convert them into equity shares.
g. Whenever, preference shares are redeemed, a notice is required to be given to
the Registrar of Companies within 30 days of the redemption [section 95(1)].
Meaning of Securities Meaning of Securities Meaning of Securities Meaning of Securities Meaning of Securities
As per section 2(45AA) of Companies Act, Securities means securities as
defined in section 2(h) of Securities Contracts (Regulation) Act, 1956 and
includes hybrids. .. ..
As per section 2(h) of Securities Contracts (Regulation) Act, Securities include
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(i) Shares, scrips stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate
(ia) Derivative
(ib) Units or any other instrument issued by any collective investment
scheme to the investors in such schemes
(ic) Security Receipt issued by Securitisation Company, as defined in
section 2(1)(zg) of Securitisation & Reconstruction of financial
assets & Enforcement of Security Interest Act, 2002 (id) units or
othersuch instruments issued to investors under any mutual fund
scheme
(ii) Government securities
(iia) Such other instruments as may be declared by the Central
Government to be securities; and
(iii) Rights or interest in securities. [Section 2(h)]
Hybrid security - Hybrid security - Hybrid security - Hybrid security - Hybrid security - Hybrid security means any security which has characters of
more than one type of security, including their derivatives. [section 2(19A)]
Thus, a convertible or partly convertible debenture is a hybrid security.
6.3 Rights shares and Bonus Shares
Rights shares: Rights shares: Rights shares: Rights shares: Rights shares: Rights shares are the shares offered to the existing members in
proportion to their existing shareholding. According to section 81, the directors of the
company are under obligation to make offer of the new shares (known as right shares)
to the existing members of the company in proportion to their shareholding. Sec 81
grants the existing shareholders the right of pre-emption, namely, the right to be first
offered the share before they are offered to the general public.
When this right accrues?
The right accrues where the company proposes to issue further shares
- after the expiry of two years from the date of incorporation of the company
or
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- after one year from the date of the first allotment of shares, whichever is
earlier.
Thus if a company makes issue after the above specified time it will be a rights
issue, unless the members decide otherwise.
According to section 81(1), a company proposing to make a rights issue is required
to send a letter of offer letter of offer letter of offer letter of offer letter of offer to members. Since it is offer to the existing shareholders, the
company is not required to issue prospectus.
The letter of offer contains a notice to the equity shareholders giving them the
option to take the shares offered by the company against the money so specified per
share. A minimum 14 days notice must be given for exercising his option.
The notice must also state that the shareholder shall have the right to renounce the
offer, in whole or in part, in favour of some other person who need not be a member of
the company. If any shareholder to whom right shares or offered, declines to accept the
shares, the board of directors may dispose them of in a manner most beneficial to the
company.
When shares need not be given to existing shareholders When shares need not be given to existing shareholders When shares need not be given to existing shareholders When shares need not be given to existing shareholders When shares need not be given to existing shareholders? / Issue of shares to non- Issue of shares to non- Issue of shares to non- Issue of shares to non- Issue of shares to non-
members and other persons members and other persons members and other persons members and other persons members and other persons. .. .. However section (81[1A]) carves out an exception to sec.
81. A company may offer further shares to any person i.e., to the public, or issue by
way of private placement or preferential allotment to any segment of shareholders, viz.,
promoters, foreign collaborators, employees, etc., in the following circumstances:
Special resolution. The further issue of capital to outsiders/other persons can be
made if it is approved by a special resolution in a general meeting authorising
that shares need not be offered to the existing shareholders.
Ordinary resolution: If a special resolution is not passed then, by an ordinary
resolution in a general meeting shares can be offered to the outsiders provided
an approval of Central Government is obtained thereto. The Central Government
shall grant approval if it is satisfied that the proposal is beneficial to the company.
[(Sec.81 (1a)]
Issue before time limit: Shares need not be given to existing shareholders in case
of an issue or allotment of shares within two years of the incorporation of a
company or within one year after the first allotment whichever event occurs earlier.
A private company need not offer its further issue first to existing shareholders.
[Section 81 (3)].
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In the case of issue of shares against conversion of loans or debentures if certain
conditions are satisfied.
SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. SEBI has issued certain guidelines regarding rights issue. These guidelines
are applicable to listed companies. For an issue size of more than 50 lakhs.
These include:
i) Appointment of an authorised merchant banker where issue size exceeds
Rs. 50 lakhs.
ii) Letter of offer should be given to shareholders for exercising right to
purchase. The letter of offer shall contain disclosures specified by SEBI
as per Form 2A. A minimum 14 days notice must be given for exercise
of right option.
iii) The Letter of Offer should be filed with SEBI atleast 21 days before
filing of the same with Stock Exchange. Offer document to be made
public for a period of 21 days from the date of filing with SEBI.
iv) The rights issue must be kept open for a minimum period of 30 days
but not beyond 60 days.
v) Raising of minimum subscription of 90% against the entire issue and
the refund of the entire money in case the minimum subscription is not
received within 42 days from the closure of the issue. In case of failure
to refund the money within next 10 days, the company and the directors
shall be personally liable to repay with interest at the rate of 15% per
annum.
vi) Agreement with depository for dematerialization giving an option to
shareholders to get the shares in demat form.
vii) Issue shall be made fully paid up within 12 months except where total
issue exceed Rs. 500 crores.
viii) Compliance certificate to SEBI within 45 days of closure of the issue.
Conversion of loans or debentures into shares Conversion of loans or debentures into shares Conversion of loans or debentures into shares Conversion of loans or debentures into shares Conversion of loans or debentures into shares The provisions of right issue do
not apply to conversion of loans or debentures into shares. However, the company can
do so only if such conversion has been approved before the issue of debentures or
raising of the loan by a special resolution and also by the Central Government
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[sec. 81(3)]. However, no such special resolution shall be necessary were the lender or
debenture holder is either the government or any institution specified by the Central
Government in this behalf.
Conversion in public interest Sub-sections (4) to (7) of section 81 provide that
where a company has taken any loans from the Central Government by issuing any
debentures or otherwise, the Government may, in the public interest, convert such
debentures or loans into shares in the company. The conversion shall be on such terms
and conditions as appear to the Government to be reasonable in the circumstances of
a particular case. While making an order for conversion, the Government shall consider
the following factors:
(a) the financial position of the company;
(b) the original terms of the issue;
(c) the rate of interest;
(d) the capital of the company;
(e) liabilities and reserves;
(f) the profits during the preceding 5 years; and
(g) the current market price of the shares of the company.
A copy of every order proposed to be issued by the Government must be laid in
draft before each House of Parliament for a total period of 30 days [sec. 81(6)].
Share capital to stand increased [Sec. 94A] Section 94A, inserted by the
Amendment Act of 1974, provides that where the Government or any public financial
institution has converted its debentures or loans into capital, the capital of the company
shall thereby stand increased by an equal amount and its memorandum altered
accordingly. The Central Government is required to send a copy of the order to the
Registrar so that he may effect the necessary alterations in the companys Memorandum.
Bonus shares: Bonus shares: Bonus shares: Bonus shares: Bonus shares: A company may, if its articles so provide, capitalize profits by issuing
fully paid shares to the members. Such shares are known as bonus shares. Thus, bonus
shares are given free of cost by the company and are allotted out of its distributable
profits. There is no actual cash flow. It is only a book entry. However, issue of bonus
shares gives positive signals to the investors that the company is doing well.
The purpose of bonus issue is to match the capital base of the company with the
asset base, when the company has large reserves.
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The articles of association must authorise capitalization of reserves. Bonus shares
should not be given by reserves created by revaluation of fixed asset.
The company must pass resolution first at the Board meeting and thereafter at the
companys General Meeting for bonus issue. Managements intention regarding
the rate of dividend to be declared in the year immediately after the bonus issue
should be indicated in that resolution.
After the allotment of bonus shares, return of allotment in e-form no. 2 is filed
with ROC.
The bonus issue of listed company is governed primarily by SEBI guidelines. SEBI
guidelines provide, inter alia, that
No bonus issue shall be made within 12 months of any public/right issue;
Bonus issue to be made out of free reserves or share premium collected in
cash only;
No bonus issue to be made in lieu of dividend;
No bonus issue to be made unless partly paid shares, if any, existing are
made fully paid-up or where company has defaulted in repayment of its
fixed deposit or redemption of its debentures or payment of statutory dues to
its employees like provident fund, gratuity, bonus, etc.
Right Shares Right Shares Right Shares Right Shares Right Shares
To be paid for - Right shares confers
a pri vi l ege on the exi sti ng
shareholders to have a claim on the
shares offered after the first public
issue.
However, the shareholders must pay
for the shares accepted.
Bonus Shares Bonus Shares Bonus Shares Bonus Shares Bonus Shares
Bonus shares are i ssued to
the existing members free of charge.
It refers to capitalization of reserves.
1
Partl y pai d - The exi sti ng
shareholding of the members as well
as rights shares may be partly paid.
Bonus shares are always fully paid. 2
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6.4 New types of Shares Recently introduced
i) Sweat equity (introduced by Companies (Amendment) Act, 1999).
ii) Equity Shares with discriminating rights (introduced by Companies (Amendment)
Act, 2000).
i) Sweat equity (section 79A)
Sweat equity shares refer to equity shares issued by the company to employees or
directors
- at a discount or
- for consideration other than cash
Money to be kept in a separate bank
account - Till the concerned regional
stock exchange approves the
allotment, money received against
rights must be kept in a separate
bank account.
This is not relevant to bonus issues
as no money is to be received by
the company.
Right to renounce - Rights shares
may be renounced by a member in
favour of his nominee. He may
renounce all or part of the shares
offered to him. Guidelines - Rights
issue are essentially regulated under
the provisions of the Companies Act,
although SEBI guidelines also apply
to listed companies.
Right Shares Right Shares Right Shares Right Shares Right Shares Bonus Shares Bonus Shares Bonus Shares Bonus Shares Bonus Shares
4
5
No such facility is available in
respect of bonus shares.Bonus issues
are essentially regulated by express
provi si ons i n the arti cl es of
association and detailed guidelines
issued by SEBI which are applicable
to listed companies.
Minimum subscription - In the event
of a company failing to receive a
minimum of 90% subscription, the
company shall have to return the
entire money received.
There is no such requirement.
3
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- for providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
Thus sweat equity shares are issued as a reward for hard work or value additions
or contributions in the form of IPRs.
Pre-conditions for the issue of Sweat Equity Shares
a. Sweat Equity Shares can only be of a class of shares already issued;
b. These can be issued by a company after expiry of one year from the date of
entitlement for commencement of business;
c. The issue is authorised by special resolution passed in a General Meeting;
d. The resolution should specify the number of shares, current market price,
consideration, if any, and the class or classes of directors or employees to whom
such equity shares are to be issued;
e. The sweat equity shares of a company whose equity shares are listed on a
recognized stock exchange are issued in accordance with the regulations made
by the Securities and Exchange Board of India in this behalf; Incase of unlisted
company, the Unlisted companies (Issue of Sweat Equity Shares) Rules, 2003
provide for procedure for issue of sweat equity.
f. All the limitations, restrictions and provisions relating to equity shares shall be
applicable to such sweat equity shares.
Unlisted companies (Issue of Sweat Equity Shares) Rules, 2003.
The main features of these rules are:
Sweat Equity can be issued only to permanent employees or whole time director
or executive director.
Issue of Sweat Equity Shares must be authorized by a special resolution. Notice
for the meeting shall include explanatory statement giving the details about
approval by the board of directors, reasons for issue, number and class of shares
to be issued, value of sweat equity shares etc.
Separate Resolution for each employee/promoter, if it is 1% or more of issued
capital if proposed sweat equity shares to any identified employees and promoters
is 1% or more of issued capital (excluding outstanding warrants and conversion),
separate resolution shall be passed for each such employee / director.
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Register of Shares Company shall maintain register of sweat Equity Shares in
prescribed form.
Disclosure in directors report Directors Report shall disclose number of shares
issued, conditions of issue, pricing formula, total sweat equity shares issued, money
realized or benefit accrued and diluted EPS pursuant to issue of sweat equity
shares.
Reporting in general meeting If sweat equity shares are issued, a certificate will
be placed at each Annual General Meeting (AGM) that sweat equity shares have
been allotted in accordance with the resolution passed in the general meeting
and in accordance with the rules. The certificate shall be issued either by auditors
of the company or practicing company secretary.
Pricing of Sweat Equity Pricing of sweat equity shall be at a fair price calculated
by independent valuer. He will consider intellectual property or know how or
other value addition. He shall consult such experts as he deems fit.. His report
should indicate justification for valuation.
Restrictions on quantum of issue Company shall not issue sweat equity shares
for more than 15% of total paid-up capital in a year or shares of value of Rs. Five
crores whichever is higher. If it is proposed to issue more equity shares, prior
approval of Central Government is required.
Employees Stock Option / Stock P Employees Stock Option / Stock P Employees Stock Option / Stock P Employees Stock Option / Stock P Employees Stock Option / Stock Purchase (ESOP / ESOS) urchase (ESOP / ESOS) urchase (ESOP / ESOS) urchase (ESOP / ESOS) urchase (ESOP / ESOS)
One of the popular ways of giving incentives to the employees is by offering
them shares of the employer company at a discounted price or free of cost.
This is one of the ways of participation in the companys profit and can give
fantastic capital gain to the employees. SEBI has issued guidelines for issue
of ESOP / ESOS. Sweat Equity Shares as defined in section 79A of the
Companies Act 1956 are different from ESOP / ESOS.
Fringe Benefit Tax on ESOP and sweat equity. Company issuing ESOP or
sweat equity is liable to FBT after 1-4-2007 @ 33.99%. However the FBT
can be recovered from the employee. Fair market value on date on which
option vests with the employees as reduced by amount actually paid by
employee or recovered from employee shall be the value of fringe benefit
[section 115WB(1)(d) of Income Tax Act].
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ii) Equity Shares with discriminating rights [section 2(46A), 86(a)(ii)]
Section 2(46A) defines share with differential rights as a share that is issued with
differential rights in accordance with the provisions of section 86.
According to section 86 a company can issue equity shares with differential rights
as to
a. dividend
b. voting or
c. otherwise in accordance with such rules and subject to such conditions a may be
prescribed.
Non-voting shares (NVS): Non-voting shares (NVS): Non-voting shares (NVS): Non-voting shares (NVS): Non-voting shares (NVS): Equity shares with discriminating rights will not only include
non-voting shares but also shares, which carry differential rights. This variation in rights
may relate to future conversion of capital, participation in right offers participation in
preferential offers, class meetings, loyalty bonuses, differential dividends, different face
value etc.
Non-voting shares are the shares which do not carry any voting rights and are
issued in accordance with Company (Issue of share capital with Differential Rights)
Rules, 2001.
Procedural rules regarding issue of non-voting shares/ shares with
differential rights:
1. The issue of such shares should be permissible under the Articles of association of
the company.
2. Issue of such shares must be authorized by the articles of association of the
company.
3. Shares with differential voting rights, including non-voting shares shall be allowed
to the extent of 25 per cent 25 per cent 25 per cent 25 per cent 25 per cent of the total issued share capital.
3. The company must have distributable profits, as per section 205, in the three
years preceding such issue.
4. Equity capital with regular voting rights will not be allowed to be converted into
shares with differential voting rights and vice-versa.
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5. Issue of such shares shall have to be approved by the shareholder shareholder shareholder shareholder shareholders resolution in s resolution in s resolution in s resolution in s resolution in
a general meeting a general meeting a general meeting a general meeting a general meeting. .. .. A listed company should obtain the shareholders approval
through postal ballot.
6. The notice of the general meeting must give the prescribed details details details details details by way of
explanatory statement explanatory statement explanatory statement explanatory statement explanatory statement.
7. A company which has defaulted in filing annual returns during the preceding
three years or has failed to repay its deposits or interest thereon on due date or
redeem debentures on due date or pay dividend shall not be eligible to issue
shares with differential rights.
8. Again, a company should not have defaulted in addressing investors grievances
or has been convicted of any offence under SEBI Act, Securities Contract Regulation
Act, 1956 and FEMA.
A AA AAdvantages of NVS dvantages of NVS dvantages of NVS dvantages of NVS dvantages of NVS Non-voting shares have off late became popular in USA and
European Countries, although investors prefer to have voting rights. Holders of non-
voting shares are compensated by offering them higher dividends as compared to
shares with voting rights.
1. NVS are good buffers against hostile takeover bids. A promoter who feels
threatened by a hostile takeover bid can issue NVS to protect his company.
2. Promoter can use NVS to raise funds in the market without creating any compulsory
obligation to pay, as in case of debentures or preference shares.
3. There will be dilution of equity but no-dilution of control.
4. Mobilization of funds through NVS would also help companies to reduce their
debt equity ratio and enhance their financial health and profitability.
5. Holders of NVS get higher dividend than holders of equity shares with voting
rights.
Dis Dis Dis Dis Dis-proportionate voting rights -proportionate voting rights -proportionate voting rights -proportionate voting rights -proportionate voting rights: Non-voting shares and shares with differential
rights are two different types of shares. While in the first case, voting rights are sacrificed,
in the later one, they may be differential in any type of right including of voting right. For
example, a company may issue two types of shares X and Y with equal face value.
While, X may have one vote for one share, Y may have five votes for every ten shares.
The lower weightage of voting power may be compensated by additional dividend on
such shares.
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Note: Section 85 to 89 do not apply to a private company, unless it is subsidiary of
a public company. Thus, a private company was authorized to issue shares with differential
rights even before the introduction of these shares with differential rights
6.5 Share Certificate and Share Warrant
Share certificate
A share certificate is a document of title issued by the company declaring that the
person named therein is the owner of a specified number of shares in the capital of the
company.
- It is a prima facie evidence of the title of the members to such shares.[section
84(1)] It also serves as estoppels as to payment.
- Every share certificate must be issued under the common seal of the company
which must be affixed in presence of two directors or persons acting on behalf of
the directors under a duly registered power of attorney and the secretary or some
other person appointed by the Board for the purpose.
- Every share must have a distinctive number(other than shares held in a
depository)sec 83.
- Every share certificate shall have distinctive number. A share certificate has to be
issued for partly or fully paid shares.
- Time limit: A company shall deliver share certificate within three months of the
allotment of shares In case of transfer, the certificate duly transferred should be
delivered in two months.
- No share certificate is required to be issued if the shares are in the demat form.
Where securities are dealt with in a depository, the company shall intimate the
details of allotment of securities to depository immediately on allotment of such
securities.(S. 113)
- The share certificate is liable for stamp duty under the State Stamp Act It is to be
paid on the issue price and not on the face value of shares.
Circumstances for issue of duplicate share certificates: Section 84(2) provides that
a company may renew or issue the duplicate of a certificate, if such certificate:
a) is proved to have been lost or destroyed, or
b) having been defaced or mutilated or torn is surrendered to the company.
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Section 84(4) makes it obligatory for companies to follow the rules prescribed by
the Government in regard to the following matters:
(i) The manner of issue or renewal of a certificate or issue of a duplicate thereof.
(ii) The form of a certificate (original or renewed) or a duplicate thereof.
(iii) The particulars to be entered In the Register of Members or in the register or
renewed or duplicate certificate
(iv) The form of such registers.
(v) The fee on payment of which, the terms and conditions, if any ( including terms
and conditions as to evidence and indemnity and reimbursement for expenses
incurred in connection with investigating evidence) on which a certificate may be
renewed or duplicate thereof may be issued.
F FF FFine for issuing false certificate ine for issuing false certificate ine for issuing false certificate ine for issuing false certificate ine for issuing false certificate If a company renews a certificate or issues duplicate
certificate with intent to defraud, the company is punishable with fine upto Rs. one lakh.
In addition, every officer who is in default can be imprisoned upto 6 months and a fine
upto Rs. one lakh can be imposed or both imprisonment and fine can be imposed
[Section 84(3)].
Share warrant
A share warrant is a bearer document of title to shares specified therein and is
issued by the public limited company against fully paid shares. (section 114). Share
warrant can be issued only with the previous approval of the Central Government.
A share warrant is treated as a negotiable instrument. It can be transferred by
simple delivery. Thus, there is no necessity to register the transfer of share warrant
with the company.
On issue of a share warrant the name of the shareholder is struck off from the
register of members. Thus the bearer of share warrant is not a member, but he is
certainly a shareholder. The articles of a company may provide that the bearer of
a share warrant shall be deemed a member of the company for all or any of the
purposes defined in the articles. Notice of general meeting is not required to be
send to the warrant holder. He can vote if the articles so provide.
According to section 114 only a public company limited by shares, if so authorised
by its articles can, with the previous approval of the Central Government be
allowed the facility of conversion of share certificate into share warrants.
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A share warrant shall mention that its bearer is entitled to the shares specified
therein. Dividend on shares specified in the warrant may be paid by coupons or
otherwise.
A share warrant holder may convert the same back into a share certificate. (Sec.
115)
According to section 115 the following particulars shall be entered in the register of
members upon the issue of share warrant:
a. The fact of the issue of the warrant ;
b. A statement of the shares specified in the warrant, distinguishing each share by its
number.
c. The date of issue of the warrant.
A private company cannot issue share warrant.
Difference between share certificate and share warrant
a. A share certificate is prima facie evidence of document of title, stating that the
holder is entitled to a specified number of shares. Share warrant is a bearer
document stating that the holder is entitled to certain number of shares specified
therein.
b. The holder of a share certificate is a member of the company whereas the bearer
of a share warrant can be a member only if the articles so provide.
c. A share warrant is a negotiable instrument whereas a share certificate is not so.
d. Only a public company can issue share warrant whereas a public as well as a
private company can issue a share certificate.
e. In order to qualify as a director, the person should acquire a share certificate
instead of a share warrant
f. A share certificate can be issued for fully paid or partly paid up shares whereas a
share warrant can be issued in respect of only fully paid up shares.
6.6 Reduction of Share Capital vs. Alteration of Share Capital
Sec. 94 deals with alteration of share capital. While sections 100 to 103 lay down
the procedure for reduction of share capital. A company can alter its share capital, If
authorised by its articles, by an ordinary resolution, in 5 ways:
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a. Increase the share capital by issuing new shares
b. Consolidate its existing shares into larger denomination
c. Sub-divide its existing shares into smaller denomination
d. Convert fully paid up shares into stock
e. Cancel shares, which have not been taken up and diminish the amount of the
share capital by the number of shares so cancelled. Such cancellation is not
deemed as reduction of share capital.
While u/s section 94 alteration of share capital involves reduction in authorised
share capital by cancellation of shares which have not yet been taken or agreed to be
taken by any person, whereas Section 100 deals with reduction of share capital by way
of cancellation of shares which have already been subscribed, whether fully paid or
not.
Reduction of share capital:
Reduction of share capital means reduction in respect of that portion of: :: ::
a. Issued capital which has been subscribed, called up and paid up, or
b. Issued capital which has been subscribed but not called up.
Mechanism Mechanism Mechanism Mechanism Mechanism :
Sec. 100 lays down that a company can reduce its capital -
- by reducing or extinguishing the liability of members in respect of uncalled or un-
paid capital
if Rs. 50 are paid up, on a share of Rs. 100 and the company extinguishes the
liability of the remaining Rs. 50 , then it will amount to reduction in capital.
- by paying off or returning paid-up capital not wanted (excess capital) for the
purposes of the company
- by paying off a part of the paid-up capital on the footing that it may be called-up
again
- by writing off or cancelling the capital which has been lost or is unrepresented by
the available assets.
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P PP PProcedure: rocedure: rocedure: rocedure: rocedure:
1. The articles should permit reduction in share capital.
2. Special resolution should be passed.
3. Confirmation of the High Court/NCLT must be taken to reduce the share capital.
4. The High Court /NCLT order should be filed with ROC and registered.
Procedure and Formalities for reduction (Section 100 to 105):
1. Authorisation by Articles: Reduction in share capital can be done only when it is
authorised by Articles of Association.
2. Special Resolution: The company must pass a special resolution for reduction of
capital (Section100).
3. Petition to High Court /NCLT: After passing special resolution for reducing share
capital, the company must then apply to the High Court/ NCLT by petition for an
order confirming the reduction scheme. It is the duty of NCLT to look after the
interest of the creditors and shareholders.
4. Consideration of petition by the High Court/ NCLT: The High Court /NCLT then
settles a list of such creditors who are entitled to object and may publish notice
fixing a day or days within which creditors not entered on this list are to claim to
be so entered or are to be excluded from the right of objecting to the reduction.
Where a creditor entered on the list does not consent to such reduction and his
debt is not discharged or determined by the company, the High Court /NCLT may
either have his interest secured or, if it thinks fit, dispense with his consent
(Section 101).
5. Interest of shareholders: Before sanctioning the scheme for reduction of share
capital, the NCLT must look after the interest of shareholders. High Court /NCLT
should see that the scheme for reduction of capital is fair and equitable to all
kinds of shareholders.
6. Order confirming the reduction: If the High Court /NCLT is satisfied that every
creditor of the company entitled to object has consented to the reduction or that
his debt has been discharged or secured, it may make an order confirming the
reduction on such terms and conditions as it thinks fit.
7. To add and reduced words to the name of the company: It may require the
company to add to its name as last words, the words and reduced for a specified
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time. The company may also be directed to publish reasons for the reduction of
capital for public information (Section102).
8. Registration of order for reduction: The order of the High Court/ NCLT confirming
the reduction must be produced before the Registrar and a certified copy thereof
alongwith minutes should be filed with him for registration.
9. On such registration by the Registrar, the resolution for reducing share capital as
confirmed by the order of the High Court /NCLT takes effect. Notice of the
registration must be published in such manner the High Court /NCLT may direct.
10. The Registrar must certify the registration of the order of the High Court/ NCLT.
11. If any officer of the company knowingly, conceals the name of any creditor entitled
to object to the reduction of capital, or knowingly misrepresents the nature of his
claim, or debts any such concealment or misrepresentation, he is punishable with
imprisonment up to one year or with fine, or with both (section 105).
R RR RReduction in Capital where company has suffered loss of capital is done by eduction in Capital where company has suffered loss of capital is done by eduction in Capital where company has suffered loss of capital is done by eduction in Capital where company has suffered loss of capital is done by eduction in Capital where company has suffered loss of capital is done by
cancelling share capital, which has been lost or is unrepresented by available assets. cancelling share capital, which has been lost or is unrepresented by available assets. cancelling share capital, which has been lost or is unrepresented by available assets. cancelling share capital, which has been lost or is unrepresented by available assets. cancelling share capital, which has been lost or is unrepresented by available assets.
This is one of the most common method of reduction. This is one of the most common method of reduction. This is one of the most common method of reduction. This is one of the most common method of reduction. This is one of the most common method of reduction.
Reduction of share capital vs. Diminution of share capital:
Reduction of capital means cancellation of that part of share capital which has
already been subscribed whether fully paid or not.
Diminution means cancellation of unissued share capital.
1) Reduction may involve reduction inter alia of paid up capital or subscribed &
issued capital, whereas diminution is in respect of unissued share capital.
2) If the articles authorise, the procedure for diminution can be effected by an ordinary
resolution, while reduction (which also needs authorisation by articles) can be
effected only by a special resolution.
3) Diminution needs no confirmation by the High Court /NCLT [Section 94(2)] but
reduction needs such confirmation (Section 101).
4) In case of reduction, the company is ordered to add to its name the words and
reduced after its name. But such a provision does not exist in the case of diminution
of the share capital as envisaged in [Section 94(1)(e)].
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5) In the case of diminution, notice is to be given to the Registrar within 30 days from
the date of cancellation whereupon the Registrar shall record the notice and
make the necessary alteration in the memorandum or articles or both (Section
95(1)(f) and (2) where as in the case of reduction more detailed procedure
regarding notice to the Registrar has been prescribed by Section 103, though
there is no such time limit as aforesaid. (i.e. 30 days).
Circumstances which does not amount to reduction of capital
i) Redemption of redeemable preference shares in accordance with the provisions
of sections 80 and 80A.
ii) A surrender of shares by a member to the company.
iii) Forfeiture of shares for non-payment of calls.
iv) Diminution of capital does not amount to reduction of capital.
v) Buy back of shares by a company does not amount to reduction of share capital.
QUESTION BANK
I. FAQs
1. A share is bundle of rights and obligations Discuss.
2. Distinguishes between Equity Shares & Preference Share
3. What is the meaning of preference share capital of a company? Explain very
briefly the various kinds of preference shares a company is allowed to issue under
the provisions of the Companies Act, 1956
4. What is meant by sweat equity shares? What are the conditions to be fulfilled by
a company proposing to issue sweat equity shares under the Companies Act,
1956?
5. What do you mean by Bonus Shares. Are they taxable under the Income tax Act?
6. Explain the right of pre- emption under the Companies Act when further capital is
issued.
7. In what way does the Companies Act, 1956 regulate the issue of further share
capital by a public limited company to persons other than the existing shareholders?
8. While the offer for new shares being issued by a public limited company is to be
made only to the existing shareholders, yet these shares can also be offered to
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outsiders. Discuss the statement in the light of the provisions of the Companies
Act, 1956.
9. Explain clearly the meaning of the term Share Certificate. What is the time limit,
under the provisions of the Companies Act, 1956 for the issue of such certificates
for shares allotted by a company? State as to how and under what circumstances
can a company issue duplicate share certificates.
10. Distinguish between share certificate and share warrant.
11. Explain clearly the difference between Reduction of Share Capital and Diminution
of Share Capital.
12. Under what circumstances can a company reduce its share capital?
II. CASE STUDIES
1. The capital of X Ltd. is Rs. 50 lakhs, consisting of Equity Share Capital of Rs. 40
lakhs and Redeemable Preference Share Capital of Rs. 10 lakhs. The Preference
Share Capital is to be redeemed before 31
st
Dec., 2007. The Company is running
in losses and its accumulated losses aggregated to Rs. 15 lakhs. The company
wants to borrow Rs. 20 lakhs from Financial Institutions to improve its working
and also to redeem the Preference Share Capital. Advise.
(Hint: No, the company cannot borrow from financial institution for the purpose.)
2. A Public Ltd. Co. wants to increase its subscribed share capital by offering the
new shares to the persons who are not the members of the company. Referring to
the provisions of the Companies Act, 1956, advice the company about the
procedure the company has to adopt to give effect to the above proposal.
(Hint: the company will have to pass special resolution or ordinary resolution with
approval of Central Government as provided in [Sec.81(1A)]
3. The authorised signatory of a company issued a share certificate in favour of X,
which apparently complied with the companys articles as it was purported to be
signed by two directors and the secretary and it had the companys common seal
affixed to it. In fact, the secretary had forged the signatures of the directors and
affixed the seal without any authority. Will the certificate be binding upon the
company?
(Hint: No: due to forgery)
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4. Board of Directors of X ltd. made a final call of Rs. 25 per share on 10000 Equity
shares of Rs. 10 each. Some of the shareholders challenged the validity of the act
of the Board of Directors on the ground that the appointment of one of the
Directors was invalid. Discuss the case.
(Hint: Call is invalid )
5. XYZ Company Ltd. is holding 45% of total Equity shares in AB Company Ltd. The
Board of Directors of AB Company Ltd. (incorporated on January 1, 2004) decided
to raise the share capital by issuing further equity shares. The Board of Directors
resolved not to offer any shares to XYZ Company Ltd. on the ground that it was
already holding a high percentage of the total number of shares already issued,
in AB Company. The Articles of Association of AB Company Ltd provide that the
new shares be offered to the existing shareholders of the company. On March, 1,
2007 new shares were offered to all the shareholders except XYZ Company Ltd.
Referring to the provisions of the Companies Act, 1956 examine the validity of
the decision of the Board of Directors of AB Company Ltd. of not offering any
further shares to XYZ Company Ltd.
(Hint: Under section 81(1A) shares can be issued to outsiders if special resolution
is passed in general meeting or ordinary resolution with approval of Central
Government as provided in [Sec.81(1A)]. The decision is correct if the company
has complied with sec. 81(1A).
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CHAPTER - VII
ALLOTMENT, CALLS & FORFEITURE
OF SHARES
7.1 Allotment of shares
7.2 Underwriting and brokerage
7.3 Purchase of its own shares by company / Buy back of shares.
7.4 Issue of shares at a premium / Discount
7.5 Call on shares
7.6 Forfeiture of shares
7.7 Surrender of shares
7.1 Allotment of Shares
a. What is allotment?
Allotment may be defined to mean the appropriation by the Board
of Directors of the company out of the previously unappropriated capital
of the company of a certain number of shares to persons who have
made applications for shares. Allotment results in a binding contract,
since it amounts to acceptance of offer.
Prospectus Invitation to offer
Application for shares Offer
Acceptance of application Allotment resulting in a
binding contract
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Allotment of shares gives a subscriber a right to demand shares and acquire
shareholders rights. Re-issue of forfeited shares does not constitute appropriation out
of unappropriated capital and therefore does not amount to allotment.
An allotment to be valid
should be made by proper authority, namely, the board of directors or a committee
authorised by the Board.
should be against application in writing,
should not be in contravention of any other law and
must be made within a reasonable time and
must be communicated to the applicant by dispatch of allotment letter.
must be absolute and unconditional
b) Conditions to be complied with by a public company before allotment of
shares
Statutory restrictions on allotment of shares: Sections 69 to 75 of the Companies
Act, provides for a number of statutory requirements with regard to allotment of shares:
these are also sometimes termed as restrictions on allotment.
1. Conditions to be complied with when a prospectus is issued -
No allotment of shares to the public can be made by a public company which has
issued a prospectus unless the following conditions are satisfied:
i. Registration of prospectus: A copy of prospectus is duly filed with the Registrar of
Companies (section 60)
ii. Application money: The amount received on application money should be at
least 5% of the nominal amount of the shares (section 69(3)).
iii. Moneys to be kept deposited in separate bank account: section 69(4) Share
application money collected should be kept deposited in a separate account with
bankers to issue.
(a) unti l the certi fi cate to commence busi ness has been obtai ned
u/s 149,
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(b) where such certificate has already been obtained, until the entire amount
payable on application for shares in respect of minimum subscription has
been received by the company.
iv. Minimum subscription section 69(1): A company cannot allot the shares unless
the minimum subscription as specified in a prospectus has been subscribed and
the application money on them has been received. As per SEBI guidelines, a
company making public issue of shares must receive a minimum of 90%
subscription against the entire issue before making an allotment of shares to the
public.
As per section 69(5) minimum subscription is to be received before the expiry of
120 days after the first issue of the prospectus. In case of failure, the entire amount is to
be repaid within 130 days after the issue of prospectus. If the money is not repaid within
130 days as aforesaid, the directors become liable to repay the same along with interest
at the rate of 6 per cent per annum payable from the expiry of the 130th day.
Minimum Subscription as per SEBI guidelines
For non-underwritten public issue: Minimum subscription received must be 90%of
the public or rights issue. If the subscription is less than 90%, shares cannot be allotted.
In such a case the company shall forthwith refund the entire subscription amount received.
If there is a delay beyond 8 days after the company becomes liable to pay the amount,
the company shall pay interest as per section 73. (i.e. interest upto 15%)
For underwritten public issue: If the company does not receive the minimum
subscription of 90% of the net offer to public including devolvement of underwriters
within 60 days from the date of closure of the issue, the company shall forthwith refund
the entire subscription amount received without interest. If there is a delay beyond 8
days after the company becomes liable to pay the amount (i.e. after 68 days), the
company shall pay interest prescribed under section 73 of the Companies Act. (i.e.
interest upto 15%).
The requirement of minimum subscription shall not be applicable to offer for sale,
or to an eligible infrastructure company.
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The significance of Minimum Subscription and the specified time for opening
of subscription list in the matter of Public Issue of Shares.
According to Section 69(1) of the Companies Act, minimum subscription is
the amount which in the opinion of the Board Of Directors of the company
must be raised by the issue of those shares which are offered to the public
for subscription with a view to provide for the following purposes:
(I) The purchase price of any property which is required to be paid out of
the proceeds of the issue.
(ii) Any preliminary expenses payable by the company and any commission
payable for the sale of shares.
(iii) The repayment of any monies borrowed by the company for any of the
above said two matters.
(iv) Working Capital.
(v) Any other expenditure stating the nature and purpose thereof and the
estimated amount.
The purpose behind the provision of minimum subscription is to prevent a
company from starting its business without adequate financial resources.
This is also an investor protection measure as the company has to refund
the amounts collected on applications in case the minimum subscription as
stated in the prospectus is not received.
Shares cannot be issued immediately after the issue of prospectus. Shares cannot be issued immediately after the issue of prospectus. Shares cannot be issued immediately after the issue of prospectus. Shares cannot be issued immediately after the issue of prospectus. Shares cannot be issued immediately after the issue of prospectus.
A AA AAccording to Section 72(1), no allotment shall be made until the beginning ccording to Section 72(1), no allotment shall be made until the beginning ccording to Section 72(1), no allotment shall be made until the beginning ccording to Section 72(1), no allotment shall be made until the beginning ccording to Section 72(1), no allotment shall be made until the beginning
of the 5th day from the date of issue of prospectus. This is known as the of the 5th day from the date of issue of prospectus. This is known as the of the 5th day from the date of issue of prospectus. This is known as the of the 5th day from the date of issue of prospectus. This is known as the of the 5th day from the date of issue of prospectus. This is known as the
time of opening of subscription list. The subscription list for public issues time of opening of subscription list. The subscription list for public issues time of opening of subscription list. The subscription list for public issues time of opening of subscription list. The subscription list for public issues time of opening of subscription list. The subscription list for public issues
should be kept open for at least 3 working days and this fact should be should be kept open for at least 3 working days and this fact should be should be kept open for at least 3 working days and this fact should be should be kept open for at least 3 working days and this fact should be should be kept open for at least 3 working days and this fact should be
stated in the prospectus. The maximum period of keeping the subscription stated in the prospectus. The maximum period of keeping the subscription stated in the prospectus. The maximum period of keeping the subscription stated in the prospectus. The maximum period of keeping the subscription stated in the prospectus. The maximum period of keeping the subscription
list open is 21days if the issue was underwritten and 10 days in other list open is 21days if the issue was underwritten and 10 days in other list open is 21days if the issue was underwritten and 10 days in other list open is 21days if the issue was underwritten and 10 days in other list open is 21days if the issue was underwritten and 10 days in other
cases. cases. cases. cases. cases.
The object of this provision is to give applicants sufficient time to study the The object of this provision is to give applicants sufficient time to study the The object of this provision is to give applicants sufficient time to study the The object of this provision is to give applicants sufficient time to study the The object of this provision is to give applicants sufficient time to study the
prospectus and to withdraw their offer to subscribe for the shares in case prospectus and to withdraw their offer to subscribe for the shares in case prospectus and to withdraw their offer to subscribe for the shares in case prospectus and to withdraw their offer to subscribe for the shares in case prospectus and to withdraw their offer to subscribe for the shares in case
they are not satisfied with the prospectus. they are not satisfied with the prospectus. they are not satisfied with the prospectus. they are not satisfied with the prospectus. they are not satisfied with the prospectus.
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v. Allotment can be made only from the beginning of the 5
th
day after the date of
issue of prospectus section 72(1). Where shares are issued in terms of a prospectus
issued generally, allotment cannot be made before the beginning of the 5
th
day
after the issue of prospectus. Prospectus is issued generally by issue of a newspaper
advertisement.
The subscription list for public should be kept open for at least three working days
and disclosed in the prospectus.
vi. Listing of shares on one or more recognised stock exchange(s) (section 73):
Allotment shall be void, where permission for listing has not been applied, or if
applied the same has not been granted by a stock exchange or all the stock
exchanges before the expiry of 10 weeks from the date of the closing of the
subscription list. Thus, if a single stock exchange refuses to grant permission, the
entire allotment becomes void, unless the refusal of the stock exchange is set
aside on appeal.
The company shall repay the moneys received from the applicants, within 78
days from the closure of the subscription list, without interest. If the money is not
so repaid on the expiry of 78
th
day, the company and every officer who is in
default is liable to repay that money to the applicants with interest at the rate of 15
per cent per annum.
vii. Basis of allotment and minimum no. of shareholders: In case the issue is over
subscribed, the applicant will have to be allotted lesser no. of shares than applied
for. In such a case allotment will be done pro-rata in consultation with the stock
exchange authorities and as per SEBI guidelines in this regard.
viii. Resolution for allotment: The Board of Director shall then pass resolution regarding
allotment of shares and authorise the issue of letters of allotment and letters of
regret.
ix. Refund of excess of application money: Section 73(2A) Where listing permission
has been granted, all monies in excess of the application money on shares allotted
must be repaid forthwith without interest. Section 73(2A) provides that if such
money is not repaid on the expiry of 78
th
day from the closure of the subscription
list, the company and every director of the company, who is an officer in default,
shall be jointly and severally liable to repay the same with interest @ 15% p.a.
x. Issuance of share certificates: as per section 113, the company should deliver the
share certificates within 3 3 3 3 3 months after the allotment of shares.
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xi. Return of allotment: After allotment, the company must file with the Registrar a
return of allotment within 30 days of the allotment of shares.
ALLOTMENT WITHIN 30 DAYS Companies must allot the securities within
30 days after close of issue. In case of issue through book building, allotment
should be completed in 15 days. If allotment is not made within 30 days,
interest will be payable after 30 days @ 15%.
2. Conditions to be complied with when prospectus is not issued -
Statement in lieu of prospectus: Where prospectus is not issued, a public company
shall not allot any shares unless it files a statement in lieu of prospectus with the
Registrar atleast 3 days before the first allotment of shares.
Resolution of Board of Directors for allotment of shares should be passed.
Return of allotment should be filed with the ROC within 30 days from the date of
allotment.
c. What is irregular allotment?
If an allotment of shares is made in contravention of the provisions of Secs. 69, 70
or 73 (discussed in the previous pages), then the allotment is termed as irregular. Thus,
an allotment will be considered irregular in the following cases:
(i) where minimum subscription has not been received;
(ii) where prospectus or a statement in lieu of prospectus has not been filed with the
Registrar;
(iii) where subscription list is opened before the beginning of the 5
th
day from the date
of the issue of prospectus;
(iv) where a minimum of 5% payable on application has not been received;
(v) where the application money is not kept in a separate account with a scheduled
bank; and
(vi) where stock exchange has either not listed shares within ten weeks or has refused
permission.
d. Effect of irregular allotment
1. Allotment valid but punishment of fine: (section 60) Where the irregularity results
in failure to deliver a copy of the prospectus to the Registrar, the company and
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every person who is knowingly a party to the issue of the prospectus shall be
punishable with fine which may extend to Rs. 50,000.
2. Allotment voidable: (section 71(1)) If a company without complying with the
provisions relating to: (i) minimum subscription, or ii) application money, or iii)
the filing of a statement in lieu of prospectus, make an allotment, it, though
irregular, is nonetheless an allotment. But an applicant may, if he so desires,
avoid the allotment:
a) within 2 months from the date of the statutory meeting where it was made
before that meeting;
b) If allotment is made after statutory meeting, within 2 months after the date of
allotment.
It should be noted that an irregular allotment can be avoided only within the time
limits indicated above, but within the time limit it can be avoided even if the company
goes into liquidation. The allottee must inform the company within the time limits that he
avoids the allotment.
3. Liability of Directors: (section 71(3)) In the event of non-compliance with the
provisions of section 69 and section 70, the allotment is rendered voidable voidable voidable voidable voidable at the
option of the applicant. Besides, any director who has knowledge of the fact of
the irregularity shall be liable to compensate the company and the shareholder
respectively for any loss, damage or costs which the company or the allotee may
have sustained or incurred thereby.
4. Fine in case allotment is made before the beginning of the 5
th
day from the date
of issue of the prospectus (section 72(3)) In such a case the company and every
officer of the company shall be punishable with fine which may extend to Rs.
50,000. However, the allotment will remain valid.
5. Failure to get listing-Allotment void: (section 73) In case of companys failure to
apply for listing of its share on a stock exchange to list its shares or permission
having not been granted before the expiry of ten weeks from the date of closing
of the subscription list, the allotment before void. Besides, the entire money received
by way of application money must be refunded forthwith. In case it is not repaid
within 8 days of becoming due, the company and every director who is an officer
in default shall be jointly and severally liable to repay that money with interest at
the rate of 15% per annum.
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Further, the company and every officer of the company who is in default shall be
punishable with fine up to Rs. 50,000 and where the repayment is delayed beyond six
months, also with imprisonment for a term up to one year.
e) Return as to allotment
A return of allotment in the prescribed form is required to be filed with the Registrar
of Companies within 30 days of the allotment. In case of allotment of shares against
cash, the return must state the number and nominal amount of the shares allotted; the
names, address and occupation of the allottees; and the amount paid or payable on
each share.
Failure to file the return as aforesaid renders every officer of the company who is in
default punishable.
7.2 Underwriting
Underwriting is in the nature of an insurance against the possibility of inadequate
subscription. Underwriting is a contract by which a person (known as underwriter) agrees
that if the shares/debentures about to be offered for subscription are not, within a
specified time taken up by the public, he will himself take them up and pay for what the
public do not take up. Thus the underwriter guarantees subscription of shares. A
company may pay underwriting commission to any person in consideration of his (a)
subscribing to or agreeing to subscribe or (b) to procure subscription for shares/
debentures. Underwriting of shares or debentures is not compulsory .
Conditions: Conditions: Conditions: Conditions: Conditions: Section 76 permits the payment of underwriting commission subject to
the following conditions:
1. The payment of commission should be authorised by the Articles.
2. The names and addresses of the underwriters and the number of shares or
debentures underwritten by each of them should be disclosed in the prospectus.
3. The amount of commission should not exceed, in the case of shares, 5% of the
price at which the shares have been issued or the amount or rate authorised by
the Articles whichever is less and in the case of debentures it should not exceed
2.5% of the price of debentures or lower rate, if lower rate is prescribed under
articles.
4. The Underwriting Commission can be paid out of capital or out of profits.
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5. The rate should be disclosed in the prospectus or in the statement in lieu of
prospectus and should be filed with the Registrar along with a copy of the
underwriting contract before the payment of the commission.
6. The number of shares or debentures which persons have agreed to subscribe
absolutely or conditionally for commission should be disclosed in the manner
aforesaid.
7. A copy of the contract for the payment of the commission should be delivered to
the Registrar along with the prospectus or the statement in lieu of prospectus for
registration.
8. Section 76(4A) clarifies that commission to the underwriters is payable only in
respect of those shares or debentures which are offered to the public for subscription
7.2a Brokerage [(sec. 76(3)]
Brokerage is different from underwriting commission in as much as a broker does
not undertake to subscribe for shares in case the same are not subscribed by the public.
Brokerage is essentially the reward paid to middle man who brings about a bargain
between the company and the purchaser of shares or debentures. Payment of brokerage
is permissible in addition to brokerage. The amount of brokerage paid or payable
should be disclosed in the prospectus or statement in lieu of prospectus. However,
brokerage can be paid only to brokers registered with SEBI.
In case of default in respect of provisions relating to commission or brokerage,
company and every officer in default is punishable with fine which may extend upto Rs.
5,000.
7.3 Purchase of its own shares by company
Section 77 prohibits a company limited by shares or a company limited by guarantee
having a share capital from buying its own shares. The section further disallows the
public company and a private subsidiary of a public company to give loan or provide
financial assistance to any person to enable him to purchase or subscribe to companys
own shares or shares of a holding company.
The aforesaid restrictions are however subject to certain exceptions which include:
lending of money by a banking company in the ordinary course of its business;
the lending of money or purchase of shares for the benefit of its employees;
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giving loans to employees to purchase fully paid shares of the company but not
exceeding his six months salary or wages.
However, buy back of shares by the company can be done subject to the provisions
of 77A, 77AA and 77B.
7.3a Buy Back of Shares
Buy-back can be described as a procedure, which enables a company to go back
to the holders of its shares and offer to purchase from them the shares that they hold.
(Sec. 77A)
Why buy-back? : There are three main reasons why a company opt for buy-back:
To improve shareholder value, since buy-back provides a means for utilising the
companys surplus funds which have unattractive alternative investment option
and since a reduction in the capital base arising from buy-back would generally
result in higher earning per shares (E. P. S).
As a defence mechanism, in an environment where the threat of corporate take-
over has become real, buy-back provides a safeguard against hostile take-overs
by increasing promoters holdings. Buy back will increase shares prices and the
shares available in market for the purchase will get reduced. Buy back will increase
holding to promoters. This will ward off take overs.
Management signaling its confidence The decision to buy-back articulates
managements view that the companys future prospects are good and hence
investing in its own shares is the best option. A company may buy back the shares
if it is of the opinion that its market price is lower than its real worth.
Power of Company to purchase its own Shares (Securities) section
77A/ 77B
A company can buy back its own shares or securities subject to the provisions of
sec. 77A , 77B and the buy back rules and regulations. The buy-back by a listed
company is to be made in accordance with SEBI (Buy-Back of Securities) Regulations,
1998, and by an unlisted company in accordance with Private Limited Company and
Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999.
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A. Pre- conditions for buy-back
1. The buy-back is permitted only if the articles of the company so authorise.
2. The buy-back of shares/securities is restricted to 25% of the total paid-up capital
and free reserves. ( in any financial year it cannot exceed 25% of the paid-up
capital and free reserve)
3. Debt-Net worth ratio is not more than 2:1 after buy-back
4. Shares/Securities for buy-back are fully paid-up. The shares are not subject to
any lock - in period.
B. Restrictions imposed for buy - back [section 77B]
A company shall not buy-back its shares or other specified securities.
through any subsidiary company, including its own subsidiary company.
through any investment company or group of investment companies
if default subsists in repayment of deposit or interest payable thereon, redemption
of debentures or preference shares, or payment of dividend to any shareholder,
or repayment of any term loan or interest payable thereon to any financial institution
or bank
if the company has not complied with the provisions of sections 159,207, and
211 i.e. when it has failed to file the annual return with the Registrar, or failed to
pay dividend within 30 days from the date of declaration, or failed to prepare the
balance sheet and profit and loss account as per requirements of Schedule VI
C. Sources of funds for buy-back [section 77A(1)]
Buy-back may be out-of
(I) its free reserves
(ii) the securities premium account
(iii) the proceeds of any shares/securities*
However, buy-back cannot be made out of proceeds of an earlier issue of the same
kind of shares or same kind of other specified securities-proviso to section 77A(1) .
Capital Redemption Reserves Account: If buy-back is out of free reserves a sum
equal to nominal value of shares so purchased shall be transferred to capital redemption
reserves account Section 77AA
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D. From whom can company purchase its shares [section 77A(5)]
The buy-back may be :
(a) from existing securities holders on a proportionate basis (tender method) or
(b) from open market (through stock exchange or book building process) or
(c) from holders of odd lots of shares or
(d) from employees pursuant to Employees Stock Option Scheme (ESOS) / Sweat
Equity.
E. Procedure of buy-back of shares /securities
Before buy-back
1 The buy-back is authorised by its Articles.(Otherwise articles will have to be
amended)
2 A special resolution is passed in General Meeting authorising the buy-back (if it
exceeds 10% of paid up capital and free reserves). The buy-back of shares/
securities is restricted to 25% of the total paid-up capital and free reserves Board Board Board Board Board
R RR RResolution is only required when the buy back is 10% or less of the total paid up esolution is only required when the buy back is 10% or less of the total paid up esolution is only required when the buy back is 10% or less of the total paid up esolution is only required when the buy back is 10% or less of the total paid up esolution is only required when the buy back is 10% or less of the total paid up
equity capital and free reserves. In case of listed company equity capital and free reserves. In case of listed company equity capital and free reserves. In case of listed company equity capital and free reserves. In case of listed company equity capital and free reserves. In case of listed company, special resolution , special resolution , special resolution , special resolution , special resolution
must be passed only by postal ballot. must be passed only by postal ballot. must be passed only by postal ballot. must be passed only by postal ballot. must be passed only by postal ballot.
3 The notice of the meeting at which special resolution is proposed to be passed
shall be accompanied by an explanatory statement stating
a.) a full and complete disclosure of all the material facts;
b.) the necessity for the buy back ;
c.) the class of security intended to be purchased under the buy-back;
d.) the amount to be invested under the buy-back;
e.) the time limit for completion of buy -back .
4 Declaration of solvency: Before making buy-back file with ROC, SEBI a declaration
of solvency - that is capable of meeting liabilities. The declaration of solvency
need not be filed with SEBI in case of non- listed company.
5 Time limit for completion of buy back: Every buy back shall be completed within
12 months from the date of passing of special resolution.
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After the buy-back
1 Verification and payment .The company shall after the closure of the offer, verify
the offers received within 15 days of such closure , and the shares so lodged by
the members and make payment to the shareholders.
2. Extinguishment of securities. The company shall extinguish & physically destroy
the securities so bought-back within 7 days of completion of buy-back.
3. Public advertisement of completion of buy-back. The company shall, within two
days of the completion of buyback issue a public advertisement in a national
daily regarding such buy-back Applicable to a listed company.
4. Return of buy-back. The company shall file a Return of buy-back with ROC, SEBI
within 30 days of such completion.
5. Register of buy-back. The company shall maintain register of buy-back mentioning
the details of the securities bought
6. Cooling period. After completion of buyback there is a prohibition of new issue of
shares within 6 months of buy-back (except bonus, conversions)
7. Penalty for default: Non- compliance of the provisions relating to buy-back shall
be punishable with 2 years imprisonment or fine upto Rs. 50,000/- or both.
7.4 Issue of Shares at a Premium
When the shares are issued at a price more than its nominal value / face value, it
is called as issue of shares at a premium. For example, if the nominal value of share is
rupees 10 and it is issued at rupees 30, the premium charged is rupees 20 per share.
The Companies Act is silent with regard to issue of shares at a premium. A private
company and an unlisted company can issue shares at a premium as may be decided
by the board of directors. Due to free pricing of shares, a company coming with a
public issue can issue share at any price. However, SEBI Guidelines provide that offer
document should indicate justification for the price. Thus, the issuer can issue shares at
a premium which the market is ready to accept.
The share premium amount should be transferred to Securities Premium Account.
Section 78 enumerates the uses to which the securities premium amount can be put.
This account should be used only for the following purposes:
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for issue of fully paid bonus shares;
for writing off preliminary expenses;
for writing off commission or discount allowed or expenses incurred on issue of
shares or debentures;
for payment of premium payable on redemption of preference shares or
debentures;
for buy-back of shares u/s 77A.
Thus the securities premium amount can not be used otherwise than for the specific
purposes mentioned above. A company may issue shares at a premium for consideration
other than cash such as acquisition of land, building, technical know-how, IPRs etc.
The balance sheet must disclose the amount of share premium as a separate item
and must also indicate how it is disposed of or exhausted (Schedule VI Part I).
7.4a Issue of shares at a discount
A company may issue shares at a discount i.e. at a price less than the nominal
value/ face value of shares. However, there are rigorous conditions to be complied
with.
Issue of shares at a discount is regulated by provisions contained in section 79. The
conditions are:
Shares at a discount can be issued only after one year from commencement of
business.
Only existing class of shares are allowed to be issued at a discount.
The discount issued should be approved by general meeting of the company and
the resolution (ordinary) should specify the maximum rate of discount.
The discount should be confirmed by Company Law Board.
The maximum discount should not exceed 10% unless the Company Law Board
permits a higher rate.
Every prospectus must contain particulars of the discount allowed on the issue of
the shares or so much of that discount as has been written off at the date of the
issue of prospectus.
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Any default in this requirement will render the company and every officer liable and
punishable with fine extending to Rs.500.
Directors liability in respect of improper issue of shares at a discount: If the directors
have improperly issued the shares at a discount, the directors render themselves liable
to compensate the company to the extent of the amount of discount.
7.5 Calls on shares
A call may be defined as a demand by the company for payment of part of the issue
price of shares or debentures which has not been paid. A Company may call the money
due on shares at intervals depending upon the requirements of funds for its activities.
Now days, the entire money due on shares is called in one installment. For example,
when TCS issued Re.1 share at a price around Rs. 850, the entire amount was called in
one installment with the share application. This saves the company from the administrative
inconvenience of calling money at various intervals and the hassles of forfeiture of
shares.
The power to make calls is exercised by the Board in its meeting by means of a
resolution (section 292(1) (a)).
Requisites of a valid call:
i) In accordance with the Articles. The call must be made in accordance with the
provisions of the Articles of Association and the Companies Act.
ii) Properly constituted Board Meeting: To be valid call must be made by the directors
duly appointed and duly qualified; against a resolution passed at the meeting of
the Board of directors in which proper quorum must have been present.
iii) Uniform Basis: (section 91) It must be made on a uniform basis and bonafide in
the interest of the company.
iv) Notice of call: Notice of call must specify the exact amount and the time of
payment. For each call at least 14 days notice must be given to members.
v) Amount: A call cannot exceed 25% of the nominal value of shares. An interval of
30 days is required between 2 calls. (Table A, Reg. 13)
vi) Payment of calls in advance: (section 92) Calls may be collected in advance and
interest may be paid thereon as per the provisions in the articles. Table A allows
the payment of interest on calls in advance not beyond 6% per annum, unless
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company in general meeting decides otherwise. However, Sec. 92(2) makes it
clear that a member who has paid calls in advance shall not be entitled to voting
rights in respect of such call in advance. He will get voting rights only when
amount is called and becomes due.
vii) Forfeiture: If call is not paid shares can be forfeited by the company.
viii) Articles of a company may restrict voting rights in respect of any shares on which
calls are not paid, after a valid call notice was served.
According to SEBI Guidelines, the entire amount is to be called along with application
in case of an offer for sale. In case of an issue size below Rs. 500 crores, the company
must ensure that the shares are made fully paid-up within 12 months of the allotment.
When the size of the issue exceeds Rs. 500 crores, the size on each call should not
exceed 25% of the total quantum of issue.
7.6 Forfeiture of shares
A companys articles usually contain a provision to forfeit shares of a member who
fails to pay his calls due within the stipulated time. Forfeiture to be valid must fulfill the
following conditions-
i) In accordance with the articles: The Articles of Association must empower the
company to forfeit the shares. As per Reg. 29 of Table A, shares can be forfeited
only for non-payment of calls. The Articles of a company may, however, lawfully
incorporate any other grounds of forfeiture.
ii) Proper notice: Before the shares of a member are forfeited, a proper notice to
that effect must have been served. Regulation 30 of Table A provides that a notice
requiring payment of the amount due together with any interest accrued must be
served mentioning a further day (not less than 14 days from the date of service of
the notice) on or before which the payment is to be made. The notice must also
mention that in the event of non-payment, the shares will be liable to be forfeited.
iii) Resolution for Forfeiture: If the defaulting shareholder does not pay the amount
within the specified time as required by the notice, the directors may pass a
resolution forfeiting the shares (Article 31 of Table A).
iv) Power of forfeiture must be exercised bonafide and in good faith: The power to
forfeit is in the nature of the trust and must therefore be exercised bonafide and
for the benefit of the company. Thus, the power of forfeiture cannot be used to
help a shareholder to relieve his liability on partly paid-up shares.
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Effect of forfeiture
i) A forfeiture has the effect of termination of membership.
ii) The amount already paid by the shareholder gets forfeited.
iii) However, a person whose shares have been forfeited continues to remain liable
as a past member in case liquidation takes place within one year of forfeiture.
iv) Liability for unpaid calls remains even after forfeiture of shares.
Re-issue of forfeited shares
Normally, forfeited shares are re-issued. In case they are not re-issued it may amount
to reduction of share capital and therefore require the approval of the Court. The forfeited
shares may be re-issued at par or at premium or at a discount. However, the discount
on re-issue should not exceed the amount forfeited on those shares. Re-issue of forfeited
shares is not a fresh allotment of shares. Hence filing of Allotment Return is not necessary.
The Board of directors, may, on a request of a shareholder whose shares have
been forfeited, cancel the forfeiture.
7.7 Surrender of shares
Surrender of shares means voluntary return of shares to the company for cancellation.
There is no provision for the surrender of shares either in the Companies Act or in Table
A, but the Articles of some companies may allow it as a short cut to the long procedure
of forfeiture. Surrender of shares shall be valid only -
a. When there is a provision to this effect in the Articles of Association of the company.
b. Surrender of shares is an alternative to forfeiture. Surrender of shares shall be
valid only where their forfeiture is otherwise justified. However, in any other
circumstances, surrender of shares cannot be accepted without sanction of the
court since it would amount to reduction of capital.
Surrendered shares may be re-issued in the same way as forfeited shares.
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QUESTION BANK
I. FAQs
1. Explain the meaning of the term allotment of shares.
2. What essential conditions must be satisfied by a public company before making a
valid allotment of shares?
3. State briefly the provisions relating to minimum subscription and consequences
of non-receipt of minimum subscription as per the Companies Act, 1956 and the
provisions as per SEBI SEBI SEBI SEBI SEBI Guidelines.
4. When is an allotment of shares made by a public company considered to be
irregular? What are its effects? Explain.
5. What are the effects of an irregular allotment of shares made by a public company?
6. The Board of Directors of M/s Reckless Investments Ltd. have allotted shares to
the investors of the company without issuing a prospectus or filling a statement in
lieu of prospectus with the Registrar of Companies, Mumbai. Explain the remedies
available to the investors in this regard.
7. Explain the term Underwriting Commission. What are the conditions to be fulfilled
by a company for the payment of such commission?
8. Whether a Company can buy-back its own shares? Explain in brief the provisions
of Companies Act, 1956 relating to the sources of funds and conditions for buy-
back its own shares by the company. .. ..
9. A public company proposes to purchase its own shares. State the source of funds
that can be utilised by the company for purchasing its own shares and the
requirements to be complied with by the company under the Companies Act
before and after the shares are so purchased
10. Whether a company can issue shares at premium? State the purposes for which
the share Premium account can be used under provisions of the Companies Act,
1956.
11. Can company issue at discount? What is the law in this relation, laid down in the
companies Act, 1956?
12. What are the conditions and procedure where under shares may be forfeited
under the Companies Act, 1956? ?? ??
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13. State the conditions to be satisfied before a company may forfeit the shares. What
is the effect of such a forfeiture?
II. CASE STUDIES
1. After receiving 80% of the minimum subscription a stated in the prospectus, a
company allotted 100 equity shares in favour of X. The company deposited the
said amount in the bank but withdrew 50% of the amount, before finalisation of
the allotment, for the purchase of certain assets. X refuses to accept the allotment
of shares on the ground that the allotment is voilative of the provisions of the
Companies Act, 1956. Comment.
(Hints: Allotment is irregular.)
2. P Ltd issued a prospectus for the purpose of issuing shares. The prospectus stated
that application had been made to the Stock Exchange, Mumbai (Regional Stock
Exchange) and Calcutta Stock Exchange for their permission for listing of the
shares. The Stock Exchange, Mumbai gave their permission but the Calcutta
Stock Exchange refused to give the permission. The company allotted the shares.
Is the allotment valid?
(Hints: As per section 73 of the Companies Act, 1956 any allotment of shares
made by a company if the company has not obtained permission for listing of the
shares as stated in the prospectus from each of the stock exchanges whose names
have been mentioned in the prospectus within 10 weeks of the closing of the
subscription list shall be void. In this problem the Calcutta Stock Exchange to
whom application has been made and stated in the prospectus refused the
permission though the Mumbai Stock Exchange gave the permission. As such the
allotment of the shares by the company was void)
3. Sunrise Ltd. is authorised by its articles to accept the while or any part of the
amount of remaining unpaid calls from any member although no part of that
amount has been called up. X, a shareholder of the Sunrise Ltd., deposits in
advance the remaining amount due on his shares without any calls made by
Sunrise Ltd.. Referring to the provisions of the companies Act, 1956, decide the
rights and liabilities of Mr. X, which will arise on the payment of calls made in
advance. .. ..
(Hints: Can claim interest on advance calls. If company goes in winding up, the
calls in advance paid will be treated as amount payable to unsecured creditors.)
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4. A member of LS & Co. Ltd., holding some shares in his own name on which Final
call money has not been paid, is denied by the company voting right at a general
meeting on the ground that the articles of association do not permit a member to
vote if he has not paid the calls on the shares held by him. With reference to the
provision of the Companies Act, 1956, examine the validity of companys denial
to C of his voting right.
(Hints: Articles of a company may restrict voting rights in respect of any shares on
which calls are not paid, after a valid call notice was served.)
5. Dowell Co. Ltd. issued 10,000 shares of Rs. 10 each. The entire issue was
underwritten by ICICI; but before the prospectus was issued the entire capital was
subscribed by the friends of directors of the company. Would ICICI be entitled to
receive any underwriting commission?
(Hints: Yes, Section 76 (4))
6. The Board of Directors of a company decides to pay 5% of the issue price as
underwriting commission to the underwriters. On the other hand the Articles of
Association of the company permit only 3% commission. The Board of Directors
further decides to pay the commission out of the proceeds of the share capital.
Are the decisions taken by the Board of Director valid under the Companies Act,
1956?
(Hints: Underwriting commission cannot be paid in excess of 3%.It can be paid
out of proceeds of share capital)
7. ABC Company Limited at a general meeting of members of the company passes
an ordinary resolution to buy back 30% of its equity share capital. The articles of
the company empower the company for buy back of shares. The company further
decides that the payment for buy back be made out of the proceeds of the
companys earlier issue of equity shares. Explaining the provisions of the Companies
Act, 1956 and stating the sources through which the buy back of companys own
shares be executed, examine: (i) whether companys proposal is in order? (ii)Would
your answer be still the same in case the company instead of 30%, decides to buy
back only 20% of its equity share capital?
(Hints: (i) No. (ii) Co. cannot buy back more than 25% in a year.)
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CHAPTER - VIII
TRANSFER OF SHARES AND THE
DEPOSITORY SYSTEMS
8.1 Right to transfer shares
8.2 Procedure of transfer of shares
8.3 When can company refuse transfer of shares
8.4 Forged transfer and blank transfer
8.5 Transmission of shares
8.6 Transfer of shares under the depositories system
8.7 Restrictions on transfer in case of
8.1 Right to Transfer Shares
Transfer of shares means a change in the ownership of shares. One
of the important features of a company is that its shares are transferable.
This provides liquidity to the investors and also contributes to a growing
capital market.
Shares of a company are freely transferable subject to the restrictions
contained in the Companies Act, any other statutes and the provisions
of the Memorandum and Articles of Association of the company (sec. 82).
However, in case of private company, by its very definition, there has
to be restrictions on the transfer of shares. This restriction should not be
in the form of prohibition. But in the case of a listed company / unlisted
public company, after the enactment of Depositories Act, 1996, the
securities have become freely transferable. Even the Board of Directors
cannot refuse transfer of shares.
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8.2 Procedure of Transfer of Shares
a. Prescribed share transfer form: Section 108 provides that transfer cannot be
registered unless there is proper instrument of transfer duly stamped and executed
by transferor and transferee. The share transfer form should be in form no. 7B
(see at the end of this module) and must be accompanied by the relevant share
certificates. However in the case of shares, which are transferred through a
depository, neither the approval of the company would be necessary nor the
instrument of transfer will be required.
b. Stamping of presentation date: The instrument of transfer should be presented to
the Registrar of Companies or the prescribed authority before it is signed by the
transferor and transferee who shall stamp or otherwise endorse the instrument
with the date on which it is presented.
c. Submission of transfer form: The instrument of transfer together with the related
share certificate should be submitted by the transferor or transferee to the company
or the share transfer agent.
The duly filled transfer form should be submitted:
- in case of listed companies within 12 months of the presentation date or
before the closure of register of members, whichever is later,
- In any other case, within 2 months from the date of such presentation.
d. Verification and scrutiny of transfer form: The share transfer form will be checked
and verified. The specimen signature will be tallied. The guidelines of Stock
Exchange and SEBI will have to be followed for scrutinizing the share transfer
form.
e. Intimation to transferor/ transferee: In the case of partly paid up shares, intimation
should be sent to the transferee especially when the transfer deed is submitted by
the transferor. In case no objection is received from the transferee within 2 weeks,
the company may proceed to register the transfer. It is customary to send intimation
to the transferor if the documents are lodged by the transferee.
f. Board resolution: A board resolution should be passed for approving the transfer
of shares and authorising issue of share certificates to the transferees.
g. Endorsement and entry in register of members: At the back of the share certificate
endorsement will be made and the name of transferee will be entered in the
register of members.
TRANSFER OF SHARES AND THE DEPOSITORY SYSTEMS
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h. Delivery of share certificates to the transferee: The share certificates after
endorsement will be delivered to the transferee within 2 months of lodgement of
transfer. In the case of listed company, share transfers should be effected within
1 month of lodgement of transfer deeds.
The various steps involved in the transfer of shares is described below:
Share Transfer Procedure
Fill up the share transfer form
Obtain prescribed share transfer form (Form No. 7B) with the presentation date
Get the deed signed by transferor and transferee, duly witnessed and attested
Attach the share certificate with the deed and affix share transfer stamps and
cancel it
Deliver the deed and the certificate to the company with an application for
transfer within the prescribed time
The company gives notice to the transferee in the case of partly paid up shares
The company board considers the application and orders for, or refuses,
registration
If transfer is refused, the company notifies the transferor and the transferee,
Returns the documents
When transfer is in order, the transferee is registered as member and the share
certificate is sent to him after endorsement of title
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Certification of Transfer
U/s 108, transfer of shares shall not be registered unless the transfer deed is
accompanied with share certificate. However, sometimes attaching the original certificate
may not be possible e.g. in cases where the shareholder want to sell only part of his
holding or wishes to sell them to two or more persons. In such cases, the member can
submit original shares to the company. The company will make endorsement on the
transfer form itself that the original share certificate has been lodged with the company,
specifying the number of shares. This is called certification of transfer.
The Company will issue balance ticket for remaining shares. The person can sell
the shares on the basis of endorsement made by the company and get balance share
certificates on submitting the balance ticket.
A who holds one share certificate of 1000 equity shares in a company wants to
transfer 300 shares in favour of B. Explain the procedure to be followed for
executing the partial transfer under the provisions of the Companies Act, 1956. .. ..
Ans: Ans: Ans: Ans: Ans: A is required to get the instrument of transfer certified for 300 shares and
obtain a balance ticker for the rest 700 shares.
8.3 When can the Company refuse transfer of shares?
A) In case of private company (Sec. 111)
A private company prescribes restrictions on transfer of shares in its Articles of
Association. A private company can refuse transfer of shares in the interest of the
company and only on bonafide grounds (Bajaj Auto ltd. v. CLB AIR 1999 SC 345)
Board resolution and notice of refusal. In case a private company refuses to register
a transfer, it shall within two months from the date of the lodgement of transfer, send
notice of refusal to the transferee and the transferor, giving REASONS for such refusal.
A board resolution should be passed for refusing to transfer the shares.
Appeal Against Refusal To Register Transfer.
First Remedy - Appeal to CLB/ NCLT In case the company refuses to register a
transfer, an appeal may be made to the CLB / National Company Law Tribunal within
two months of the receipt of notice of refusal and where no notice is received, within
four months from the date the instrument of transfer was delivered to the company. Sec.
111(2),(3).
Second Remedy - Appeal for Rectification of register of members. [Sec. 111(4)].
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If a persons name appears in the register of members, he is presumed to be the
member of the company even though in fact he is not so. It is the duty of the company
to maintain the register of members accurately and updated regularly. If the company
does not do so, the aggrieved shareholder can appeal for rectification of register of
members to the Company Law Board. Right to appeal u/s 111 extends to wrong entries
made in the register of members as well as refusal to register transfer of shares.
Grounds for rectification of register of members: An aggrieved person may apply to
CLB for rectification of register of members under two situations.
(a) If the name of any person -
i) is, without sufficient cause, entered in the register of members of a company
(thus rectification has been ordered on this ground where a person was
induced to become a member by mis-leading prospectus, where allotment
was invalid or where a forged transfer has been registered), or
ii) after having been entered in the register, is without sufficient cause omitted
therefrom; or
(b) If default is made, or unnecessary delay takes place, in entering in the register the
fact of any person having become, or ceased to be, a member.
Appeal against refusal of transfer u/s 111(2) and application for rectification u/s
111(4) has to be by way of petition in writing and shall be accompanied by such
fee as may be prescribed.
Powers of CLB: The CLB/NCLT after such inquiry as it thinks fit may either dismiss
the appeal or reject the application or by an order
i) direct the registration of transfer or transmission within 10 days of receipt of
order, or
ii) direct rectification of the register and also direct the company to pay damages,
if any sustained by the aggrieved party.
It is also empowered to pass interim orders or grant injunction regarding dividend /
bonus shares / right shares and award of costs.
Penalty: If the default is made in giving effect to orders of CLB (later it will be NCLT),
company as well as every officer who is in default is punishable with fine up to Rs.
10,000 plus Rs. 1,000 for every day after the first day till default continues [sec. 111(9)].
When a company does not intimate refusal of transfer or transmission within two months,
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there is a general penalty of Rs. 500 for every day of default for violation of any provision
of sec 111.
B) In case of a public company listed or unlisted (Sec. 111A)
Shares of public company are freely transferable. The Board of Directors of such
company does not have any discretion to refuse or withhold transfer of any security. The
transfer is immediate and automatic when the shares are in the demat form in a
depository.
Appeal to CLB/NCL Appeal to CLB/NCL Appeal to CLB/NCL Appeal to CLB/NCL Appeal to CLB/NCLT(Sec 111A (2)) T(Sec 111A (2)) T(Sec 111A (2)) T(Sec 111A (2)) T(Sec 111A (2)) If the Company refuses to transfer the shares
within two months from the date of lodgement of shares without sufficient cause, without sufficient cause, without sufficient cause, without sufficient cause, without sufficient cause,
an aggrieved transferee may seek remedy by filing an appeal before CLB /National
Company Law Tribunal. The CLB / Tribunal are empowered to issue directions to
the concerned company to register the said transfer of shares.
R RR RRectification of register of members ectification of register of members ectification of register of members ectification of register of members ectification of register of members The rectification of register of members or
record of depository can be done if the transfer is made in contravention of any of
the provisions of the SEBI Act, 1992, Sick Industrial Companies Act, 1985 or any
other law. Thus, these three grounds would be the only sufficient cause for refusal
to register of shares within the meaning of sec.111A (3). The expression any
other law would certainly include non-compliance with the provisions of sec.108
or sec 108A to 108I (restriction on transfer of shares on or by a dominant
undertaking). For rectification of register of members, an application should be
made by an aggrieved depository, company, investor or depository participant or
SEBI to the CLB/ National Company Law Tribunal.
The application should be moved within two months of the transfer. . . . . After
inquiry, if the CLB/NCLT is satisfied of the contravention, it can direct the
company/depository to rectify ownership records of securities. However, before
completion of enquiry, the CLB/NCLT can suspend voting rights in respect of
securities so transferred.
Right of transferees pending registration of transfer [Sec 206A.]: Sometimes, during
the intervening period of registration of transfer, the company may declare dividend or
issue rights shares or bonus shares. In order to protect the interest of transferees in such
a situation, section 206A was added by Amendment Act of 1988.This section provides
that in such cases the right to dividend, rights shares or bonus shares shall be kept in
abeyance till the company gets a clear mandate in that regard from the transferor in
writing.
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8.4 Forged Transfer and Blank Transfer
F FF FForged transfer orged transfer orged transfer orged transfer orged transfer does not confer any title. In case of forged transfer, the signature of
the transferor is forged.
Effect
Forged transfer is nullity at law. No title can pass on basis of forged document. It
is not defect in title but complete absence of title.
When the company transfer shares on the basis of forged share transfer form, the
transferee will not get any title to the shares. The original member will continue to
have all the ownership rights.
According to section 84(1) of the Companies Act, a share certificate specifying
any shares held by any member is prima facie evidence of the title of the member
to such shares. If the company has issued a share certificate to the transferee and
he has sold the shares to an innocent purchaser, the company cannot deny his
title, for the certificate stops it from doing so. Therefore, the innocent purchaser is
entitled to compensation from the company if it refuses to register him as a
shareholder (Balkis Consolidated Co. v. Tamkinson 1893 AC 396).
If the company has been put to loss by reason of forged transfer, it may recover
compensation from the person who lodged it. (Sheffield Corporation v. Barclay,
1905 AC 392)
Blank transfer: Blank transfer: Blank transfer: Blank transfer: Blank transfer: Where a share holder signs a share transfer form without filling in
the name of the transferee and hands it over along with the share certificate to the
transferee thereby enabling him to deal with the shares, he is said to have made a
blank transfer.
Ills of blank transfer - Loss of stamp duty
- Loss of Income-tax.
Restrictions on blank transfer - Sec. 108(1A), (1B)
a) Share transfer form to be presented to prescribed authority for stamping the date
thereon.
b) The duly filled transfer form should be sent for transfer within 12 months of the
presentation date or before the closure of register of members, whichever is later,
in case of listed shares. In any other case, within 2 months from the date of such
presentation.
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8.5 Transmission of Shares
Transmission of shares may be referred to as the involuntary transfer of shares by
operation of law. It takes place in the event of death or insolvency of a shareholder or
if a shareholder is a company it goes into liquidation. The Supreme Court in Worldwide
Agencies v. Margarate T Desor AIR 1990 SC 607(SC) held that, transmission on death
of last holder of shares is by operation of law. It is instantaneous transfer of ownership
to the legal heirs from moment of death. A simple letter of request accompanied by
proof of succession entitles the legal representative for registration of the same in his
name. No stamp duty is accordingly payable on transmission.
The following are the main points of difference between the transfer of shares and
transmission of shares:
i) Nature of Act: Nature of Act: Nature of Act: Nature of Act: Nature of Act: Transfer of shares is the effect of deliberate voluntary act of the
parties; while transmission of shares is the result of operation of law on the
happening of some relevant event such as the death of the shareholder, insolvency
or lunacy of a shareholder or purchase in a court sale.
ii) Consideration: Consideration: Consideration: Consideration: Consideration: There must be some consideration for the transfer of shares in all
cases except where the shares are transferred by way of gift, whereas the question
of consideration does not arise in cases of transmission of shares.
iii) Instrument of transfer: Instrument of transfer: Instrument of transfer: Instrument of transfer: Instrument of transfer: A validly executed instrument of transfer is required in the
case of transfer of shares, but for the purposes of transmission of shares, execution
of any instrument of transfer is not required and only a written request to that
effect is sufficient. However, evidence showing the entitlement of the transferee
(e.g., legal representative) may be required by the company such as succession
certificate etc.
iv) Stamp Duty: Stamp Duty: Stamp Duty: Stamp Duty: Stamp Duty: In case of transfer stamp duty is payable on the amount of the
market value of shares; while no stamp duty is payable in case of transmission of
shares.
v) T TT TTransfer during L ransfer during L ransfer during L ransfer during L ransfer during Lock ock ock ock ock-in period: -in period: -in period: -in period: -in period: Transfer during lock-in period is not permissible.
Transmission of shares is allowed even if shares are under lock-in period.
vi) Liabilities: Liabilities: Liabilities: Liabilities: Liabilities: In case of transfer, transferee does not get liabilities of transferor, except
in case of amount payable on partly paid-up shares. In case of transmission,
transferee gets all liabilities and rights of original owner.
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8.6 The System of Depositories
A. What is a Depository?
The system of depositories has revolutionized stock markets. The most single
important development in the Indian Capital Market in the last decade is the emergence
of the Depositories System. A depository is a company where securities of investors are
held in electronic accounts. Just as the banks holds money, in the same way a depository
holds securities. A depository in India, must have a networth of 100 crores and must
obtain a certificate of commencement of business from SEBI.
Depository Depository Depository Depository Depository vs vs vs vs vs Bank Bank Bank Bank Bank A depository is similar to a bank. Just as you leave money in
banks rather than holding it in cash, you leave shares in the depository instead of
holding them in physical form. As proof of you holdings, you get a statement from
the depository, just as you get a statement from a bank giving you the balance in
your account. For withdrawing cash from bank you issue a cheque. In the depository
when you sell the shares you have to issue a debit instruction for delivery of
securities from your account. Similarly to receive securities into your account, you
have to issue a credit instruction similar to a pay -in-slip used for crediting money
to your bank account. The depository thus is to shares what a bank is to money.
Depository Depository Depository Depository Depository Bank Bank Bank Bank Bank
- Holds securities in Accounts - Holds funds in Accounts
- Transfers securities between Accounts - Transfers funds between Accounts
- Transfers without handling securities - Transfers without handling money
- Safe keeping of securities - Safe Keeping of money
National Securities Depository Limited (NSDL) is the first depository in India, which
commenced its operation in November, 1996. It was setup at the initiative of
NSE, IDBI and other financial institutions. The Central Depository Services Limited
(CDSL) is the second depository set-up in March 99. It has been promoted by
BSE, Bank of India, Bank of Baroda, SBI and HDFC Bank.
Constituents : Constituents : Constituents : Constituents : Constituents : There are four constituents in the depositories system:
a) The depository
b) The depository participants
c) The beneficial owner
d) The issuer
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a) The depository: The depository holds the securities of the investors in the form of
electronic book entries (dematerialised form). It maintains ownership records of
securities and effects transfer ownership through book entry.
b) The depository participant: The depository cannot deal with millions of investors
directly. It appoints agents called depository participants who open and maintain
accounts. It is similar to the branch of a bank. You can open account in any
branch of a bank.
c) Beneficial owner: By fiction of law, the depository is registered owner of the securities
held with it with the limited purpose of effecting transfer of ownership at the
behest of the owner. The name of the depository appears in the records of the
issuer as registered owner of securities. The name of actual owner appears in the
records of the depository as beneficial owner. The beneficial owner has all the
rights and liabilities associated with the securities. The owner of securities intending
to avail of depository services opens an account with a depository through a
depository participant (DP). The securities are transferred from one account to
another through book entry only on the instructions of the beneficial owner.
d) The issuer: It is the company which issues the security.
Models of depository: Models of depository: Models of depository: Models of depository: Models of depository: There are two models of depository Immobilisation and
dematerialisation. In the immobilization model, physical scrips are held in the
depository vaults, supporting the book entry records kept on the computer. It
means storage of scrips in the vaults of the depository so that the physical movement
of scrips is frozen. In contrast, in dematerialisation, there is no physical scrip in
existence and the scrips are held in dematerialised form (electronic form). India
has adopted dematerialisation model of depository system.
Structure/Design of Depository
Depository Issuer /R&T Agent
Clearing Corporation
Clearing Member
Depository Participant
Stock Exchange
Trading Member
Investor
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B. Why Depository?
The depository system was introduced to eliminate the ills associated with paper
based securities system such as delay in transfer, bad delivery, theft, fake and forge
shares etc. Before the introduction of the depository system the following problems
were faced by the investors and the companies:
- Forged and fake share certificates
- Bad deliveries
- Loss of certificates in transit
- Mutilation of certificates
- Delays in transfer
- Long settlement cycles
- Mismatch of signatures
- Delay in refund and remission of dividend interest etc.
Benefits of a depository:
- Eliminates bad deliveries
- Improves Liquidity:- Immediate transfer of shares
- Low cost of public Issue
- No stamp duty in case of transfer within the depository.
- Eliminates the scope of theft, forgery etc. risks associated with physical form.
- Entitles the transferee to all rights immediately and settlement of transaction.
- Reduction in handling large volumes of paper
- Reduction in transaction cost
- Convenient method of consolidation of folios/accounts
- Holding investments in equity, debt instruments and Government securities in a
single account
C. Key concepts of depository :
Depository facilitates paperless trading and electronic book entry transfer of securities.
The following are its key concepts :
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- Principle of FREE TRANSFERABILITY of shares.
- Concept of FUNGIBILITY of shares
- Concept of DEMATERIALISATION
- Concept of REMATERIALISATION
- Demat or Dematerialisation: Demat or Dematerialisation: Demat or Dematerialisation: Demat or Dematerialisation: Demat or Dematerialisation: is the process of transferring physical scrips into
computerised ledger A/c maintained by Depository. Demat securities are in fungible
form i.e. they do not carry distinctive numbers.
1 In dematerialisation process, investor surrenders defaced certificates along with
Dematerialisation Request Form to the depository participant.
2 Depository participant intimates NSDL of the request through the system.
3 Depository participant submits the certificates to the registrar.
4 Registrar confirms the dematerialisation request from NSDL.
5 After dematerialising certificates, registrar updates accounts and informs NSDL of
the completion of dematerialisation.
6 NSDL updates its accounts and informs the depository participant.
7 Depository participant updates its accounts and informs investor.
F FF FFungible Shares: ungible Shares: ungible Shares: ungible Shares: ungible Shares: Under a depository, shares do not have distinctive numbers,
this means that shares, like currency are fungible meaning exchangeable for
any other. Share certificates shall become interchangeable. In case the
investors want to convert dematerialized shares in to physical shares, will not
get the same share certificates bearing same distinctive numbers which they
surrendered at the time of entry into depository.
Dematerialisation Process
NSDL Depository Participant
Registrar
Investor
3
6
4
1
5
2
7
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R RR RRematerialisation: ematerialisation: ematerialisation: ematerialisation: ematerialisation: The conversion of dematerialised holdings back into
certificates is called rematerialisation. If the investor wishes to get back his
securities in physical form, all he has to do is to request his depository
participant for rematerialisation of the same by filing up Rematerialisation
Request Form. Depository Participant will then forward the request to the
depository after verifying that the investor has necessary balances. Depository,
in turn will intimate the registrar who will print the certificates and dispatch
the same to the investor. The entire process of rematerialisation usually takes
a maximum of 30 days.
D. Facilities offered by Depository
F FF FFunctions: unctions: unctions: unctions: unctions: The functions of depository include account opening, dematerialisation,
rematerialisation, settlement and clearing, pledge and hypothecation etc. Depository
participant is the key player in the system who acts as an agent of the depository and is
in fact the customer interface of depository. It opens the accounts of the investors,
facilities dematerialisation, settles trades and effects corporate actions.
Depository also provides electronic credit in new issued wherein investor opens an
account with the depository participant, submits application with depository giving DP-
Id and client-Id, the registrar uploads list of allottees to the depository and depository
credits allottee account with depository participant (DP). The refunds, if any, are sent by
registrar as usual in any public issue. The following facilities are offered by a depository:
Dematerialisation i.e., converting physical certificates to electronic form;
Rematerialisation i.e., conversion of securities in demat form into physical
certificates;
Facilitating repurchase/redemption of units of mutual funds;
Electronic settlement of trades in stock exchanges connected to depository;
Pledging/hypothecation of dematerialised securities against loan;
Electronic credit of securities allotted in public issued, rights issue;
Receipt of non-cash corporate benefits such as bonus, in electronic form;
Freezing of demat accounts, so that the debits from the account are not permitted;
Nomination facility for demat accounts;
Services related to change of address;
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Effecting transmission of securities;
Instructions to your DP over Internet through SPEED-e facility.
Account monitoring facility over Internet for clearing members through SPEED
facility;
Other facilities viz. holding debt instruments in the same account, availing stock
lending/borrowing facility etc.
E. Legal Framework
Government of India promulgated the Depositories Ordinance Act in September,
1995, which was later enacted as Depositories Act of 1996. the legal framework for
depositories has been laid down by this Act and is regulated by SEBI. The depositories
in India are regulated by the following Acts:
- The Companies Act, 1956;
- The Depositories Act, 1996;
- The SEBI (Depositories and Participants) Regulations, 1996.
- Bye-laws of Depository;
- Business Rules of Depository
The other Acts are:
- The Indian Stamp Act, 1899;
- Securities and Exchange Board of India act, 1992;
- Securities Contracts (Regulation) Act, 1956;
- Benami Transaction (Prohibition) Act, 1988;
- Income-tax Act, 1961;
- Bankers Book Evidence Act, 1891.
The Depositories Act, 1996, provides for a legal framework for the establishment,
functioning and dealing in securities. However, the Act allows only securities of companies
to be dealt in depository mode.
SEBI (Depositories and Participants) Regulations, 1996, provides for the regulations
for depositories.
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F. How to trade in electronic shares?
Buying and selling shares in the electronic form is just like buying and selling physical
shares, the only difference is trading in securities in the electronic form is simpler and
safer.
If investor wish to sell his shares, he places an order with his broker and instruct his
depository participant by way of a delivery instruction (which is a cheque like instrument)
to debit his account with the number of shares sold by him.
When he buys shares he must inform his broker about his depository account number
so that the shares bought by him are credited into his account and instruct his participant
by way of Receipt instruction to receive credit in his account.
Payment for electronic shares either bought or sold is made in the same way as in
the case of physical securities. The shares thus bought are transferred in the investors
name the very next day of pay out. No formalities of filling transfer deeds, affixing share
transfer stamps and applying to the company for registering the shares in investors
name are required to be observed as in case of physical transfer of securities.
Performance of dematerialisation
Dematerialisation of shares has been becoming popular with the investors as well
as the companies as technological progress has become part of stock market in India.
All the scrips in the stock market are being traded in dematerialized form. The depository
services were available in almost all major cities in the country.
Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Initial offer to be in demat form in certain cases (Section 68B) Section 68B provides
that every listed public company, making initial public offer of any security for a sum of
rupees ten crores or more, shall issue the same only in dematerialised form by complying
with the requisite provisions of the Depositories Act, 1996 (22 of 1996) and the
regulations made thereunder.
Days to come:
The details of some forthcoming things to come are given below :
- Securities to be mandatorily dealt in electronic form
- Public issue only in demat form
- Dividend distribution
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- Securities lending and borrowing
- Increased participation by international investors.
- Faster settlement cycle rolling settlement.
G. Effects of Depository System or Dematerialization of Shares
Sec. 83 Sec. 83 Sec. 83 Sec. 83 Sec. 83 Shares shall cease to have distinctive numbers.
Sec. 41 Sec. 41 Sec. 41 Sec. 41 Sec. 41 The beneficial owner specified in the register maintained by
the depository shall be deemed to be the member of the
company.
Se. 152 A Se. 152 A Se. 152 A Se. 152 A Se. 152 A The register and index of beneficial owners maintained by the
depository shall be deemed to be the register and index of
membersand debenture holders.
Sec. 113 Sec. 113 Sec. 113 Sec. 113 Sec. 113 No share certificate shall be issued to the shareholder when
shares are issued in dematerialized form. Also, where shares
are transferred in dematerialized form, thetransferee shall
not be issued a share certificate.
However, where the shares are required to be issued in
dematerialized form, the companyshall immediately, after
allotment, intimate the details of allotment to the
depository.
Sec.108 Sec.108 Sec.108 Sec.108 Sec.108 The provisions relating to production of transfer deed along
with share certificate for effecting the transfer of shares shall
not apply where the shares are held in dematerialized from.
In other words, no transfer deed is required to be executed
where shares are held in depository system.
8.7 Restrictions on Transfer in case of Dominant Undertaking (section 108A
108 I)
The object of these provisions is to prevent concentration of economic power and
acquisition of controlling interest in public company or a private company which is a
subsidiary of a public company.
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R RR RRestriction on transfer in case of dominant undertaking estriction on transfer in case of dominant undertaking estriction on transfer in case of dominant undertaking estriction on transfer in case of dominant undertaking estriction on transfer in case of dominant undertaking As per sec. 108G of
Companies Act there are restrictions on transfer in following cases-
(a) If a group or bodies corporate under same management taken together are
dominant undertaking in a particular goods or services and its share in market
of the goods or services will increase by acquisition of shares acquisition of shares acquisition of shares acquisition of shares acquisition of shares in other company.
(b) If the group or bodies corporate taken together will become dominant undertaking
if they acquire shares acquire shares acquire shares acquire shares acquire shares in another company.
(c) If the group or body corporate under same management are already a dominant
undertaking and it wants to transfer to transfer to transfer to transfer to transfer its shares.
Meaning of Dominant undertaking Meaning of Dominant undertaking Meaning of Dominant undertaking Meaning of Dominant undertaking Meaning of Dominant undertaking As per section 2(d) of MRTP Act, Dominant
undertaking means an undertaking, which by itself or with interconnected undertakings
produces, supplies or controls 25% or more goods of any description produced in
India or 25% or more of any services rendered in India. As per sec.108H, definition of
dominant undertaking, group etc. under MRTP Act will apply to sections 108A to
108G.
P PP PPrior approval of Central Government rior approval of Central Government rior approval of Central Government rior approval of Central Government rior approval of Central Government (Sec.108A) (Sec.108A) (Sec.108A) (Sec.108A) (Sec.108A) This section applies only where
the acquirer (or transferor of shares) is the owner of a dominant undertaking and as a
result of transfer, its dominance is increased. Prior approval of Central Government is
required where any individual, firm, body corporate, group, constituent of a group or
bodies corporate under the same management jointly or severally, acquire more than acquire more than acquire more than acquire more than acquire more than
25% of the paid-up equity share capital 25% of the paid-up equity share capital 25% of the paid-up equity share capital 25% of the paid-up equity share capital 25% of the paid-up equity share capital of a public company or a private company
which is a subsidiary of a public company.
No approval is required for acquisition of preference shares or equity shares of a
private company. Similarly, no approval will be required if they do not in the aggregate,
along with the existing holding if any exceed 25% of its paid up share capital. Where
the present holding and the intended acquisition put together would exceed the prescribed
limit of 25%, approval of Central government would become necessary.
Intimation to Central Government if proposed transfer will exceed 10% of holdings Intimation to Central Government if proposed transfer will exceed 10% of holdings Intimation to Central Government if proposed transfer will exceed 10% of holdings Intimation to Central Government if proposed transfer will exceed 10% of holdings Intimation to Central Government if proposed transfer will exceed 10% of holdings
(108B) (108B) (108B) (108B) (108B) Every body corporate or bodies corporate under the same management
holding 10% or more of the subscribed equity capital, whether singly or together of any
company shall intimate to the Central Government of any proposal for transfer of such
shares.
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If the Central Government is of the opinion that there is likely to be change in
management of the dominant undertaking due to such transfer and such interest is
prejudicial to the interests of the company or to public interest, the Central Government
may by order that no such shares shall be transferred to the proposed transferees. In
case of industry specified in schedule XV, Central Government can order that such
shares should be transferred to Central Government or a corporation named by Central
Government. Such acquisition will be at prevalent market value (sec. 108B). [Industries
covered in schedule XV are - Arms and Ammunition and allied defense equipment,
Atomic Energy, Minerals specified in Schedule to Atomic Energy (Conditions of Production
and Use) Order, 1953 and Railway transport.]
T TT TTransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company ransfer in case of dominant undertaking in foreign company (108C) (108C) (108C) (108C) (108C) If a group
or bodies corporate under same management is a dominant undertaking and if it
holds more than 10% shares in a foreign company having established business in
India, shares in such foreign company cannot be transferred to any citizen in India or
body corporate in India without approval of Central Government. The approval can be
refused only if Central Government is of the opinion that such transfer is prejudicial to
the public interest (sec 108C). Application for approval should be made in Form 7E.
P PP PPower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer ower of Central Government to direct companies not to give effect to transfer
Central Government can order that a transfer should not be given effect, if after such
proposed transfer, the controlling interest in the dominant undertaking is likely to change.
Such order can be made only if the Central Government is of the opinion that such
transfer is prejudicial to the interest of company or prejudicial to the public interest. If
transfer is already taken place, Central Government can order that the shares should
be re-transferred to the person who had sold them and the person shall refund the
amount which was received by him on sale (sec108D). If the permission of Central
Government is not refused within 60 days, the permission is deemed to have been
granted (sec 108E).
R RR RRestriction not applicable to corporate bodied controlled by Central Government estriction not applicable to corporate bodied controlled by Central Government estriction not applicable to corporate bodied controlled by Central Government estriction not applicable to corporate bodied controlled by Central Government estriction not applicable to corporate bodied controlled by Central Government
The restrictions are not applicable to transfer to or by Central Government, any
Corporation established under any Central Act or any financial institution (sec 108F).
However, it has been clarified that the Government Company or the said institutions
shall not transfer any shares unless the acquirer has obtained pervious approval of the
Central Government.
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P PP PPenalty for violation enalty for violation enalty for violation enalty for violation enalty for violation Violation of these provisions is punishable with fine upto
Rs.50, 000 and even imprisonment in some cases, as prescribed under section 108-I.
If transfer is against these provisions, transfer can be denied.
8.8 Nomination of Shares /Debentures/Deposits (section 109A, 109B)
Earlier, there was no provision for making nomination by the holders of shares/
debentures/ deposits. In the event of death of a shareholder/ debenture holder/ deposit
holder, the formalities of transmission had to be completed by producing succession
certificate, letter of probate, affidavit, indemnity bond, etc. To simplify this time consuming
process, sections109A, 109B introduced nomination facility Provisions in respect of
nomination are as follows:
1. For what can nomination be made?
Nomination can be made for:
(i) shares
(ii) debentures and
(iii) fixed deposits
2. Who can make nominations?
Nomination can be made by-
i) Individuals only applying or holding shares or debentures on their own behalf,
either singly or jointly, and
ii) If the shares are held jointly, all joint holders should sign the nomination form. (In
the amended form, space has been provided as a specimen, if there are more
joint holders, more sheets can be added for signatures of holders of shares or
debentures and witness. In the earlier form there was space for only 2 names
which meant that 3 joint holders were not allowed to nominate. This is a welcome
step).
iii) A minor can be nominated by a holder of shares or debentures or deposits and in
that event the name and address of the guardian should be given by the holder.
(If nominee is minor, the holders of shares / debentures can appoint a person
who will be entitled to hold shares/ debentures in the event of death, during
minority).
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iv) A non-resident Indian can be nominated on repatriable basis
The nomination, as aforesaid, will hold good against any legal successor
(whether by will or status).
The nomination overrides any provision in respect of transmission by operation of
law or by will. Thus, if a person has been appointed as nominee, the shares will be
transferred in his/ her name, irrespective of any provision in will or succession certificate
or probate [ section 109A(3)]
Nomination can be varied or cancelled in prescribed manner, but nomination prevails
over any provision of law of succession, will etc.
3. Who cannot be a nominee?
Facility of nomination is available only to individuals i.e. natural persons (who can
die). Nomination by non-individuals like trust, society, body corporate, partnership firm,
karta of HUF or a power of attorney holder is not permissible.
Similarly, the following cannot be a nominee:
(i) trust, (ii) society, (iii) body corporate, (iv) partnership firm, (v) Karta of Hindu
Undivided Family or (vi) a power-of-attorney holder.
4. How to make a nomination
An investor is required to file nomination in duplicate prescribed form no. 2B with
company or registrar and share transfer agents of the company who will return one
copy thereof to the investor. The form should be signed by two witnesses. If nominee is
minor, name and address of guardian shall be given by holder.
If shares/ debentures are held jointly, all joint holders must sign the nomination
form. In case of joint holding, the title passes to the nominee only if all joint holders die.
[if one of the joint holder dies, the shares are transferred in name of surviving joint
holders]
5. Rights of nominee holder
i. The nominee is entitled to all rights of deceased member / debenture holder like
dividend and bonus. However, he will not be eligible for voting rights or other
rights as a member, unless he makes application in writing and is registered as a
member in respect of the shares / debentures.
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ii. If nominee becomes entitled to any shares/ debentures by virtue of nomination,
he will apply to company along with proof of death of holder/ joint holders. He
can either
a. request Board to register himself as the share holder/ debenture holder or
b. transfer the shares / debentures of deceased share/ debenture holder. [section
109B(1)]. Thus, the nominee can either register his name or directly transfer
the debentures/ shares in some others name.
If he elects to be registered holder of shares / debentures, he will have to send a
written notice to the company stating that he elects to be the registered holder. Such
notice should be accompanied by death certificate of share / debenture holder. [section
109B(2)].
Default of the nominee Default of the nominee Default of the nominee Default of the nominee Default of the nominee The nominee must either register himself as member or
transfer the shares/ debentures is some others name. If he does neither, company can
send him a notice to elect either to become a member or transfer the shares/ debentures.
if the nominee does not comply within 90 days, Board can withhold payment of dividends,
bonuses or other money payable, till the requirement of notice is complied with section
109A(4).
6. When does nomination stand rescinded?
Nomination will stand rescinded upon (i) transfer of share or (ii) transfer of debenture
or (iii) repayment of deposits or (iv) renewal of deposits.
7. Valid Discharge by company
Transfer of share or debenture in favour of a nominee and repayment of amount of
deposits to nominee shall be a valid discharge by a company against the legal heir.
QUESTION BANK
I. FAQs
1. What are the rights of the transferees pending registration of shares?
2. What is the validity period of a share transfer deed?
3. State the procedure to be followed for transfer of shares
4. Explain the provisions regarding nomination facility available to shareholders,
depositor, and debenture holders.
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5. Write short notes on blank transfer and forged transfer.
6. What are the remedies against refusal to transfer shares?
7. What is depository? Explain the concept of dematerialization and rematerialisation.
8. How does transfer of shares takes place in case of demat shares.
9. How does the system of depository functions? State the benefits to the company
and the investors.
10. Explain clearly the meaning of transfer and transmission of shares. In what way
done the transfer of shares differ from that of transmission of shares?
11. Distinguish between transfer of shares and transmission of shares. Discuss the
right of aggrieved party against refusal to transfer the shares.
12. Explain clearly the meaning of certification of transfer. What is the effect of a
company refusing to register the transfer of shares?
II. CASE STUDIES
1. Hero Cycles Ltd. has received an application for transfer of 1,000 equity shares
of Rs. 10 each fully paid up in favour of Mr. Balak. On scrutiny of the application
form it was found that the applicant in minor. Advise the company regarding the
contractual liability of a minor and whether shares can be allotted to Mr. Balak by
way of transfer.
( (( ((Hints: :: :: Minor can be admitted as a member only when shares are fully paid up.)
2. A commits forgery and thereby obtains a certificate of transfer of shares from a
company and transfers the shares of B for value acting in good faith. Company
refuses to transfer the shares to B whether the company can refuse? Decide the
liability of A and of the company towards B.
(Hints: The company must restore the shares to the original owner restore the shares to the original owner restore the shares to the original owner restore the shares to the original owner restore the shares to the original owner. .. ..The bonafide
buyer is entitled to get compensation from company on basis of principle of
estoppel.Company can claim compensation from person to lodged forged
document.)
3. The Board of directors of X Co. Ltd. have refused transfer of shares in favour of S
on the ground that if the shares were transferred it would be difficult to pass any
special resolution (which requires 3/4 majority) without Ss consent. Advice S.
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(Hints: S should appeal to the court as the directors have no right to refuse transfer
of shares on this ground, as it is not a legitimate reason. Passing of special resolution
is needed for limited purpose and is not a matter of daily routine administrative
nature. As such, the directors in such situation are acting with an oblique motive
and also on wrong footings. A similar view was expressed by the Supreme Court
in Bajaj Auto Ltd v Flrodia (1970) 2 SCC 550.)
4. A private company refused transfer of shares lodged by Mr. X. State the provisions
of the Companies Act, 1956 regarding the ground for refusal of transfer.
(Hints: Refusal of transfer by unlisted or private companies : In case of unlisted or
private companies the Board of directors of the company has the powers in terms
of the provisions of the Articles of the company to refuse transfer of any shares if
the power of the Board is exercised bona fide and in the interest of the company.
In Bajaj Auto Ltd v N.K. Florida (1970) 2 SCC 550 it was held by the Supreme
Court that even the Articles give the Board absolute power to refuse transfer of
shares, they must act bona fide in the interest of the company and for general
interest of the shareholders as they are in a fiduciary position towards the company
and the shareholders)
5. Mr. KK purchased some shares from Mr. YK and delivered the same to the company
on 23 July. The company neither registered the shares nor informed the transferee
refusing the transfer of the shares. Mr. KK filed an appeal under section 111 of
the Companies Act, 1956 to the CLB on 22 December. Advise Mr. KK.
(Hints: According to section 111(3) of the Companies Act, 1956 an appeal against
refusal of transfer of shares shall be made to the CLB within 2 months from the
date of receipt of the notice of refusal or within 4 months from the date lodgment
of the shares if no notice of refusal is received. In this case the transfer was delivered
to the company on 23 July and therefore appeal to the CLB should have to be
made on or before 22 November. Therefore the appeal made by Mr. K is time
barred and not valid.)
6. Mr. Ps who has 200 shares registered in his name in a company died. His executors
applied to the company to have the shares registered in their name. The Articles
of the company provides that the directors may at any time in their absolute and
uncontrolled discretion refuse to register any transfer of shares. The directors of
the company refused to register the shares in the name of the executors under the
said provisions of the Articles. Advise the executors.
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(Hints: The executors may apply to the court for an order for registration of the
shares in their favour. On the death of the shareholders the shares are transferred
to the executors by operation of law which is called transmission of shares and not
transfer of shares. In Indian Chemical Products Ltd v State of Orissa (1966) 2
Comp LJ 63 it was held that the directors cannot refuse transmission of shares for
they have no right to interfere with the course of law)
7. Mr. B applied for 100 shares in a company but no allotment was made to him.
However, 100 shares were transferred to him by the company and his name was
registered in the register of members. Mr. B did not take any steps to ratify it. The
company was wound up. Is Mr. B liable to the company?
(Hints: Yes. Section 111 of the Companies Act, 1956 provides for rectification of
the register of members. When a person knows that his name is registered in the
register of members and he allows it to be so registered, he has fallen to the
doctrine of holding out and becomes a shareholder. He has also lost his rights to
have his name removed from the register of members)
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CHAPTER - IX
MEMBERSHIP
9.1 Definition of a member
9.2 Member v. Shareholder
9.3 Modes of acquiring membership
9.4 Who may become a member?
9.5 Termination of membership
9.6 Rights of a member
9.7 Liabilities and duties of a member
9.8 Variation of the rights of a member
9.1 Definition of a member
A company is an artificial person and has a separate personality
distinct from its members; even then it is composed of members.
Section 41 of the Companies Act defines a member in the following
words:
1. The subscribers of the Memorandum of a company shall be
deemed to have agreed to become members of the company,
and on its registration, shall be entered as members in its register
of members.
2. Every other person who agrees in writing to become a member of
a company and whose name is entered in its register of members,
shall be a member of the company.
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3. Every person holding equity share capital of a company and whose name is
entered as beneficial owner in the records of the depository shall be deemed to
be a member of the concerned company.
On this basis, apart from signing of the memorandum two pre-requisites for a
person to become a member of a company are:
i) the agreement in writing to take shares of the company; and
ii) the registration of his name in its register of members.
Besides, a person may also become a member of a company through the depository
system.
9.2 Member v. Shareholder
In the case of a company, limited by shares, the persons whose names are put on
the Register of members, are the members of the company. They may also be called
shareholders of the company as they have been allotted shares and are holding them
in their own right. In such a situation, the terms member and shareholder are
interchangeably used to mean the same person.
However, a distinction is made between a member and a shareholder in the following
cases:
a. A person who is holding a share warrant is a shareholder but he is not a member
of the company as his name is struck off the Register of members [Section 2(27)
and Section 115].
b. In the case of a company limited by guarantee having no share capital or an
unlimited company having no share capital, there will be only members but no
shareholders.
c. A person who subscribers to the memorandum of association, immediately
becomes the member, even though no shares are allotted to him. Till shares are
allotted to the subscriber, he is a member but not the shareholder of the company.
d. Technically a person whose name is not entered in the Register of members is
generally not regarded as a member. Thus, there may be situation where a person
is the holder of shares but his name is not entered in the Register of members yet
or vice versa.
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Thus in the case of transfer of shares where the transferor has delivered the
shares to the transferee for consideration, the transferee shall merely be a
shareholder but not the member of the company till his name is entered in
the Register of members.
Likewise, in the event of death of a member, the deceased will continue to
remain the member of the company though, quite naturally he cannot be
the shareholder. The legal heir will be the shareholder but not the member
till his name is entered in the Register of member.
When a shareholder S becomes insolvent and his property, including shares,
vests in the Official receiver or Official Assignee. The Official Receiver or
Assignee is holding the shares in his own right. Therefore, S is no longer the
shareholder, though he continues to be the member of the company.
9.3 Modes of acquiring membership
A person may become a member or a shareholder of a company in any of the
following ways :
1. By subscribing to the memorandum of association. Subscribers to the memorandum
become members, the moment the company is registered, and it is not necessary
that their names must have been entered in the Register of members.
2. By agreement and registration According to sec. 41(2), except in the case of the
subscribers to the Memorandum, to be a member of the company, two conditions
must be satisfied, namely, (i) that there is an agreement in writing to become a
member; and (ii) his name is entered in the Register of members of the company.
Registration of the name of a person as a member of a company may arise:
a) by application and allotment.
b) by transfer - the member may acquire shares from an existing member by
sale, gift or some other transaction.
c) by transmission.
d) by estoppel/holding out - this arises when a person holds himself out as a
member or knowingly allows his name to remain on the register when he has
actually parted with his shares.
e) on conversion of convertible debentures or loans into shares.
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f) on acquisition of shares on take-overs/ merger/ amalgamation through
Courts order.
3. By holding Shares as Beneficial Owner in the Records of a Depository:- Pursuant
to section 41(3) ,a person holding equity share capital of a company whose
name has been entered in the records of the depository shall be deemed to be a
member of the concerned company.
4. By agreeing to purchase qualification shares:- A person who has agreed to purchase
qualification shares from the company is deemed to have become a member
automatically on incorporation of the company. This applies to the directors.
Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. Membership by holding out/ Membership by estoppel. When a person allows his
name to be on the register of members of the company, or holds himself out as a
member, or allows other to believe that he is a member (by attending meetings, by
accepting dividends, etc.), then such a person is deemed to be a member of the company
and he is known as a member by holding out. The rule of estoppel shall apply and such
a person is estopped from denying that he is a member. Such a member shall be liable
as a contributory in the event of winding up, like any other member of the company.
However, he may escape liability by applying for removal of his name under section
111 of the Act.
9.4 Who may become a member?
a) Minor Minor Minor Minor Minor. .. .. A minor can become a member in respect of fully paid shares through
transfer or transmission.
The Company Law Board has laid down in Nandita Jain v. Bennett Coleman & Co.
Ltd. that a minor can become a member provided four conditions are fulfilled:
i. Company must be a company limited by shares.
ii. Shares are fully paid up.
iii. Application for transfer is made on behalf of minor by lawful guardian.
iv. The transfer is manifestly for the benefit of the minor
It has been held in several Court decisions that there is no legal bar to minor
becoming a member of a company by acquiring shares (by way of transfer) provided
the shares are fully paid up and no further obligation or liability is attached to them.
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Minor can become member by transfer or transmission, but a company may not
allow a minor to be a member by allotment.
b) Company Company Company Company Company. .. .. A company being a legal person can become a member of another
company if it is so authorised by its memorandum to purchase or invest in shares.
c) P PP PPartnership firm artnership firm artnership firm artnership firm artnership firm Since a firm is not a legal person, it cannot be registered as a
member of a company. However, partners may hold shares as joint members.
d) F FF FForeigner oreigner oreigner oreigner oreigner A foreigner can become a member subject to the provisions of FEMA
and other legal provisions.
e) Hindu Undivided F Hindu Undivided F Hindu Undivided F Hindu Undivided F Hindu Undivided Family (HUF): amily (HUF): amily (HUF): amily (HUF): amily (HUF): An HUF is not a legal person (though it is a
person under Income Tax Act.), hence, it cannot be a member of a company.
However, an HUF can hold shares in the name of its Karta (i.e. Manager) e.g.
shares cannot be held in the name of V.K.Jain HUF, but shares can be held in the
name of V.K.Jain Karta (V.K.Jain HUF).
f) P PP PPawnee: awnee: awnee: awnee: awnee: A pawnee never had the absolute ownership.A pawnee cannot be treated
as the holder of the shares pledged in his favour.
g) Bankrupt. Bankrupt. Bankrupt. Bankrupt. Bankrupt. A bankrupt may be a member of a company, as long as he is on the
register of members. He is also entitled to vote. (Morgan v. Gray 1953) Ch. 83.
h) Joint Membership. Joint Membership. Joint Membership. Joint Membership. Joint Membership. Shares may also be held by two or more members jointly.
However listing agreement provides the maximum limit of three members to hold
the shares jointly. All persons comprised in a joint holding will be treated a member
for the purpose ceiling limit of fifty members under section 3(1)(iii).The rights
subjected to the shares can however be exercised by any one of the such members
and usually whose name appears first.
i) R RR RRegistered trust: egistered trust: egistered trust: egistered trust: egistered trust: A trust is a legal obligation annexed to a ownership of property.
A trust is not a legal person. According to section 153 of Companies act a
company cannot take notice of any trust in the register of members or debentures.
A trust cannot be a member. The trustees should take shares in their individual
names(without describing them as trustees.).
9.5 Termination of membership
Membership is terminated when a persons name is removed from the register of
members for some proper reason. This may occur when:
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a) he transfers all of his shares;
b) his shares are forfeited, surrendered or sold to enforce a lien;
c) he holds redeemable preference shares and they are redeemed;
d) he dies and his legal representative transfers the shares or secures their registration
in his own name;
e) his contract to take the shares is rescinded or repudiated;
f) he becomes insolvent and the Official Assignee or Receiver disclaims the shares
or transfers them; &
g) the shares are held by a company in the course of liquidation, and the liquidator
disclaims the shares or transfers them.
h) the company seals his shares in exercise of its rights under the articles of association
of the company.
i) the Court or any other competent authority attaching and selling the share in
satisfaction of a decree or claim.
9.6 Rights of a member
These are as follows:
1) To have the certificate of shares held or the certificate of stock issued to him within
the prescribed time (Section 113).
2) To have his name borne on the register of members.
3) To transfer shares subject to any restrictions imposed by the articles (Section 82).
4) To attend meetings of shareholders, receive proper notice and to vote at the
meetings.
5) To associate in the declaration of dividends and to apply to the Court for an
injunction restraining the directors from paying dividends on an ultra vires
declaration or out of capital.
6) To inspect the registers, indexes, returns and copies of certificates, etc. kept by the
company and to obtain extracts or copy thereof (Section 16).
7) To obtain copies of Memorandum and Articles on request on payment of the
prescribed fees (Section 39).
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8) To have the first option in case of issue of new shares or a further issue of shares
(i.e., the right of pre-emption)) by the company (Section 81).
9) To receive a copy of the statutory report [Section 165(1) & (2)].
10) To apply to the Court to have any variation or abrogation to his rights set aside by
the Court (Section 107).
11) To have notice of any resolution requiring special notice [Section 196(2)].
12) To obtain on request minutes of proceedings at general meeting[Section 196(2)].
13) To remove directors by joining with others (Section 284).
14) To obtain a copy of the profit & loss account and the balance sheet with the
auditors report (Sec 210, 219).
15) To apply for the appointment of one or more competent inspectors by the
Government to investigate into the affairs of the company as well as for reporting
thereon (Section 235, 237)
16) To participate in the appointment of an auditor or auditors at the Annual General
Meeting (Section 224).
17) To inspect the auditors report at the Annual General Meeting of the company
(Section 230).
18) To receive a share in the capital of the company and in the surplus assets, if any,
on the companys liquidation.
19) To participate in passing of the special resolution that the company may be wound
up by the Court or voluntarily [Section 433, 484(a)(b)].
20) To participate in appointment and in fixation of remuneration of one or more
liquidators in the case of a Members Voluntary Winding up and to fill any vacancy
in the office of a liquidator so appointed by him (section 490,492).
9.7 Liabilities and duties of a member
1) To take shares, when they are allotted in due time and in compliance with the
provisions of the Act, unless the refusal to accept the shares has been sent on the
ground of non-compliance with the provisions of the Act as regards the issue of
the prospectus or as regards allotment.
2) To pay for the shares allotted to him when the allotment is made and when calls
have been made validly and in conformity with the provisions of the articles.
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3) To abide by the doing of the majority of members unless the majority acts
vindictively, oppressively, malafide of fraudulently.
4) To contribute to the assets of the company in the case of winding up when the
shares held are partly paid-up.
5) Members are severally liable for debts of the company contracted, where its business
is carried on beyond the expiry of six months from the date at which its membership
is reduced below the legal minimum (i.e., seven members in the case of a public
company and two members in the case of a private company). However, such
members are not liable for debts contracted before the expiry of six months.
(Section 45).
Member vs. Contributory Member vs. Contributory Member vs. Contributory Member vs. Contributory Member vs. Contributory. . . . . In the event of winding-up of a company, since a member
may be called upon to contribute towards the assets of the company, he is accordingly
called a contributory. However, under section 428, the expression contributory includes
the holder of fully paid up shares. Even a past member may be held liable as a list B
contributory in case the winding-up commences within one year of his ceasing to be a
member of the company.
Can a member be expelled? Can a member be expelled? Can a member be expelled? Can a member be expelled? Can a member be expelled? The view expressed by the Courts and the Department
of Company Affairs in this regard is that a company cannot empower itself even by
making a provision in the Articles of association to expel a member
9.8 Variation of shareholders rights (Section 106)
The share in a company may be equity shares and/or preference shares. Usually,
the rights attaching to different classes of shares are different. These are termed as class
rights or special rights of class shares. These rights are given by the memorandum, the
articles, the terms of issue of shares or a special resolution.
According to section 106 for variation of shareholders rights two things should be
noted:
There should be only variation in the rights and rights alone and such variation
should not affect the liability of the member; and
Such variation in right is in respect of share of any class and not to shares of any
kind.
These rights may be varied subject to the fulfilment of the following conditions:
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(1) The holders of atleast 3/4ths of the issued shares of the class whose rights are to
be varied must give their consent in writing or a special resolution must be passed
at a separate meeting of holders of the issued shares of that class.
(2) The Memorandum or the Articles of the company must contain a provision with
respect to such variation.
(3) In the absence of any such provision in the Memorandum or Articles, such variation
must be not be prohibited by the terms of issue of the shares of that class.
Rights of dissenting shareholders
The holders of not less than 10 per cent of the issued shares of a class, who did not
consent to or vote in favour of the resolution for the variation, may apply to the court to
have the variation cancelled, if the same is oppressive or unfairly prejudices their rights.
Where such application is made, the variation shall have affect only if the court
confirms it. Application to the court should be made within 21 days after the variation
of rights was effected. The court if it is satisfied, having regard to all the circumstances
of the case, that the variation would unfairly prejudice the shareholders of the class
represented by the applicants, disallow the variation; and shall if not so satisfied confirm
the variation. The decision of the court on any such application is final.
The company must within 30 days, forward a copy of the order to the Registrar. If
default is made the company and every officer of the company who is in default are
punishable with fine which may extend to Rs. 500. (Section 107).
QUESTION BANK
I. FAQs
1. Distinguish between a shareholder and member of a company.
2. To what extent is it possible for a minor to become a member of a company under
the provisions of the Companies Act, 1956. Explain.
3. Define the term member of a company as laid down under the provisions of the
Companies Act, 1956. State the circumstances under which a member may not
be a shareholder or a shareholder may not be a member.
4. Explain the different ways through which a person may become member of a
company.
MEMBERSHIP
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5. Who is a member of a public limited company? How membership is acquired?
Can a company be member of another company?
6. How is membership of a company terminated? In what respects may a member
be differentiated from a shareholder?
7. State the conditions under which the rights attached to any class of shares can be
varied. Explain the rights of dissenting shareholders in this regard.
8. Comment: Every shareholder of a company is also known as a member, while
every member may not be known as a shareholder.
9. Explain, very briefly, the various ways by which membership of a company may be
acquired.
10. How far can a minor become a member of a company under the Companies Act,
1956?
11. State with reasons whether the following can become member of a company:
a) a minor, b) foreigner, c) a partnership firm, d) a company. e) a HUF
f) a registered trade union
II. CASE STUDIES
1. A company issued 20 partly paid equity shares and registered them in the name
of the minor describing him as minor. The father of the minor signed the application
on the minors behalf. After some time company went into liquidation. The company
filed a suit against father of the minor to recover the remaining amount on the
shares. Whether the company will succeed? Advice. .. ..
( (( ((Hints: : : : : The allotment is void as agreement with minor is void. Hence, neither the
minor nor the guardian will be liable. The facts of case are similar to Palaniappav.
Official Liquidator AIR 1942 Mad 470=12 Comp Cas 89(Mad HC)
2. Mr. B applied for 100 shares in a company but no allotment was made to him.
However, 100 shares were transferred to him by the company and his name was
registered in the register of members. Mr. B did not take any steps to rectify it. The
company was wound up. Is Mr. B liable to the company?
(Hints:Yes. Section 111 of the Companies Act, 1956 provides for rectification of
the register of members. When a person knows that his name is registered in the
register of members and he allows it to be so registered, he comes in the purview
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of doctrine of holding out and becomes a shareholder. He has also lost his rights
to have his name removed from the register of members)
3. Western Cycles Ltd. has received an application for transfer of 1,000 equity shares
of Rs. 10 each fully paid up in favour of Mr. Balak. On scrutiny of the application
form it was found that the applicant in minor. Advise the company regarding the
contractual liability of a minor and whether shares can be allotted to Mr. Balak by
way of transfer.
(Hints:As provided in section 41(2) of the Companies Act, 1956 every person
who agrees in writing to become a member of the company and whose name is
registered in the register of members of the company becomes a member of the
company. Membership of a company creates contractual liability of the members.
As per section 11 of he Indian Contract Act, 1872 a minor is not eligible to enter
into any contract. In terms of the aforesaid provisions the minor is not eligible to
become a member of the company. However it has been held and clarified in
many cases that the liability of the members arises between the member and the
company interse if any amount is lying unpaid on the shares of the company.
In the present case the shares are fully paid up. As such the company may
transfer the shares in favour of Mr. Balak.( Nandita Jain v. Bennett Coleman & Co.
Ltd Appeal no 27 of 1972 dated 17.2.78)
MEMBERSHIP
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CHAPTER - X
BORROWINGS AND DEBENTURES
10.1 Borrowing Powers.
10.2 Meaning of Debentures
10.3 Types of Debentures.
10.4 Debenture Trust Deed
10.5 Redemption of Debentures and Remedies of Debenture Holders
10.1 Borrowing Powers
Every trading company has an implied power to borrow. A non-
trading company must, in its Memorandum or Articles, contain an express
power to borrow; it cannot be implied.
A public company is not allowed to exercise its borrowing powers
until it has obtained the certificate to commence business. A private
company may, however, exercise the borrowing powers immediately after
incorporation. The power to borrow money is generally exercised by the
directors but articles normally provide for certain restrictions on their
power to borrow. In any case, directors cannot borrow beyond the
aggregate of the paid up capital and free reserves of the company without
obtaining the approval of the shareholders by way of a resolution passed
in a general meeting. This restriction, however, does not apply to
temporary loans obtained from the companys bankers in the ordinary
course of business.
10.2 Meaning of Debentures
Meaning of Debenture Debenture means an instrument in writing
issued by a company under its common seal, acknowledging its
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indebtedness for a certain sum of money and undertaking to repay it on or after a fixed
future date. According to sec. 2(12) of the Companies Act, Debenture include
debenture stock, bonds and any other securities of a company, whether constituting a
charge on the assets of the company or not.
Characteristic features of a debenture - The characteristic features of a debenture
are as follows:
1. It is issued by the company and is the form of a certificate of indebtedness.
2. It usually specifies the date of redemption. It also provides for the re-payment of
principal and interest at specified date or dates.
3. It generally creates a charge on the undertaking or undertakings of the company.
Usually the words pari passu appear in the terms and conditions of debentures.
This means that all the debentures of a particular class will receive the money
proportionately in case the company is unable to discharge the whole obligation.
What are Bonds?
Bonds are similar to debentures. In India, the two terms are used interchangeably.
Some consider bond to be an American term while others consider bond as long-term
government securities. Thus there is hardly any difference between bonds and debentures.
In India, a bond with a maturity of less than 1 year is regarded as a money market a money market a money market a money market a money market
instrument instrument instrument instrument instrument, bonds of 1 to 3 year maturity are called short short short short short-term bonds, -term bonds, -term bonds, -term bonds, -term bonds, those with 4 to
7 year maturity are called intermediate term bonds intermediate term bonds intermediate term bonds intermediate term bonds intermediate term bonds and those with a maturity period
beyond 7 years are called long long long long long-term bonds. -term bonds. -term bonds. -term bonds. -term bonds.
10.3 Types of Debentures
1. Classification on the basis of transferability
a. Registered debentures. These are debentures in respect of which the interest as
well as the principal is paid only to the registered holders i.e., persons whose
name appear in the Register of debenture holders. Such debentures are transferable
in the same way as shares i.e. by executing transfer deed.
b. Bearer Debentures. These debentures are payable to the bearer and are
transferable by mere delivery. The company does not maintain any register of
holders of these debentures and payment of interest is made to the bearer on the
production of interest coupons attached to the debentures.
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2. Classification on the basis of security
a. Unsecured debentures (Simple/Naked Debentures). These are the debentures,
which are not secured by any charge or mortgage on the assets of the company.
They do not give any security to the holders but merely signify an acknowledgement
of the debt. Holders of these debentures rank as ordinary creditors in a winding up.
b. Secured debentures (Mortgage Debentures). These are debentures, which are
secured by a charge or mortgage on the assets of the company. If some particular
assets of the company (e.g., fixed assets like land, building, etc.) are mortgaged
or charged as security, it is known as fixed charge fixed charge fixed charge fixed charge fixed charge. When the charge or mortgage
is not fixed on any particular asset or assets, but is over all the assets of the
company, including floating assets, it is called a floating charge floating charge floating charge floating charge floating charge. The mortgage
or charge is created by means of a Mortgage (Trust) Deed entered into between
the company and the trustees (representatives) for the debentureholders. The
trustees hold the mortgage in trust for the debentureholders and if the company
fails to redeem the debentures, the trustees realise the mortgage and distribute
the proceeds among the debentureholders.
3. Classification on the basis of redemption or payment
a. Redeemable Debentures. These are debentures, which have to be paid off by the
company on a certain future date or on the expiry of a certain period stipulated in
the terms of issue. However, redeemed debentures can be re-issued in accordance
with the provisions of Section 121.
b. Irredeemable Debentures /Perpetual. These are debentures, which are not
ordinarily repayable within the lifetime of the company. These become redeemable
only on the liquidation of the company. However, the company has the option of
redeeming them whenever it likes. Irredeemable debentures are also called
Perpetual debentures. Under the Companies Act, a debenture will be treated as
irredeemable where no period is fixed for repayment of the principal amount or
repayment is made conditional on the happening of a contingency.
4. Classification on the basis of convertibility
Convertible Debentures. Convertible debentures may be defined as debentures
which are convertible into shares at the option of the holders after a specified period.
Such debentures assure a fixed rate of interest to the holders during the initial years of
progress as well as hold out of the prospect of higher returns later on. The company
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has also the advantage of getting relieved of the fixed interest burden in due course.
Convertible debentures may be partly convertible debentures (PCDs) or fully convertible
debentures (FCDs).
(a) Fully Convertible Debentures: Fully convertible debentures are those debentures
that are converted into equity shares of the company on the expiry of a specified
period or periods where the conversion is to be made at or after 18 months from
the date of allotment but before 36 months. The conversion is optional on the
part of the debenture holders in terms of SEBI guidelines. Convertible debentures
may or not carry any interest.
(b) Partly Convertible Debentures: PCD consist of two parts-convertible and non-
convertible. The convertible portion (s) is/are convertible into equity shares at the
expiry of specified period(s) whereas non-convertible portion is redeemed at the
expiry of a certain period(s). Where the conversion takes place at or after 18
months, the conversion is optional at the discretion of the debenture holders.
(c) Non Convertible Debentures: (NCD) or plain vanilla debentures These debentures
do not have any option for conversion into equity shares. They are to be redeemed
on maturity.
(d) Optionally convertible debenture (OCD) These are the debentures wherein the
holder has the option to convert them into shares within a stipulated time. For
example a company may issue OCD with a face value of Rs100 with the
interest rate of 8% for six years.According to the conversion terms each debenture
is to be converted into 4 shares at the end of 18 months at the option of the
holder. The holder may decide to convert into shares or decide to just receive
interest.
The OCDs are similar to mezzanine financing which is a hybrid of debt and
equity. Here the debt is converted into equity at the option of the holder.
Under SEBI guidelines ,conversion must take place within 36 months from the
issue of debentures.
5. Other types
(a) Zero Interest Debentures. These are sold at discount from their eventual maturity
value and have zero interest rate .These debentures are sold to the investors for
discount .The difference between the face value of the debentures and the
acquisition cost is the gain to the investors. The investors are not entitled to any
interest and are entitled to only repayment of principal sum on the maturity period.
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The Finance Act,2005 has introduced a new bond called Zero coupon bond,
which has been defined as follows:
Zero Coupon Bond Zero Coupon Bond Zero Coupon Bond Zero Coupon Bond Zero Coupon Bond Zero Coupon Bond means a bond issued by any
- infrastructure capital company or infrastructure capital fund or a public sector
company
- on or after 1 11 11
st st st st st
June, 2005 June, 2005 June, 2005 June, 2005 June, 2005,
- in respect of which no payment and benefit is received or receivable before
maturity or redemption
- from such issuing entity and which the Central Government may notify in this
behalf. Section 2(48)
For example, a 5-year zero coupon bond is offered at a discount (say Rs. 65)
fetches no periodic interest and is redeemed at the face value of say Rs. 100 at the end
of 5 years.
(b) Indexed Bonds/ Debentures. These debentures provide investors an effective hedge
against inflation. The returns are indexed to stock-exchange index or the price
index.
(c) Debentures with Warrant option: A company may issue the convertible debentures,
whether fully convertible or partly convertible with detachable warrant. The warrant
gives a right to the holder to get equity shares mentioned in the warrant after the
expiry of a certain period at a price not exceeding the price fixed in the warrant.
(d) Fixed rate debentures and floating rate debentures: In case of fixed rate debentures
the rate of interest is fixed. In case of floating rate debentures the interest rate is
linked to some benchmark such as a bank rate, a particular index rate or Mumbai
Inter Bank Offer Rate (popularly known as MIBOR).
(e) Debentures with Call or Put Options: A Put Option gives the debenture holder the
right to redeem the debentures before their maturity period while a Call Option
gives the right to the company to redeem the debentures before the maturity.
Prohibition on issue of debenture with voting rights: Section 117 prohibits issue of
debentures with voting rights. Thus a debenture owner does not carry any voting right
since he is a creditor and not a shareholder of the company.
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Distinction between share and debenture-
The points of distinction between share and debenture may be noted as follows:
1. A shareholder is a member of the company. A debenture holder is a lender to the
company.
2. A shareholder has a right to vote. A debenture holder does not enjoy such a right.
Section 117 declares that no company shall after the commencement of the
Companies Act, 1956 issue any debentures carrying voting rights at any meeting
of the company.
3. Income on shares depends on the profits, Shareholders are entitled to get dividend
only out of profits. Debentureholders are entitled to a fixed rate of interest which
the company must pay irrespective of profits, i.e., profits or no profits.
4. Shareholders cannot be paid back (except in case of redeemable preference
shares) until its winding up. Debentureholders, unless the debentures are
irredeemable, may be paid back on the expiry of the specified time.
5. In the event of winding-up, shareholders cannot claim payment unless all outside
creditors have been paid in full. Debentureholders, normally being secured lenders,
have prior claim for repayment.
6. Dividend on shares is not a charge against profit. Interest on debentures, on the
other hand, is a charge against the profits and is deducted from revenues for the
purpose of calculating tax liability.
Debenture Certificate: Debenture Certificate: Debenture Certificate: Debenture Certificate: Debenture Certificate: Just like a share certificate, a company issues a debenture
certificate acknowledging that the certificate holder is a creditor of the company to the
extent of the amount shown in the certificate with interest at specified rate. The certificate
is transferable just like a share certificate. Debenture certificate must be delivered to
debenture holder within 3 months after allotment.
10.4 Debenture Trust Deed
In case of companies which issue debentures to the public it becomes necessary to
execute a debenture trust deed. The purpose of executing a debenture trust deed is to
create a charge on the companys properties in favour of the trustees. It is not possible
for the company to create separate charge in favour of a large number of debenture
holders. Therefore, the system of debenture trust deed takes care of the interest on the
debenture holders by conveying the property of the company to the trustees and declaring
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a trust in favour of the debenture holders. The trust deed contains the terms and conditions
on which the debenture are issued and defines the rights of the debenture holders and
the company. As per SEBI guidelines the trust deed should be executed within six months six months six months six months six months
from the closure of the issue for listed companies.
SEBI guidelines pertaining to debentures SEBI Guidelines 2000 protect the interest
of the debenture holders. According to SEBI guidelines, a company should obtain
compulsorily credit rating from a recognised credit rating agency (CRISIL or ICRA or
CARE etc.) for issue of debentures. The interest on debentures is freely determinable. A
debenture redemption reserve should be created.
Steps taken for protection for interest of debentures (sections 117A, 117B
and 117C)
Sections 117A, 117B and 117C have been inserted by the Companies (Amendment)
Act 2000 in order to protect the interest of debenture holders. These newly added
sections contain provisions relating to debenture trustees, trust deed, creation of security
and debenture redemption reserve.
Debenture Trustees (Section 117B)
i) Appointment of debenture trustees made compulsory
Section 117B provides that no company shall issue a prospectus or a letter of offer
to the public for subscription of its debentures, unless the company has, before such
issue, appointed one or more debenture trustees for such debentures and the company
has, on the face of the prospectus or the letter of offer, stated that the debenture trustee
or trustees have given their consent to the company to be so appointed.
ii) Bar on certain persons to become trustees
A debenture trustee should be an independent person. According to proviso to
section 117B, a person shall not shall not shall not shall not shall not be appointed as a debenture trustee, if he-
a. beneficially holds shares in the company.
b. is beneficially entitled to moneys which are to be paid by the company to the
debenture trustee;
c. has given any guarantee in respect of principal debts secured by the debentures
or interest thereon.
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iii) Functions of trustees
The function of the debenture trustees shall generally be to protect the interest of
holders of debentures (including the creation of securities within the stipulated time)
and to redress the grievances of holders of debentures effectively.
In particular, and without prejudice to the generally of the foregoing functions, a
debenture trustee may take such other steps he may deem fit
a. to ensure that the assets of the company issuing debenture and each of the
guarantors are sufficient to discharge the principal amount at all times;
b. to satisfy himself that the prospectus or the letter of offer does not contain any
matter which is inconsistent with the terms of the debentures or with the trust
deed;
c. to ensure that the company does not commit any breach of convenant and
provisions of the trust deed;
d. to take such reasonable steps to remedy any breach of the convenant of the trust
deed or the term of issue of debentures;
e. to take steps to call a meeting of holders of debentures as and when such meeting
is required to be held.
The trustees should show due care and diligence as trustee. A trust deed cannot
exempt trustee from liability of breach of trust (Section 119(1).
iv) Trustees to file petition if the interest of debenture holders are in jeopardy
Where at any time the debenture trustee comes to a conclusion that the assets of
the company are insufficient or are likely to become insufficient to discharge the principal
amount as and when it becomes due, the debenture trustee may file a petition before
the CLB and the CLB may, after hearing the company and another person interested in
the matter, by an order, impose such restrictions on the incurring of any further liabilities
as the Central Government thinks necessary in interest of holders of the debentures.
Debentures trust deed (Section 117A)
i) A trust deed for securing any issue of debenture shall be in such form and shall be
executed within the prescribed period.
ii) Copy of the trust deed to be available for inspection.
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A copy of the trust deed shall be open to inspection to any member or debenture
holder of the company and he shall also be entitled to obtain copies of such trust
deed on payment of such sum as may be prescribed.
iii) Penalty for non-compliance
If a copy of the trust deed is not made available for inspection or is not given to
any member or debenture holder, the company and every officer of the company
who is in default, shall be punishable, for each offence, with fine which may
extend to five hundred rupees for every day during which the offence continues.
A debenture trust deed authorises the trustees to enforce the security if the company
defaults in the payment of interest or repayment of debentures
Debenture redemption reserve (section 117C)
i) Creation of debenture redemption reserve
In respect of debentures issued after the commencement of the Amendment Act,
a company is required to create a debenture redemption reserve for the
redemption of such debentures, to which adequate amount shall be credited,
from out of its profits every year until such debentures are redeemed.
ii) Utilisation of debenture redemption reserve
The amount standing to the credit of debenture redemption reserve shall be utilised
by the company only for the purposes of debenture redemption.
iii) Payment of interest and redemption of debentures
The company shall pay interest and redeem the debentures in accordance with
the terms and conditions of the issue.
iv) Failure in redeeming the debentures on maturity date
Where a company fails to redeem the debenture on the date of maturity, the
Company Law Board may, on the application of any or all the holders of debentures
shall, after hearing the parties concerned, direct, by order, the company to redeem
the debentures forth with by the payment of principal and interest due thereon.
v) Non compliance of order of company law board
If default is made in complying with the order of the company low board, every
officer of the company who is in default, shall be punishable with imprisonment
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which may extend to three years and shall also be liable to a fine of not less than
five hundred rupees for every day during which such default continues.
10.5 Redemption of Debentures
Redemption of debenture refers to extinguishing or discharge the liability on account
of debentures and in accordance with the terms of redemption stated in the debenture
trust deed. There are three aspects that a company has to keep in mind regarding
redemption, viz. the time of redemption, the amount to be paid and the sources from
which redemption will have to be carried out:
Remedies to debenture holders:
i. When the debentures are not secured: When the debentures are not secured by
any mortgage or charge then the holder has alternative remedies either
a) to sue the company for the recovery of the money secured by the debenture
and execute the decree against the companys property; or
b) to present petition for the winding up of the company under section 433(e)
of the Companies Act, 1956 on the ground of the companys inability to pay
its debts. However if winding up is already in progress the holder has to
prove in such winding up the amount due to him like any other unsecured
creditor.
ii. Where the debentures are secured: Where the debenture are secured by a
mortgage or a charge, the holder thereof who wishes to realise his security and
recover the money due to him may resort to all or any of the following remedies:
a. A debenture holder may sue on his behalf and on behalf of other debenture
holders of the same class to obtain payment or enforce his security by sale.
b. All the debenture holders may file petition to CLB. The CLB, after hearing the
parties concerned, direct the company to forthwith redeem the debentures
and pay interest thereon. [Section 117C(4)].
c. He may apply to the court for an order of foreclosure, the effect of which is
that the borrowers interest in the assets charged is completely extinguished
and the lender becomes the owner of them. For an action of foreclosure, it
is necessary that all debentures holders of class concerned join hands.
d. He may in the capacity of a creditor present an application for winding up
for the principal and interest thereon. [Section 433(e)].
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e. He may have the property sold by the trustee if the debenture trusts deed
permits the sale.
f. In case of company insolvency, he may realise value of his security and
prove for the balance of his debt, if the security is insufficient or give up the
security and prove for the whole debt. But he will not be entitled for payment
of interest after the date of liquidation of the company. He is not entitled to
recover the interest out of his security when arriving at a balance for which
he can prove in the winding up.
Directors of defaulting company are disqualified if debentures are not redeemed
in time. [Section 274(1)(g)(B)].
Powers of the Central Government in regard to conversion of debentures and
loans into shares of the company. This can be studied under the following heads:
(i) When terms of issue of such debentures or terms of loan do not include term
providing for and option conversion:
(ii) Matters considered in determining the terms and conditions of such
conversion;
iii) Remedy available to the company if conversion or terms of conversion is not
acceptable to it
(a) Central Government can compulsorily order to convert part of debentures issued
to Central Government or loans given by Central Government into equity shares
on terms and conditions fixed by Central Government,even if the terms of
debentures or loan do not contain any such provision for option of conversion of
debentures or loans into equity [section 81(4)]
(b) These provisions apply only when debentures are issued or loan is given by Central
Government. Central Govt. can order conversion only when it is in public interest.
(c) If C.G.issues such order,appeal can be filed in Court within 30 days. 81(7).
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QUESTION BANK
I. FAQs
1. Explain the meaning of the term Debentures under the Companies Act, 1956.
When a debenture certificate is required to be issued?
2. Explain clearly the meaning of Fully Convertible Debenture and Partially
Convertible Debenture. In what way do they differ from each other?
3. State the types of debentures that a company may offer to the public.
4. What is meant by redemption of debentures? State the types of remedies available
to debenture holders: (i) when the debentures are not secured by any mortgage
or charge, and (ii) when the debentures are secured by a mortgage or charge.
5. What are the provisions of the Companies Act, 1956 relating to the appointment
of Debenture Trustee by a company?
6. Explain briefly the distinction between shares and debentures and state whether a
company can issue debentures with voting rights.
7. Write short note on debenture trust deed.
8. List out the important features of debentures.
II. CASE STUDIES
1. The directors of Unity Ltd.; without the authorisation of the company, borrowed
funds and utilised it for the benefit of the company. The company repudiates its
liability to repay. Decide.
(Hint: The company cannot repudiate the liability)
2. Whether the following can be appointed as Debenture Trustees:
(1) A shareholder who has no beneficial interest.
(2) A creditor whom the company owes Rs. 499 only.
(3) A person who has given guarantee for repayment of amount of debentures
issued by the company.
(Hint: (1) Yes; (2) No (3) No )
3. A company limited wants to issue debentures of Rupees fifty lakhs with an option
to debenture holders to convert 50% of debentures into equity after two years.
Advise the company.
(Hint : The company can issue optionally convertible debentures)
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CHAPTER - XI
MANAGEMENT OF A COMPANY
11.1 Who Manage the Company?
11.2 Choice of Managerial Personnel
11.3 Number of Directors.
11.4 Who can be a Director?
11.5 Who cannot be a Director?
11.6 How Directors are Appointed?
11.7 How a Managing Director or Wholetime Director is appointed?
11.8 Powers of Directors (S. 291 To 293)
11.9 When Directors cease to hold office
11.10 Remuneration to Directors
11.1 Who manage the Company?
One of the important features of a company is that there is separation
of ownership from management. The shareholders do not directly
manage. Instead, they elect some persons from among themselves as
their representative to act on behalf of the company. Such persons are
known as directors. The power to manage however is not entrusted to
any single director but to all the directors, collectively called the Board
of Directors. The chief organs of company management are
a) The Shareholders The Shareholders The Shareholders The Shareholders The Shareholders, who have ultimate control of the company. They
can elect and remove directors and amend corporate documents
viz., Memorandum of Association and Articles of Association.
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b) The Board of Directors The Board of Directors The Board of Directors The Board of Directors The Board of Directors, who frame the business policies of the company and are
responsible for overall management, supervision and control.
c) The Chief Executive The Chief Executive The Chief Executive The Chief Executive The Chief Executive, who may be a Managing Director (MD) or a Manager (M)
responsible for day-to-day administration of the company. The chief executive
implements the decisions of the Board and functions under its control and
supervision . For the assistance of the chief executive there may be Whole-Time
Directors (WTD) and other departmental managers such as finance manager,
production manager, personnel manager and company secretary.
11.2 Choice of Managerial Personnel
Managerial Personnel is the term used to refer to all categories of persons who
manage the company or are involved in the management of a company. As stated
earlier they are:
a) Managing Director,
b) Whole Time Director
c) Manager. (Refer Part-I, Schedule XIII)
A public company or a private company which is a subsidiary of a public company
(referred to as a public company hereinafter) having a prescribed paid up share capital
which at present is rupees five crores or more must have at least one of the three rupees five crores or more must have at least one of the three rupees five crores or more must have at least one of the three rupees five crores or more must have at least one of the three rupees five crores or more must have at least one of the three
categories viz. MD categories viz. MD categories viz. MD categories viz. MD categories viz. MD, WTD OR M. , WTD OR M. , WTD OR M. , WTD OR M. , WTD OR M. Other public companies or private companies have
no such compulsion [S.269(1)].
It should be noted here that the term manager means a person who has the
management of the whole or substantially the whole of the affairs of the company.
[S.2(24)] A manager need not be a director of a company. WTD is defined as a director
in Whole time employment of the company, looking after some aspects of the business
of the company delegated to him by the board of directors.
As per S As per S As per S As per S As per S. 197 A, a company can appoint either one of MD or M at a time . 197 A, a company can appoint either one of MD or M at a time . 197 A, a company can appoint either one of MD or M at a time . 197 A, a company can appoint either one of MD or M at a time . 197 A, a company can appoint either one of MD or M at a time. A
company cannot have both MD and M at one time. There is no such bar on appointment
of WTD who can be appointed without any restriction along with M or MD.
Legal status of managerial persons
Are managerial persons officers of the company?
Yes, section 2(30) Officers include any director, manager
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Are managerial persons officers in default of the company?
Yes, section 5
11.3 Number of Directors
i) Minimum Number of Directors:
a) A public company must have at least three directors.
b) A private company must have at least two directors.
Section 252 of the Act has been amended by the Companies (Amendment) Act,
2000, to the effect that a public company having (a) a paid up capital of five crore
rupees or more and (b) one thousand or more small shareholders may may may may may elect a director
by the small shareholders. Small shareholders means a shareholder holding shares of
nominal value of twenty thousand rupees or less in a public company.
ii) Maximum Number of Directors:
The Companies Act does not fix any maximum number. It is usual for the articles of
the company to fix a maximum number of directors. However if the company wants to
increase the total number of directors beyond the maximum fixed by the articles, approval
of the Central Government is required. Where the maximum fixed by articles is less
than 12, the number can be increased to 12 without Government approval.
Composition of Board in listed companies. Composition of Board in listed companies. Composition of Board in listed companies. Composition of Board in listed companies. Composition of Board in listed companies. (clause 49(I) of Listing Agreement) A
company should have optimum combination of executive and non-executive directors.
There should be at least 50% independent directors if Chairman is executive. In case of
non-executive chairman, at least one-third should be independent directors.
Independent Directors: Independent Directors: Independent Directors: Independent Directors: Independent Directors: Independent directors means a non-executive
director who-
(a) apart from receiving directors remuneration, does not have any other
material pecuniary relationship or transactions with company, its
promoters, its directors, its senior management or its holding company,
subsidiaries and its associates, which may affect independence of
director. Senior management means members of management one
level below executive directors including functional heads
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(b) is not related to promoters or management at the board level or at one
level below the Board
(c) has not been executive of the company in immediately preceding three
financial years
(d) is not an partner or an executive or was not partner or an executive
during the preceding three years, of any of the following i) the statutory
audit firm or the internal audit firm that is associated with the company
and ii) the legal firm/s that have a material association with the entity
(e) is not a material supplier, service provider or customer or a lessor or a
lessee of the company, which may affect independence of the director
and and and and and
(f) is not a substantial shareholder of the company i.e. owing two percent
or more of the block of voting shares. [clause 49-I(A)(iii) of Listing
Agreement][Concept of materiality implies that minor transactions with
company will not affect the independent character of the director]
Nominee directors appointed by an institution which has invested in or lent
to the company shall be deemed to be independent directors [Explanation
(c) to clause 49-I(A) of Listing Agreement].
11.4 Who can be a Director ?
The Companies Act does not lay down any academic or technical qualifications for
directors. However the articles, usually provide that, in order to be eligible to become
a director, a person must own certain number of shares. This is known as qualification
shares. If no such share qualification has been laid down in the articles, then even a
non-member can be a director. Thus it is not necessary that a director should be a
shareholder of the company
Any person can be a director, if he satisfies the following conditions:
i) He must be an individual (i.e., natural person) sec. 253
ii) He must hold qualification shares if the articles so provide.
iii) He must not suffer from any of the statutory disqualification disqualification disqualification disqualification disqualifications s s s s (mentioned in S.274)
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Director Identification Number: Director Identification Number: Director Identification Number: Director Identification Number: Director Identification Number: Every person who is a director or who intends
to become a Director, must obtain DIN (Director Identification Number).
Section 266A provides that every Director must apply for obtaining DIN in
Form DIN-1 electronically at the website of the MCA. According to Sec
266C one person should have only one DIN.
The objective of DIN The objective of DIN The objective of DIN The objective of DIN The objective of DIN is to ensure that
the Government keeps a track on Directors to prevent the
phenomenon of Vanishing Companies.
Legal action can be taken on Directors for violating thelaw.
The directors do not exceed the maximum number of directorships
permissible under the Companies Act, 1956.
According to proviso to Section 253 introduced by the Companies
(Amendment) Act, 2006 no company shall appoint or reappoint a person
as director, unless a DIN has been allotted to him.
DIN- 2 F DIN- 2 F DIN- 2 F DIN- 2 F DIN- 2 Form orm orm orm orm According to Section 266D, every director must inform his
DIN to company within one month from receipt of number from Central
Government. (in DIN- 2 Form)
DIN- 3 F DIN- 3 F DIN- 3 F DIN- 3 F DIN- 3 Form orm orm orm orm Section 266E imposes obligation on every Director to intimate
DIN to ROC within one week of receipt of information u/s 266D in Form
DIN-3.
DIN- 4 F DIN- 4 F DIN- 4 F DIN- 4 F DIN- 4 Form orm orm orm orm If there is any change in information supplied in DIN 1 form,
it should be informed to ROC in Form DIN 4.
A Director must quote his DIN in every Return and information under
Companies Act.
DIGIT DIGIT DIGIT DIGIT DIGITAL SIGNA AL SIGNA AL SIGNA AL SIGNA AL SIGNATURE TURE TURE TURE TURE: : : : : Those Directors who are required to sign e-forms
are required to obtain Digital Signature Certificates (DSC).
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11.5 Who cannot be a Director?
The following persons are disqualified from being the directors of a company:-
sec. 274
1. A person who has been found to be of unsound mind by a Court.
2. A person who is an undercharged insolvent.
3. A person who has applied to the Court of Insolvency to be adjudged (declared)
as an insolvent.
4. A person who has been convicted of an offence, involving moral turpitude (an act
done contrary to justice, honesty or good morals) and sentenced to an imprisonment
of not less than six months, and five years have not elapsed since the expiry of the
sentence.
5. A person who has not paid his call-money on his shares for six months and
6. A person who has been disqualified by the court for fraudulent activities in company
promotion or management.
7. The Companies (Amendment) Act, 2000 has, in addition to the existing grounds
added one more disqualification. A person shall not be capable of being appointed
director of a company, if he is already a director of a public company which
a. has not filed the annual account and annual returns for any continuous
three financial years commencing on or after 1.4.1999 or
b. has failed to repay its deposit or interest thereon on due date or redeem its
debenture on due date or pay dividend and such failure continues for one
year or more.
A private company which is not a subsidiary of a public company may, by its articles,
provide additional disqualifications.
Ceiling on number of directorships Ceiling on number of directorships Ceiling on number of directorships Ceiling on number of directorships Ceiling on number of directorships
Section 275 of the Act provides that no person, shall hold directorship in
more than 15 companies. In calculation of 15 15 15 15 15 companies pursuant to the
provision of section 275 the following companies shall be excluded:-
a. a private company which is not a subsidiary/ holding company of a
public company;
b. an unlimited company;
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c. an association not carrying on business for profit section 25;
d. if he is an alternative director in another company.
P PP PPenalty: enalty: enalty: enalty: enalty: Any person who holds office, or acts, as a director in more than 15
companies in contravention, of the provisions shall be punishable with fine
up to Rs. 50,000 (Section 279)
11.6 How Directors are Appointed?
Appointment of Directors
Nominee directors - Nominee directors - Nominee directors - Nominee directors - Nominee directors - Usually, Government, foreign collaborators, holding companies,
financial institutions or other lenders reserve a right to nominate a directors(s) to represent
their interest on the Board. In the case of a public company or a private company which
is a subsidiary of a public company, nominee directors can be appointed only if a
provision to that effect exists in the Memorandum of Association or Articles of Association
of the company. The total strength of the non-rotational directors including the nominee
directors cannot exceed 1/3 of the total strength of the Board.
11.7 How a Managing Director or Wholetime Director is Appointed ?
Definition:
Managing Director- Section 2(26)
Managing director must be a director of the company.
He must be entrusted with substantial P PP PPower of management ower of management ower of management ower of management ower of management of the company.
First Directors Subsequent Directors
* By Articles * By Company in General Meeting S.255
* By Subscribers to the * By Board of Directors S.260,262,313
Memorandum. S 254 * By Central Government S.408
* By Third parties. (Nominee directors)
* By Principle of Proportional
Representation S.265
* By Small shareholders. S.252
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Powers to be entrusted by an agreement OR a resolution passed at a general/
board meeting OR by Memorandum of Association.
Powers to do administrative acts not deemed to be substantial P PP PPowers of owers of owers of owers of owers of
management. management. management. management. management.
P PP PPowers of management owers of management owers of management owers of management owers of management to be exercised subject to superintendence, control and
direction of the Board.
Manager Section 2(24)
Manager must be an individual.
He must be entrusted with the management entrusted with the management entrusted with the management entrusted with the management entrusted with the management of the whole or substantially the
whole of the affairs of the company affairs of the company affairs of the company affairs of the company affairs of the company. .. ..
He must be in- in- in- in- in-charge of the management charge of the management charge of the management charge of the management charge of the management of the whole or substantially the whole
of the affairs of the company affairs of the company affairs of the company affairs of the company affairs of the company. .. ..
He must exercise the power conferred on him subject to the superintendence,
control and direction of the Board of the company.
He may or may not be a director of the company.
He may or may not be under a contract of service, i.e. an employee of the
company.
Term of office:
(a) Managing director - Maximum of 5 years* at a time (Section 317)
(b) Whole time Director - No time limit stipulated in the Act
(c) Manager - Maximum of 5 years* at a time (section 388)
*Reappointment or re-employment possible not earlier than two years from the
date on which it is to come into force {section 317(3)}.
A MD, WTD can be appointed by the Board of Directors and will further need
approval in general meeting. Further, in case of public companies, the appointment
of MD/WTD needs approval from Central Government if the appointment is not made
in accordance with the conditions specified in Schedule XIII. If the appointment is as per
the conditions mentioned in Schedule XIII then no approval of Central Government is
necessary and the return in prescribed form is to be filed within ninety days from the
date of such appointment. Refer Schedule-XIII
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In case the approval of Central Government is required, an application has to be
made within 90 days from the date of appointment [S. 269(3)]. The Central Government
has power to reject the application it finds that the person proposed to be appointed is
not a fit and proper person or such appointment is not in public interest or that the
terms and conditions of the appointment are not fair and reasonable [S. 269(4)].
11.8 Powers of Directors (Section 291 to 293)
The Board of Directors are the top most organ of a company. They derive their
powers from two sources
(i) the Articles of Association and,
(ii) the Companies Act.
Individual directors have no powers. The powers are exercised by the board (i.e.,
directors collectively). But the Board has the power of delegating authority to an individual
director or to a committee of directors. The Articles of Association generally contain a
list of the powers, which may be exercised by directors and the limitations on those
powers if any. The Board exercises its powers in the Board meetings. According to the
Companies Act, the Board must meet at least once in every three calendar months, i.e.
at least four such meetings must be held in every year. The powers of the directors can
be explained with the help of the following chart.
Statutory P Statutory P Statutory P Statutory P Statutory Powers owers owers owers owers
1. Powers exercisable only at
meetings of the Board
2. Powers exercisable only with
the consent of the company,
in general meeting.
3. General (Residue) Powers.
P PP PPowers of Directors owers of Directors owers of Directors owers of Directors owers of Directors
Managerial P Managerial P Managerial P Managerial P Managerial Powers owers owers owers owers
Power of superintendence control
and direction of affairs of the
company.
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Statutory Powers
The statutory powers are set out in the Companies Act, 1956. The directors are The directors are The directors are The directors are The directors are
empowered to do all the things that the company can do.(S empowered to do all the things that the company can do.(S empowered to do all the things that the company can do.(S empowered to do all the things that the company can do.(S empowered to do all the things that the company can do.(S.291) .291) .291) .291) .291). Of course, this is
subject to the provisions of the articles and the Companies Act. The Companies Act
makes specific provisions in regard to the powers of the directors and the manner in
which they should be exercised. The powers may be grouped under three heads.
A. Powers exercisable only at meetings of the Board (S.292)
These include the following :
1. the power to make calls.
2. the power to authorise buy-back of shares.
3. the power to issue debentures.
4. the power to borrow money otherwise than on debentures
5. the power to invest the funds of the company
6. the power to make loans.
The Board may, however, by a resolution passed at a meeting delegate to any
committee of directors, the managing director, or the manager, the powers to borrow
money, to invest the funds and to make loans.
Some other powers which must also be exercised at the Board meetings are. :
7. the power to fill up casual vacancies among directors (S.262)
8. the power to give consent to contracts in which any director is interested. (S.297)
9. the power to recommend the rate of dividend.
B. Powers exercisable only with the consent of the company in general meeting
(S 293)
In case of public companies and their subsidiaries, the Board of directors cannot
exercise any of the following powers without the consent of the shareholders in general
meeting :
i) the power to sell, lease or otherwise dispose of the whole or part of the undertaking,
ii) power to remit debt due by a director,
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iii) power to borrow in excess of capital and free reserves of the company,
iv) power to make contributions to charity in excess of Rs. 50,000 or 5% of the
profits and the funds not directly related to companys business,
v) power to appoint sole-selling agents.
P PP PPolitical contributions by directors olitical contributions by directors olitical contributions by directors olitical contributions by directors olitical contributions by directors - Under section 293A a company shall not
make a political contribution unless all the following conditions are satisfied:
a. The company is not a government company.
b. The company has been in existence for 3 or more financial years.
c. The amount of donation in any financial year cannot exceed five per cent five per cent five per cent five per cent five per cent of
the average net profits of a company earned during the three immediately
preceding financial years.
d. Besides, a resolution authorising the making of the contribution must also be
passed at a meeting of the Board of directors.
e. Further the amount of contribution along with the name of the party or
person must also be disclosed in the profit and loss account.
Section 80GGB (Income T Section 80GGB (Income T Section 80GGB (Income T Section 80GGB (Income T Section 80GGB (Income Tax A ax A ax A ax A ax Act) Deduction for contributions by ct) Deduction for contributions by ct) Deduction for contributions by ct) Deduction for contributions by ct) Deduction for contributions by
companies to political parties companies to political parties companies to political parties companies to political parties companies to political parties
Eligible Assessee : Indian Company
Amount of deduction : Any contribution made by an Indian company to any registered
political party.
C. General (Residue) Powers
These include all other powers which subject to the provisions of the Act, the Board
is authorised to exercise. These may be exercised either at meetings of the Board or by
Resolution by circulation or by delegating the same to committees or others.
The general powers of the Boards as stated in C above are restricted in many
ways. Firstly, the Board cannot do anything which the company itself cannot do. Secondly,
the Board shall not exercise its powers of its accord that are to be exercised or done by
the company at the general meeting. Thirdly, the Board cannot exceed the powers
which are delegated to it by the company.
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11.9 When Directors cease to Hold Office
A director ceases to hold office in the following circumstances.
1. When he resigns from his office; or
2. When he retires by rotation; or
3. When he vacates his office;
4. When he is removed from his office
i) By shareholders in general meeting
ii) By Central Government.
iii) By Court.
i) The shareholders in the General Meeting may remove the directors by passing an
ordinary resolution and giving proper notice. ii)The Central Govt. may, by order,
remove director from office if the High Court has found him to be guilty of fraud,
negligence, mismanagement, breach of trust etc, iii)The Court may remove a
director with a view to prevent oppression and mismanagement in a company.
11.10 Remuneration to Directors / Managerial Person
Remuneration when company is making profits
1. Overall Ceiling of Directors Remuneration
Section 198 lays down the overall limits of remuneration payable to the managerial
personnel. Section 309 fixes limits in respect of individual directors or directors acting
as a Board. Under section 198 managerial remuneration must not exceed 11 per cent 11 per cent 11 per cent 11 per cent 11 per cent
of the net profits of the net profits of the net profits of the net profits of the net profits of any financial year. The sitting fee payable to Directors for attending
the meetings of the Board is not included in remuneration.
2. Remuneration of Part-time Directors
Sub-section (4) and (7) of section 309 deal with remuneration payable to part time
directors i.e. directors other than managing and whole-time directors. The remuneration
can be paid in any of the following two modes:
- By way of monthly, quarterly or annual payment with the approval of the Central
Government.
- By way of commission with the approval of the shareholders by a special resolution.
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Limits - Limits - Limits - Limits - Limits - The remuneration payable to part time directors shall not exceed 1% of the
net profits if the company employs any whole time director or managing director or
manager and 3% of the net profits in any other case. However, any remuneration in
excess of these limits can be paid with the approval of the Central Government.
3. Remuneration of Managing/ Whole time Director
Sub-section (3) of section 309 lays down the ceiling on the remuneration payable
to a managing or whole-time director. The remuneration may be paid either:
- By way of a monthly payment or
- At a specified % of the net profits or
- Partly by one and partly by the other
Limits Limits Limits Limits Limits - The remuneration paid to any one managing or whole time director shall
not exceed 5% 5% 5% 5% 5% of the net profits and if more than one such directors are employed by
the company, then the total managerial remuneration payable to all the directors shall
not exceed 10% 10% 10% 10% 10% of the net profits of the company. However, the company can pay
higher remuneration with the approval of the Central Government.
Directors sitting fees:- Directors sitting fees:- Directors sitting fees:- Directors sitting fees:- Directors sitting fees:- The overall remuneration excludes the sitting fees.
Sitting fees are payable to the director for attending the board meetings or
committee meetings.
As per the recent notification (July 2003) of Department of Company Affairs
the Government has hiked sitting fees for directors for attending board
meetings and committee meetings.
Directors of companies with a paid-up capital and free reserves of
Rs. 10 crore or more, or a turnover in excess of Rs.50 crore can be
paid up to Rs. 20,000 per meeting of the board and its committee.
Directors of all other companies can be paid up to Rs. 10,000 per
meeting attended, either board or committee.
Overall limits of remuneration to managerial persons :
P PP PParticulars articulars articulars articulars articulars Limit Limit Limit Limit Limit
(a) Where the public company has : Not more than 5% of net profit.
one managerial person
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(b) Where the public company has : 10% of net profit.
more than one managerial person
(c) Remuneration to directors including : 1% of net profit.
to non executive directors where
MD/WTD is appointed
(d) Remuneration to directors where : 3% of net profit.
the company does not have any
managerial persons
Remuneration when profit is inadequate or company is in loss
In case of loss making companies or if the profits are inadequate, a MD or
WTD or Manager is entitled to minimum remuneration. The ceiling has been
prescribed in Part II of Schedule XIII. Monetary ceilings have been placed
varying with the effective capital of the company concerned.
However, the company in general meeting may, with the approval of the
Central Government, authorise the payment of higher remuneration than
stipulated under section 309 or Schedule XIII.
However, no approval of the Central Government is required if the increase
in remuneration is in accordance with the conditions specified in Schedule
XIII (See annexure I regarding schedule XIII).
R RR RRemuneration to Managing / Whole time Directors in case of P emuneration to Managing / Whole time Directors in case of P emuneration to Managing / Whole time Directors in case of P emuneration to Managing / Whole time Directors in case of P emuneration to Managing / Whole time Directors in case of Private Limited rivate Limited rivate Limited rivate Limited rivate Limited
Company Company Company Company Company
Sections 198, 269, 309, 310, 311, & Schedule XIII do not apply to a
private company which is not a subsidiary of public company.
As a result, such a company is free to pay any remuneration to its directors
including managing and whole time directors, subject to the provisions of
the Article of Association, if any. These companies are not required to comply
with Schedule XIII or seek approval of the Central Government.
P PP PProhibition of tax free payments. rohibition of tax free payments. rohibition of tax free payments. rohibition of tax free payments. rohibition of tax free payments. Company can not pay remuneration which
is tax free i.e. the remuneration is subject to income tax at the hands of the
director (Sec. 200)
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Meaning of Remuneration
Section 198 has defined Remuneration inclusively.
Remuneration shall include:
(a) any expenditure incurred by the company in proving rent free
accommodation.
(b) Any expenditure incurred by the company in providing any other
benefits or amenity free of charge.
(c) Any expenditure incurred by the company on account of the
managerial person.
(d) Any expenditure incurred by the company to effect any issuance on
the life of or to provide any pension, annuity or gratuity for, any
managerial person or his spouse or child.
How perquisites should be valued? How perquisites should be valued? How perquisites should be valued? How perquisites should be valued? How perquisites should be valued?
It should be valued at actuals.
Where valuation is not possible, it should be as per Income Tax Rules.
F FF FFurther the maximum percentage of remuneration of 11% shall not urther the maximum percentage of remuneration of 11% shall not urther the maximum percentage of remuneration of 11% shall not urther the maximum percentage of remuneration of 11% shall not urther the maximum percentage of remuneration of 11% shall not
include include include include include:
Sitting fees payable to directors [section 309(2)]
Guarantee commi ssi on payabl e to di rectors for standi ng
surety for loans and credit facilities [circular no.3/94,dated 16 February,
1994]
Payment to directors for rendering services of a professional nature
[proviso to subsection (1) of section 309]
Payment to directors for holding office or place of profit under the
company [section 314]
Consideration received by a director under a contract governed by
section 297
Payment of interest to directors for advancing loan to a company [letter
no. 8/26 (309)/76-CL-V, dated 9 January, 1978]
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Annexure I
Schedule XIII to the Act (See Section 198, 269, 310,311)
Schedule XIII is divided into three parts:
Part I deals with the eligibility conditions for the appointment of MD/WTD/Manager
without Central Government approval.
Parts II deals with the remuneration payable to such managerial personnel
Part III deals with procedural part.
Part II
Section I : Remuneration by the companies having profits.
Maximum limits are: 5% of net profit for one managerial person.
10% of net profit for more than one managerial person.
Section II : Remuneration by companies having inadequate profits:
The remuneration is based on effective capital effective capital effective capital effective capital effective capital of the company and payable on a
slab rate stipulated: By notification dated 16.1.2002 the Central Government has
amended Schedule XIII and now the new section II prescribes three different situations
and provides a different ceiling under each situation.
Situation. A Ceilings not requiring special resolution and Government approval
(Not exceeding Rs. 2,00,000 p.m.)
Situation. B Ceilings requiring special resolution but not Government approval
(Not exceeding Rs. 4,00,000 p.m.)
Situation. C Ceilings requiring special resolution and Government approval
(Exceeding 4,00,000 p.m.)
Situation. D Ceilings in respect of companies in Special Economic Zones (Not
Exceeding 20,00,000 p.m.)
In the above first three cases, payment of remuneration is to be approved by the approved by the approved by the approved by the approved by the
R RR RRemuneration Committee. emuneration Committee. emuneration Committee. emuneration Committee. emuneration Committee.
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QUESTION BANK
I. FAQs
1. Define director. What is his legal position in a company?
2. What are the provisions relating to payment of sitting fees to the directors for
attending Board meetings?
3. Examine the position of directors of a company as its trustee, agent and employee.
According to you, what is the true relationship between the company and its
directors?
4. What do managerial personnel and managerial remuneration mean?
5. Is there any prohibition on a company to simultaneously appoint different
categories of managerial personnel? Does the law prescribe any limit on payment
of remuneration to such personnel?
6. Distinguish between managing director and manager. What are their
disqualifications?
7. Can a director resign from his office?
8. What are the statutory and other powers, which the Board of directors can exercise
at Board Meeting?
9. What are the powers of directors that cannot be exercised without the approval of
members given in a general meeting.
10. The Board of Directors of a company shall be entitled to exercise all such acts
and things as the company is authorised to exercise and do. Examine the
statement.
11. How is managerial remuneration determined in case of loss-making companies?
Is Central Government approved necessary in such cases?
12. What are the powers which directors can exercise in the board meeting?
II. CASE STUDIES
1 Advise the Board of Directors of a public company about their powers in respect
of the following proposals explaining the relevant provisions of the Companies
Act, 1956:
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a. Donation of Rs. 5,00,000 to a hospital established exclusively for the benefit
of employees.
b. Buy back of shares of the company for the first time upto 10% of the paid up
equity share capital.
c. Delegating to the managing director of the company the power to invest
surplus funds of the company in the shares of some other companies.
(Hint : a Yes b Yes c No)
2 The Board of Directors of a public company in the private sector having made an
average profit of Rs. 1 crore during the last three financial years propose to
donate during the current year the following amounts:
a. Rs. 1,00,000 to a school run exclusively for the benefit of employees;
b. Rs. 40,000 to a general charitable fund; and
c. Rs. 4,00,000 to a political party.
Advise the Board of Directors about their powers in respect of the above explaining
the relevant provisions of the Companies Act.
(Hint: a Yes; b Can donate upto Rs. 50,000 or 5% of average net profits during 3
preceding financial years, whichever is greater; c It can give political donation
upto 5% of net profit.
3 The Board of Directors of a public limited company borrowed in excess of the
limits as laid down by the Companies Act, 1956. The money was utilized for
genuine purposes in the interests of the company. Can the company repudiate
the liability being ultra vires the director?
(Hint: No)
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CHAPTER - XII
MEETINGS AND PROCEEDINGS
12.1 Types of company meetings
12.2 Requisites of a Valid Meeting
12.3 Law & Practice relating to General Meeting
12.4 Statutory Meeting
12.5 Annual General Meeting
12.6 Extra Ordinary Meeting
12.7 Board Meetings
12.8 Meetings of Debenture Holders
12.9 Annexure I Comparison of Meetings
12.1 Types of Company Meetings
Meetings play a very important role in the management of a company.
In fact all the important decisions of the company are taken in the meetings
only. The shareholders express their will and exercise their rights in the
general meetings of members. While the board of directors exercise
their powers and take decisions through board meetings. Company
meetings may be classified as:
A. Shareholders Meetings
(i) Statutory Meeting.
(ii) Annual General Meeting.
(iii) Extra ordinary General Meeting.
(iv) Meetings of a class of Members.
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B. Directors Meetings
i) Meetings of the Board of Directors.
ii) Meetings of the Committee of Board of Directors.
C. Creditors Meetings
i) Debentureholders Meeting.
ii) Other Creditors Meeting.
12.2 Requisites of a valid Meeting
Meetings of a company must be convened and held in perfect compliance of the
applicable provisions of the Companies Act, 1956 and rules framed there under. Every
meeting, in order to be valid, must be properly convened, properly constituted and properly convened, properly constituted and properly convened, properly constituted and properly convened, properly constituted and properly convened, properly constituted and
properly conducted. properly conducted. properly conducted. properly conducted. properly conducted.
I. MEETING TO BE PROPERLY CONVENED means that -
(a) the meeting must have been convened by the proper authority, namely the Board
of Directors, Shareholders or Central Government/ Tribunal and
(b) proper and adequate notice must have been given to all those entitled to attend.
Refer para 12.3 for provisions regarding notice
II. MEETING TO BE PROPERLY CONSTITUTED means that -
a) there must be a proper quorum and
b) there must be a proper Chairman.
Refer para 12.3 for provisions regarding quorum and chairman
III. MEETING TO BE PROPERLY CONDUCTED means that-
the proceedings of the meeting must be conducted in accordance with the law
relating to meetings as per the Companies Act (sections 171 to 185), the Companys
own articles of association or by the common law relating to meetings. Proper rules for
ascertaining the sense of the meeting, the rules for discussion and order in debate must
be observed. Also, the proceedings should be recorded properly.
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T TT TTele Conferencing ele Conferencing ele Conferencing ele Conferencing ele Conferencing
Tele-conference means a meeting conducted among participants in different
locations via telecommunications equipment; a conference with participants
in different locations linked by telecommunication devices, and tele-
conferencing means the holding of teleconferences.
Video-conferencing means a tele-conference conducted via television
equipment and; video-conferencing means the holding of video-
conferences. It involves the use of television sets linked by telephone lines
etc. to enable a group of people to communicate with each other in sound
and vision. Video-conferencing is a system enabling groups of people at
various locations to see and speak to each other, making it possible to hold
meetings, seminars, etc., without the expense and time wasted in travel.
Special studios are not required; information is available from Telecom
department.
The Companies (Amendment) Bill, 2003[it never become a law] provides
that a company may hold Board Meeting through tele-conferencing or video
conferencing and such meeting shall be valid if the minutes of such meeting
have been approved and signed subsequently by all directors of the Board
who participated in such meeting. The Central Government may specify the
powers, which shall not be exercised in the Board Meeting held through tele
conferencing or video conferencing.
12.3 Law and Practice relating to Meetings
a. Notice
b. Ordinary and Special Business
c. Quorum
d. Voting and the Right to Demand a Poll
e. Proxies
f. Resolutions
g. Chairman
h. Minutes
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A. Notice
The notice of a meeting should be in accordance with -
(i) General rules in relation to notice,
(ii) Rules as laid down in the Articles and the Companies Act, and
(iii) Secretarial standards on Board Meetings (SS-1) and General Meetings (SS-2) of
Institute of Company Secretaries of India (which is recommendatory in nature).
1. 1. 1. 1. 1. Authority: Authority: Authority: Authority: Authority: The proper authority to call the meetings are
a) Board of Directors - - - - - The authority to summon a meeting is generally prescribed
in the Articles. The Articles normally empower the Board of Directors to
convene meetings.
b) Shareholders The shareholders of a company in certain circumstances can
call an extraordinary general meeting.
c) CLB If for any reason it becomes impracticable to call a meeting (other than
Annual General Meeting, the CLB can order calling, holding and conducting
of a meeting (section 186). Under section 167, power is conferred on the
CLB to call or direct the calling of annual general meeting if there is a
default in holding the same.
2. 2. 2. 2. 2. R RR RRequirements of notice - equirements of notice - equirements of notice - equirements of notice - equirements of notice - The three main requirements of notice are that
- it is given to every person entitled to receive it;
- it is given at the proper time; and
- it contains the necessary information, and fairly discloses the purpose of the
meeting particularly of any special business.
3. 3. 3. 3. 3. P PP PPersons entitled to notice ersons entitled to notice ersons entitled to notice ersons entitled to notice ersons entitled to notice As per section 172(2) notice of every general meeting
must be sent to
- every member at his registered address in India,
- the legal representative of a deceased member,
- the official assignee or Official Receiver of an insolvent member, and
- the auditor of the company.
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The other recipients of the notice include
- in the case of a listed company, the stock exchanges on which the shares or
other securities of the company are listed;
- financial institutions, pursuant to a covenant in the agreement entered into
with them for availing financial assistance;
- trustees of debenture trust deed;
4. 4. 4. 4. 4. L LL LLength of notice: ength of notice: ength of notice: ength of notice: ength of notice: For general meeting of any kind (Statutory, AGM, EGM) atleast
21 clear days notice must be given. A shorter notice for AGM will be valid if all
the members entitled to vote at the meeting give their consent.
In case of Extra Ordinary General (EGM), a shorter notice will be valid if consent is
given by members holding atleast 95% of the paid up capital carrying voting rights or
representing atleast 95% of the voting power (section 171). The consent of the shorter
notice may be given either at the meeting or before the meeting in Form 22A.
For Board Meeting, the directors can fix their own norms for dispatch and service of
notice. Even the dispatch of agenda is not necessary for the meetings of the Board
Directors.
21 clear days must be calculated excluding excluding excluding excluding excluding the day on which the notice is
served (where served by hand delivery) and the day on which the meeting is
to be held. Where notice is served by post, it will mean excluding the day on
which notice is posted, 48 hours (i.e. 2 days for postal transit and the day on
which meeting is to be held (21 + 2 + 2 = 25 days). Therefore, notice of
a general meeting must be sent atleast 25 days before the date of meeting
where the service of notice is sent by post.
5. 5. 5. 5. 5. Serving of Notice: Serving of Notice: Serving of Notice: Serving of Notice: Serving of Notice: The notice must be served in the manner prescribed in the
Articles read with the Companies Act. A notice can be served on a member either
personally, or by sending it by post to him to his registered address. Notice of
Board meeting should be given in writing to every director by hand or by post or
by fax or by e-mail or by any other electronic mode.
6. 6. 6. 6. 6. Contents of the notice: Contents of the notice: Contents of the notice: Contents of the notice: Contents of the notice: The notice must contain the following particulars -
a. Time, day, date and place of holding a general meeting.
b. Agenda - The notice should clearly specify the nature of the meeting and the
statement of the business to be transacted at the meeting. It may be ordinary
business or special business.
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If special business is to be transacted, each such item should be in the form
of a resolution and should be accompanied by an explanatory statement
which should set out all such facts as would enable a member to take an
informed decision on the matter.
c. The notice should be accompanied by an attendance slip and a Proxy form
which clear instructions for filling, stamping, signing and depositing the Proxy
form.
d. Documents accompanying the notice -
i. For AGM Audited Financial Statement of accounts, directors and
auditors reports, proxy from, etc.;
ii. For Statutory Meeting statutory report, proxy form, etc., and
iii. For EGM explanatory statement, proxy form, etc.
e. Notes to notice Notes to the notice are given immediately after the
information regarding ordinary and special business items. The notes to the
notice contains the information regarding the following:
i. The notice must state about the right of a member to appoint Proxy and
inform them to lodge Proxies atleast forty-eight hours before the time
fixed for the meeting.
ii. An intimation that an explanatory statement pursuant to section 173(2)
is annexed to the notice.
iii. Dates of closure of Register of Members and Share Transfer books.
iv. Information about the nomination facility available to members
v. Inti mati on that di vi dend, i f decl ared, shal l be pai d wi thi n
thirty days from the date of declaration to Members whose names appear
as beneficial owners with depositories or in the Register of Members on
or before the date specified.
vi. Request to members to bring to the meeting the admission slip along
with their copy of the Annual Report.
B. Ordinary and Special Business
The business to be transacted at a company general meeting may comprise of (i)
ordinary business (ii) special business.
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Ordinary business Ordinary business Ordinary business Ordinary business Ordinary business relates to :
(a) consideration of the accounts, balance sheet and the reports of the Board of
directors and auditors;
(b) the declaration of dividends;
(c) the appointment of directors in place of those retiring ; and
(d) the appointment of auditors and fixation of their remuneration. These items are
considered at the AGM.
Any other business scheduled to be transacted at the meeting will be deemed to be
special business special business special business special business special business. In case of special business an explanatory statement explanatory statement explanatory statement explanatory statement explanatory statement should be attached
to the notice of the meeting. The statement must state all material facts concerning
each item of special business including the nature of interest of any director or manager
therein. It must also state the time and place where the documents in respect of such
items can be inspected.
In case of EGM, all business transacted shall be special business.
C. Quorum
a. Meaning: Meaning: Meaning: Meaning: Meaning: Quorum means the minimum number of the members who must be
present at a meeting as required by Law/Rules. In order that the meeting may be
properly constituted, the quorum of members must be present at a meeting.
b. Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: Quorum for Board Meeting and Shareholders Meeting: In the absence of any
provisions in the articles, the quorum, in respect of general meeting, is
five five five five five members personally present in case of a public company and
two two two two two members personally present in case of private company [Section 174(1)].
The quorum for a Board meeting is one one one one one-third -third -third -third -third of its total strength or two directors
whichever is higher. Interested directors shall not be counted for the purpose of quorum.
(i) Proxies are not counted for quorum purposes. Only members present in person
can be counted for purposes of quorum. However the representative of a body
corporate appointed under section 187 or the representative of a Governor of a
State under section 187-A is a member personally present for purpose of counting
a quorum.
(ii) Quorum must be present throughout the meeting.
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(iii) If the quorum is not complete, the chairman and members will wait for half an
hour from the scheduled time for the meeting. If the quorum is not present even
after half an hour, the provisions are as follows:
a. if the meeting is a requisition meeting, the meeting stands dissolved
b. in case of AGM or EGM called by Board of Directors, the meeting shall be
adjourned to same day in the next week at the same time and place, unless
Board determines otherwise. No quorum is necessary for such adjourned
meeting. (However, there should be at least two members, as meeting
requires at least two members, and the wording used is members present
shall be the quorum.)
c. c. c. c. c. Can a single member present constitute a meeting? Can a single member present constitute a meeting? Can a single member present constitute a meeting? Can a single member present constitute a meeting? Can a single member present constitute a meeting?
A single member present cannot by himself constitute a meeting. There are, however
few exceptions to this general rule which permits a meeting to be constituted by
one shareholder only.
(i) where a person holds all the shares of a class, that person may constitute the
class meeting;
(ii) where default is made in holding the annual general meeting pursuant to
section 166, the CLB may convene a meeting and direct that one member
present in person or by proxy shall constitute the meeting. (Explanation to
section 167(1))
(iii) where CLB orders a meeting to be held with the direction that one member
present in person or by proxy shall constitute that meeting (Explanation to
section 186(1))
d. d. d. d. d. Consequences of lack of quorum Consequences of lack of quorum Consequences of lack of quorum Consequences of lack of quorum Consequences of lack of quorum: If a meeting is held without a proper quorum,
the meeting will be a nullity. If no quorum is present, there is no meeting and the
proceedings are invalid.
D. Voting and the Right to Demand a Poll
Every holder of equity shares shall have a right to vote. The preference shareholders
shall have right to vote only on resolutions, which directly affect the rights attached to
the preference shares held by them (sec 87). In general meetings vote is taken by the
following methods -
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by show of hands
by poll
by postal ballot
Show of hands Show of hands Show of hands Show of hands Show of hands- -- -- In the first instance, vote is taken by show of hands (sec. 177).
Each member has one vote in such voting. The shareholders present at the meeting
indicate their views by raising their hands. However, the voting by show of hands may
not always reflect the opinion of members upon a value basis.
Demand for poll Demand for poll Demand for poll Demand for poll Demand for poll Section 179 provides that before or on declaration of the result
of the voting on any resolution on a show of hands, a poll may be ordered to be taken
by the Chairman of the meeting of his own motion, and shall be ordered to be taken by
him on a demand made in that behalf by the person or persons specified below, namely:
a. In the case of a public company public company public company public company public company having a share capital, by any member or
members present in person or by proxy and holding shares in the company:
(i) which confer a power to vote on the resolution not being less than 1/10
th
of
the total voting power in respect of the resolution, or
(ii) on which an aggregate sum of not les than fifty thousand rupees has been
paid up;
b. In the case of a private company private company private company private company private company having a share capital, by one member, present
in person or by proxy, if not more than seven members are personally present,
and by two members present in person or by proxy, if more than seven members
are personally present;
c. In the case of any other company any other company any other company any other company any other company, by any member or members present in person
or by proxy and having not less than 1/10
th
of the total voting power in respect of
the resolution.
Postal ballot
The concept of obtaining the approval/ consent of the members by postal ballot
has for the first time been introduced in the Companies Act, 1956 by the Companies
Amendment Act, 2000 by inserting a new section section 192A into the Act. Under
this section listed company listed company listed company listed company listed company has been given the option of having the resolutions of
shareholders passed by a postal ballot instead of having them passed at a general
meeting.
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Thus, a listed company may may may may may get any resolution passed by means of a postal ballot,
instead of transacting the business in general meeting. It shall shall shall shall shall do so if such business is
notified by the Central Government as capable of being passed by postal ballot. In
exercise of the powers conferred by section 192A of the Act, the Central Government
has prescribed the Companies (Passing of the Resolution by Postal Ballot) Rules 2001.
The notice of a decision to pass any resolution by postal; ballot should be sent to
all shareholders along with a draft resolution explaining the reasons therefore.
a. The shareholders may send their assent or dissent in writing on a postal ballot
within a period of 30 days from the date of passing of the letter.
b. The notice shall be sent by Registered Post Acknowledgement Due.
c. The notice shall include a postage pre-paid envelope for facilitating communication
of assent or dissent.
d. There are several business items which can be passed through only by postal
ballot by a listed company. Some of these are; Alteration in the object clause of
memorandum; Buy-back of own shares by the company etc.
E. Proxies
Proxy is the term applied to a person appointed to act on behalf of another
person entitled to attend and vote at a meeting. The term is also used to denote the
instrument by which the appointment is made. Thus a person who is authorised to vote
for another and the document by which he is so authorised both are called proxy. If a
member is unable attend to meeting he can appoint another person as proxy (Section
176). Such another person may or may not be member of the company.
F. Resolutions
i. Ordinary resolution
ii. Special resolution
iii. Resolution requiring special notice
iv. Resolution by Circulation.
v. Registration of resolution and agreement
R RR RResolution: esolution: esolution: esolution: esolution: A resolution refers to the decision of a meeting. Thus, once the motions
have been put to the members and they have voted in favour of it, it becomes a
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resolution. With respect to general body meetings, there are three kinds of resolutions,
namely, ordinary, special and requiring special notice.
Motion: Motion: Motion: Motion: Motion: A proposal made at a meeting by any member is called Motion . A
motion when passed is called a resolution. A person proposing a motion is called a
mover. A motion must be signed by its mover.
A motion may be passed as originally moved or with certain amendments proposed
during the meeting. Motions may relate to the closure of discussion or postponement of
the discussion.
(i) (i) (i) (i) (i) An ordinary resolution An ordinary resolution An ordinary resolution An ordinary resolution An ordinary resolution is a simple majority resolution, i.e., the votes cast in favour
of the resolution, are more than the votes cast against the resolution, if any.
Matters requiring ordinary resolution - Matters requiring ordinary resolution - Matters requiring ordinary resolution - Matters requiring ordinary resolution - Matters requiring ordinary resolution -
To increase the share capital To appoint Directors/ managing/Whole-
time Directors
To adopt annual accounts To declare dividends
To wind-up company voluntarily To give consent for selling undertaking
of the company
( (( ((ii) ii) ii) ii) ii) A AA AA special resolution, special resolution, special resolution, special resolution, special resolution, on the other hand, requires a special majority (3/4
th
majority)
to approve the resolution. The three requirements are:
1. The votes in favour must atleast be three times the votes cast against the
resolution, if any.
2. The notice as per the provisions of the Companies Act must have been duly
given .
3. The notice must specify the intention to propose the resolution as a special
resolution.
The 3/4
th
majority is of the members present and voting. For example, if there are
12 members present and vote, 9 or more voting in favour will carry the resolution as a
special resolution. If 8 abstain from voting, 3 vote in favour and 1 against, the resolution
is carried.
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Matters requiring special resolution - Matters requiring special resolution - Matters requiring special resolution - Matters requiring special resolution - Matters requiring special resolution -
To alter the objects or the place of registered office of a company
To alter the articles of association To reduce the share capital
To change the name of the company To pay interest on shares out of
capital
To have the company wound up by the court
(iii) A AA AA resolution requiring special notice resolution requiring special notice resolution requiring special notice resolution requiring special notice resolution requiring special notice means that at least fourteen days before
the meeting, the member proposing to move such a resolution must inform the
company. The company in turn is required to inform all members, of the proposed
resolution, at least seven days before the date of the meeting. Such a resolution is
required for appointing or removing a director or auditor.( Sec 189)
(iv) R RR RResolution by circulation. esolution by circulation. esolution by circulation. esolution by circulation. esolution by circulation. Sometimes it is not practicable for the company to
hold the board meeting. In such cases the Board may pass resolution by circulation
under section 289. The Board may pass any resolution by circulation except
those resolutions which are required by the Companies Act or the Articles to be
passed only at a Board meeting. Passing of resolution by circulation does not
dispense with the statutory requirement of holding Board meeting at least once in
every quarter. The following are the rules regarding the passing of resolution by
circulation:
a. The draft of the resolution along with all the necessary papers should be
circulated to all the directors in India at their usual address.
b. The resolution is approved by all or majority of them as are entitled to vote
on the resolution.
c. The number of directors present in India must not be less than the quorum.
The system of passing the resolution by circulation is a convenient practice and it
also ensures quick decision making. When a resolution is passed by circulation, it is
advisable to record it in the minutes of the next Board meeting.
(v) R RR RRegistration of certain resolutions and agreements egistration of certain resolutions and agreements egistration of certain resolutions and agreements egistration of certain resolutions and agreements egistration of certain resolutions and agreements - Section 192 enumerates
certain resolutions and agreements, a copy of which must be forwarded to the
Registrar of Companies for registration within thirty days after their passing /
making. Such resolutions or agreements shall be filed with the Registrar within 30
days in form no. 23.
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G) Chairman
The chairman plays a very important role in the conduct of a meeting. A meeting is
not properly constituted unless the proper person is in the chair. The chairmans main
function is to preside over the meeting and conduct it in an orderly manner.
The articles of the company may provide, that the board of directors shall appoint
one of the members of the board, to be the chairman of the board as well as for
the general meeting. The chairman of the board shall preside as chairman at
every general meeting of the company (Regulation 50 of Table A)
As per Regulations 51 and 52 of Table A, if no chairman is designated beforehand
or he is not present within fifteen minutes of the appointed time of the meeting or
is unwilling to act as Chairman of the meeting, the directors present shall elect
one amongst themselves to be Chairman of the meeting. But, if no director is
willing to act as Chairman or if no director is present within 15 minutes after the
appointed time of the meeting, the members present may elect one amongst
themselves to be Chairman of the meeting. The chairman, if required to be so
elected shall be elected by a show of hands unless a poll is demanded.
Duties and role of Chairman:
A chairman is required to maintain order and decorum at a meeting, to give ruling
on points of order, decide priority of speakers, to maintain relevancy and order in
debate, to adjourn a meeting, to exercise a casting vote in case of tie, and to ascertain
the sense of a meeting and declare the result of voting.
H) Minutes
What do you mean by the term minutes? Minutes constitute the official record of
business transacted at meetings. It is the record of the proceedings at a meeting of
directors or shareholders of a company. Minutes are the record of resolution and matters
ancillary thereto and not a complete transcript of every word used in the course of a
meeting.
Section 193 creates a statutory obligation on every company to maintain minutes
of all proceedings of
a) every general meeting; and
b) every meeting of the board of directors or its committee.
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Dissolution, P Dissolution, P Dissolution, P Dissolution, P Dissolution, Postponement & Adjournment of Meeting ostponement & Adjournment of Meeting ostponement & Adjournment of Meeting ostponement & Adjournment of Meeting ostponement & Adjournment of Meeting
Dissolution Dissolution Dissolution Dissolution Dissolution of the meeting refers to the situation where the meeting no
longer exists as such. Its proceedings are not merely suspended but exhausted.
P PP PPostponement ostponement ostponement ostponement ostponement When the date of the meeting is shifted to another date,
without conducting the meeting at all it is called postponement.
Adjournment Adjournment Adjournment Adjournment Adjournment When a meeting is dissolved with the object of holding it
again on some future date, such act is called adjournment. A meeting is
usually adjourned in the following cases:
1. When the business is not finished.
2. When a quorum is not present within half an hour from the appointed
time.
3. When a motion for adjournment is adopted.
4. When a poll is demanded.
12.4 Statutory Meeting (sec 165)
Object: Object: Object: Object: Object: The statutory meeting is the first meeting of the shareholders of a public
company. The basic purpose of the statutory meeting is to acquaint the members about
the development after the formation of the company and to discuss the various matters
arising out of the promotion and formation of the company. Holding of statutory meeting
is important due to the fact that u/s 433 (b) of the Act, the company may wound up if
there is default in holding the statutory meeting or delivering the statutory report to the
Registrar.
T TT TTime limit: ime limit: ime limit: ime limit: ime limit: As per section 165 every public company limited by shares or guarantee
and having a share capital, must hold statutory meeting, within a period of not less
than one month and not more than six months from the date the company becomes
entitled to commence business.
However, the following companies are not required to hold a statutory meeting:
(a) a private company;
(b) a public company not having share capital;
(c) a public company liability of its members unlimited;
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(d) a public company limited by guarantee and not having share capital and
(e) a Government company.
Notice: Notice: Notice: Notice: Notice: Notice of the statutory meeting along with the statutory report must be
given to every member of the company and also to the Registrar. The notice must be
given at least twenty-one clear days before the meeting. The meeting at a shorter notice
shall be valid if consent is accorded thereto by members of the company holding not
less than 95 percent of such part of the paid-up share capital of the company as gives
a right to vote at the meeting.
The members may discuss any matter relating to the formation of the company or
arising out of the statutory report.
Statutory report Statutory report Statutory report Statutory report Statutory report - The statutory report is required to be sent to each member along
with the notice of the meeting. A copy of it should also be sent to the Registrar for
registration. The statutory report must contain matters set out under section 165(3).
The report should be certified by not less than two directors, one of whom should be the
managing director where there is one. Further, the auditors of the company shall certify
that part of the statutory report which relates to the shares allotted, cash received in
respect thereof and the receipts and payments and the balance of cash in hand
Contents of statutory report: Contents of statutory report: Contents of statutory report: Contents of statutory report: Contents of statutory report: Such report shall state the following
(a) the total number of shares allotted
(b) the amount of cash received in respect of all the shares allotted
(c) the receipts and payment upto a date within seven days of the date of the report
(d) details of contract
(e) the particulars of arrears of calls due from any director or manager
(f) details of commission or brokerage paid or to be paid to any director or to the
manager in connection with the issue or sale of shares or debentures
Default: Default: Default: Default: Default: If default is made in complying with any requirement of section 165, every
director or other officer of the company who is in default shall be punishable with fine,
which may extend to five thousand rupees.
In case of default in filing the statutory report or in holding the meeting, the company
may be wound up under section 433 (b).
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12.5 Annual General Meeting (sec 166)
The purpose of AGM is to inform the shareholders the progress made by the company
during the previous year and the present position and the future prospects of the company.
Such a meeting must be held annually.
a. a. a. a. a. Which companies to hold Which companies to hold Which companies to hold Which companies to hold Which companies to hold - Every company, whether public or private, having a
share capital or not, limited or unlimited must hold an Annual General Meeting.
b. b. b. b. b. When to hold. When to hold. When to hold. When to hold. When to hold. The first Annual General Meeting of a company may be held
within eighteen months from the date of its incorporation. Further, the first AGM
must be held within 9 months of the close of the first financial year of the company
(section 166 & 210).
In respect of subsequent A subsequent A subsequent A subsequent A subsequent AGMs GMs GMs GMs GMs, section 166 read with section 210 provides as
follows:
(a) There must be one meeting held in each calendar year.
(b) The gap between two AGMs must not be more than fifteen months.
(c) Meeting must be held not later than six months from the close of the financial
year.
Thus subsequent AGM must be held at the earliest of the above three dates.
The Registrar of Companies is empowered to grant extension of time extension of time extension of time extension of time extension of time, for special
reasons, up to a maximum period of three months.
c. c. c. c. c. Day Day Day Day Day, Hour and Place of A , Hour and Place of A , Hour and Place of A , Hour and Place of A , Hour and Place of AGM - GM - GM - GM - GM - Every annual general meeting shall be held
during business hours and on a day that is not a public holiday (except in certain
cases). Further, the meeting shall be held either at the registered office of the
company or at some other place within the city, town or village in which registered
office of the company is situated.
d. d. d. d. d. Agenda of A Agenda of A Agenda of A Agenda of A Agenda of AGM - GM - GM - GM - GM - The business to be transacted at an AGM may comprise of (i)
ordinary business (ii) special business.
Ordinary business Ordinary business Ordinary business Ordinary business Ordinary business relates to:
(a) consideration of the accounts, balance sheet and the reports of the Board of
directors and auditors;
(b) the declaration of dividends;
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(c) the appointment of directors in place of those retiring ; and
(d) the appointment of auditors and fixation of their remuneration.
Any other business scheduled to be transacted at the meeting will be deemed to be
special business special business special business special business special business and therefore, every item on the agenda must be accompanied by an
explanatory statement in terms of section 173.
e. e. e. e. e. Notice of A Notice of A Notice of A Notice of A Notice of AGM - GM - GM - GM - GM - The notice notice notice notice notice of the meeting must be given to every person entitled
thereto at least twenty one clear days before the date of the meeting. A shorter
notice may be held valid if consent is accorded to by all the members entitled to
vote at the meeting. A copy of the directors report and auditors report must
accompany the notice. Also a proxy form must be attached to the notice, on
which it must be specifically mentioned that a member entitled to vote is entitled
to appoint proxy and proxy need not be a member of the company. The notice
must contain a statement of the business to be transacted thereat.
f ff ff. .. .. A AA AAGM must be held even if accounts are not ready GM must be held even if accounts are not ready GM must be held even if accounts are not ready GM must be held even if accounts are not ready GM must be held even if accounts are not ready Requirement of holding an
annual general meeting is independent of presenting audited accounts at the
AGM. Thus, annual general meeting must be held within prescribed time even if
audited accounts are not ready. If the meeting is adjourned, then the adjourned
meeting must be held within the maximum time allowed.
g gg gg. .. .. Default in holding A Default in holding A Default in holding A Default in holding A Default in holding AGM - GM - GM - GM - GM - If default is made in holding an AGM in accordance
with the provisions of the Act, the Central Government may, on the application of
any member of the company, call or direct the calling of a general meeting of the
company and give such directions as it thinks fit including direction that one
member of the company present in person or by proxy shall be deemed to constitute
a valid meeting.
In case of default in holding an AGM in accordance with section 166 or in complying
with any directions of the Central Government, National Company Law Tribunal, the
company, and every officer of the company who is default, shall be punishable with fine
up to rupees fifty thousand. In case the default continues, a further fine upto Rupees
2500 per day may be levied till such default continues.
12.6 Extra Ordinary General Meeting (sec 169)
All general meetings other than the statutory and annual general meeting shall be
called as extraordinary general meetings.
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All business transacted at such meetings is called special business and therefore,
every item on the agenda must be accompanied by an explanatory statement in terms
of section 173.
An EGM may be called:
i) by the Board of directors of its, own accord;
ii) by the directors on requisition;
iii) by the requisionists themselves;
iv) by the Company Law Board/ Tribunal.
i) i) i) i) i) By the Board of directors of its, own accord By the Board of directors of its, own accord By the Board of directors of its, own accord By the Board of directors of its, own accord By the Board of directors of its, own accord The Board of Directors may call
EGM at an time by giving not less than 21 days clear notice. A shorter notice
may, however, be given if consent is accorded thereto by members of the company
holding, if the company has share capital, not less than 95% of such part of the
paid up capital of the company as gives a right to vote at the meeting. If the
company has no share capital, by members having not less than 95% of the total
voting power exercisable at that meeting.
ii) ii) ii) ii) ii) By the directors on requisition - By the directors on requisition - By the directors on requisition - By the directors on requisition - By the directors on requisition - The Board of Directors must convene a general
meeting upon request or requisition under the following conditions:
i. The requisition must be signed by member(s) holding atleast 1/10th of the
paid up share capital of the company, in the case of companies having a
share capital; and by members holding atleast 1/10th of the total voting
power in other cases.
ii. The requisition must state the objects of the meeting.
iii. The requisition must be deposited at the registered office of the company.
iv. The directors must, within 21 days of the receipt of a valid requisition, issue
a 21 clear days notice for the holding of the meeting on a date fixed within
45 days of the receipt of the valid requisition.
iii) iii) iii) iii) iii) By the requisitionists themselves - By the requisitionists themselves - By the requisitionists themselves - By the requisitionists themselves - By the requisitionists themselves - On a valid requisition being made as per
section 169, the Board of directors are under an obligation to convene the meeting
within forty five days forty five days forty five days forty five days forty five days of the receipt of the valid requisition. In case, the Board of
directors fails to call the meeting as aforesaid, the requisitionists or such majority
of them as spelt out under section 169 may call and hold the meeting within
three months three months three months three months three months of the date of the requisition.
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iv) iv) iv) iv) iv) By the CLB/National Company L By the CLB/National Company L By the CLB/National Company L By the CLB/National Company L By the CLB/National Company Law T aw T aw T aw T aw Tribunal - ribunal - ribunal - ribunal - ribunal - If for any reason it is impracticable
to call a meeting of the company, the National Company Law Tribunal on its
motion or on an application of any director or any member entitled to vote at that
meeting. The directions given by the Company Law Board/ Tribunal may include
a direction that one member present in person or proxy shall be deemed to
constitute a valid meeting.
Class meeting Class meeting Class meeting Class meeting Class meeting - When it is proposed to alter, vary or affect the rights of a particular
class of shareholders and it is not possible to obtain the consent in writing, of the
holders of 3/4th of the issued shares of that class, a meeting of the holders of those
shares may be called. Such a meeting is commonly known as a class meeting. All
resolutions in a class meeting are required to be passed as special resolutions. The
holders of at least ten per cent of the issued shares of that class who did not consent in
favour of the consent may apply to the Court within twenty one days to have the resolution
cancelled and where such application is made, the resolution shall not have effect
unless and until it is confirmed by the Court.
12.7 Board Meetings
A company essentially acts through its Board of directors. The Board generally
acts by taking decisions collectively through resolutions made in the meeting of
the Board. A decision of a Board meeting will not be considered valid unless the
meeting was properly convened and duly constituted.
According to section 285, a Board meeting must be held at least once in every
three calendar months and at least four such meetings must be held every year.
The proper authority to call meeting of Board of directors is any director. However,
a manager or secretary may also call a meeting of the Board if a requisition to
that effect is made by a director.
Board meetings may be held at any place and also outside business hours
according to the convenience of the directors.
The quorum for a meeting of the Board of directors shall be 1/3
rd
of its total
strength (any fraction contained in that 1/3
rd
to be rounded of to one) or two
directors, whichever is higher. However, in case the interested directors exceeds
or are equal to 2/3
rd
of the total strength, the remaining directors, i.e., the number
of directors who are not interested, present at the meeting shall be the quorum
provided they are not less than two.
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It may be noted that in case of Board meetings, quorum is required to be present
throughout the meeting.
The minutes must be so entered within thirty days of the conclusion of such meeting.
The minutes must be duly signed by the chairman of the said meeting or the chairman
of the next succeeding meeting.
12.8 Meetings of Debenture Holders
The terms of issue of debentures and the trust deeds invariably contain provisions
for meetings of the debenture-holders. These meetings are held for
a. Modification or compromise of rights between the company and the debenture-
holders.
b. to release a particular property from the charge.
c. to reduce the amount of debenture interest or to defer its payment or to effect an
exchange of debentures for equity or preference shares.
To facilitate this, there is commonly inserted in a trust deed a clause enabling a
specified majority of debenture holders by resolution to bound the whole body of
debenture holders.
The provisions of general meetings of the company as contained in section 171 to
175 and sections 177 to 186 as modified by the companys articles shall apply to the
meetings of debenture holders.
12.9 Annexure I Comparison of Company Meetings
Board Meeting Board Meeting Board Meeting Board Meeting Board Meeting Statutory Statutory Statutory Statutory Statutory
Meeting Meeting Meeting Meeting Meeting
Annual Annual Annual Annual Annual
General General General General General
Extraordinary Extraordinary Extraordinary Extraordinary Extraordinary
1. Applicable
Provision
Section 285
& Article of
Association
Section 165 Section 166
Section 169
& Article of
Association
2. Who can
convene?
According to
Article of
Association and
standing order.
Duly
constituted
Board meting/
Court.
Duly
constituted
Board meeting/
Company Law
Board.
Duly constituted
Board meeting/
Requisitionists
/ Company Law
Board.
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3. Duration
Once every
3 months - at
least four
meetings during
the year.
Once in
company's
life time. Within
not less than 1
month and not
more than 6
months of the
date of
commencement
certificate.
Once every year
- with 15
months of last
Annual General
Meeting and 6
months
of end of
financial year.
As and when
Board thinks
necessary or
when
requisitioned
by members.
4. Objective The enable
directors to
determine policy,
make decisions
and exercise
control, direction
and supervision
over
management.
To acquaint
members, as
soon as possible
after
incorporation,
with matters
reformation of
the company and
its financial
position and
prospects.
To enable
members to
review at the end
of the company
on the basis of
report and
annual accounts,
to elect directors
and auditors and
in general to
exercise their
rights
To transact
business outside
the scope of
Annual General
meeting and
other business
of urgent nature
5. Agenda Approval of
minutes,
consideration
of financial and
trading reports,
passing accounts
for payment,
transfers, staff
matters, convening
of general
meeting, etc.
Adoption of
Statutory Report,
approval of any
modification of
any contract.
Adoption of
Directors Report,
Audited Accounts,
Balance sheet,
etc., declaration
of dividend,
election of
directors and
auditors and any
special business.
Any special
business.
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Board Meeting Board Meeting Board Meeting Board Meeting Board Meeting Statutory Statutory Statutory Statutory Statutory Annual Annual Annual Annual Annual
6. Notice to
Whom
To every director -
as per Article of
Association or
reasonable
length.
To all members
and Auditors -
21 days clear
notice.
Same as
Statutory
Meeting.
Same as
Annual
General
Meeting.
7. Annexures to
Notice
Proposed
resolution of any
director.
Statutory Report,
Proxy Form,
Admission Card.
Audited
Accounts and
Balance Sheet,
Auditors Report,
Directors Report,
Proxy Form,
Admission Card,
Explanatory
statement (if
special
business).
Explanatory
Statement,
Proxy Form,
Admission
Card.
8. Quorum 1/3rd of total
(disinterested)
directors or 2
whichever is
higher - Article
of Association
may provide
larger number
Public company
- 5 Private
company - 2
Public company
- 5, Private
company - 2
(Article of
Association may
provide larger
quorum)
Same as
Annual
General
Meeting
9. Chairperson As per Articles
usually
Chairman of the
Board.
As per Article of
Association -
usually
Chairman of the
Board.
Same as
Statutory
Meeting.
Same as
Annual
General
Meeting
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10. Proxies Proxy cannot be
appointed.
Members entitled
to attend and vote
can appoint
proxy/ proxies.
Members of
company without
share capital
cannot appoint
proxy unless
provided by
Articles of
Association.
Members of
Private company
can appoint one
proxy.
Same as
Statutory
Meeting.
Same as
Annual
General
Meeting]
11. Resolutions Onl y ordi nary
Resol uti on -
passed at
meeti ng or by
Circulation
Special business
- ordinary
resolution
For Ordinary
Business -
ordinary
resolution. For
Special
Business -
ordinary or
special
resolution.
Special
business -
Ordinary or
Special
resolution
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12. Voting Each director
has one vote,
chairman has
casting vote if
allowed by
Article of
Association.
Voting usually by
show of hands.
Decisions by
simple majority.
Each member
has one vote; by
show of hands -
voting right
proportional to
shareholding
only in poll.
Voting by show
of hands unless
poll demanded
Same as
Statutory
Meeting.
Same as
Annual
General
Meeting.
13. In case of
default
Fine up to
Rs. 1000 for
every officer for
default in issuing
notice.
For default in
holding meeting
fine up to Rs.
5000 for
company and
every office in
default.
For default in
holding meeting
fine up to Rs.
50,000 and Rs.
2,500 per day
for continuing
default for
company and
every officer in
default.
Same as
Annual
General
Meeting.
QUESTION BANK
I. FAQs
1. Discuss the requisites of a valid general meeting as per the Companies Act,
1956.
2. In what circumstances an Extra-ordinary General meeting is to be held?
3. State the conditions and procedure for holding an Extra-ordinary general meeting
on requisition.
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4. Every meeting, in order to be valid must be duly convened, properly constituted
and conducted. Elucidate.
5. What is the quorum for a general meeting?
6. Differentiate between a ordinary resolution and special resolution.
7. Under what circumstances do special resolutions becomes necessary?
8. Explain the provisions of the Companies Act, 1956 relating to holding of Annual
General Meeting of the Company with regard to the following :
- Period within which the first and the subsequent Annual Meetings must be
held.
- Business which may transacted at the Annual General Meeting.
9. What are the items that constitute ordinary business in an annual general meeting.
10. Distinguish between Special business and Special resolution.
11. Explaining the provisions of the Companies Act, 1956 with regard to holding of
the Annual General Meeting.
12. What is statutory meeting? Explain its significance.
II. CASE STUDIES
1. Low Esteem Infotech Ltd. was incorporated on 1.4.2006. No General Meeting of
the company has been held so far. Explain the provisions of the Companies Act,
1956 regarding the time limit for holding the first annual general meeting of the
company and the power of the Registrar to grant extension of time for the first
Annual General Meeting. .. ..
(Hint: The First AGM should be held within earlier earlier earlier earlier earlier of the following dates:-
- being 18 months from the date of incorporation.
- being 9 months from the close of the financial year.
Thus if the company is incorporated on 1.4.2006. The First AGM can be held
latest by 1.10.2007. If AGM is held on or before 1.10. 2007, any further AGM
for 2006 and 2007 is not necessary. Thereafter AGM must be held every year.
There is no provision to grant extension for holding 1
st
AGM by the ROC.)
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2. Decide the last date for holding the next Annual General Meeting in the following
case : Public Limited Company incorporated on 15-2-2000; Certificate of
Commencement of Business 10-4-2000; Annual General Meeting for 2002-
2003 held on 10-7-2003; Accounting year April- March
(Hint: Gap between two general meetings should not be more than 15 months
and should be held within 6 months from close of financial year)
3. The financial year of the Company ended on 31
st
March, 2007. By what time
should the Company hold its Annual General Meeting?
(Hint: The AGM has to be held within 6 months from close of financial year
(section 210). Hence, meeting should be held before 30-9-2007.)
4. The financial year of Up-to-date Business Consultants Ltd. ends on 30
th
June
every year. For the financial year ended 30.06.2001, the company could not
hold its annual general meeting on or before 31.12.2001 and accordingly
requested the Registrar of Companies, Chennai to grant an extension of time for
a period of 3 months so that the general meeting could be held on or before
31.03.2002. The company held its last annual general meeting on 31.12.2000
for adopting its annual accounts for the year-ended 30.06.2000. Examine whether
the request of the company would be considered by the Registrar in view of the
fact that if extension was granted there would be no annual general meeting of
the company during the calendar year 2001.
(Hint: The time for holding AGM can be extended for special reasons by three
months, with permission of Registrar of companies. [proviso to section 166(1)]
under section 210(3)(b), annual accounts must be submitted within six months
from date of closure of accounts. This period can be extended upto 9 months with
permission of ROC. If such permission is granted, it may happen that in a particular
calendar year, there will be no AGM held. This would be permissible- Department
letter NO. 34/11/69- CL-III dated 13-1-1972- same view in madras & Southern
Maratha Railway v. Bezwada Municipality AIR 1944 PC 71 In view of this, here is
no offense if no AGM was held in year 2001.)
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CHAPTER - XIII
ACCOUNTS AND AUDIT, STATUTORY
REGISTERS & DIVIDENDS
13.1 Accounts and audit. (209 233 B)
13.2 Statutory Registers, Books, Returns to be maintained by a company.
13.3 Divisible Profits and Dividend (205 207
13.1 Accounts and Audit (Sections 209 - 233 B)
(a) (a) (a) (a) (a) Books of account required to be kept - Books of account required to be kept - Books of account required to be kept - Books of account required to be kept - Books of account required to be kept - Section 209 of the
Companies Act requires every company to maintain proper books of
account with respect to certain receipts and payments, sales and
purchases, assets and liabilities. Besides, companies engaged in
production, processing, manufacturing or mining activities are required
to keep proper cost accounting records in relation to utilisation of material
or labour or other items of costs, as may be prescribed.
Location of Books of Accounts: The aforesaid books of account are
required to be kept at the registered office of the company except where
the Board of directors decide to keep the same at any other place in
India and the Registrar is intimated the full address of that other place
within seven days of the decision.
Preservation of Books of Accounts: Books of Accounts for 8 years
immediately preceding the current year shall be maintained.
What do you mean by P What do you mean by P What do you mean by P What do you mean by P What do you mean by Proper Books of Accounts? roper Books of Accounts? roper Books of Accounts? roper Books of Accounts? roper Books of Accounts?
Books which give true and fair view of the state of affairs
of the company
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The books of account explain the transactions; and
The books of account are kept on accrual basis and according to the
double-entry system of accounting.
The accounts are prepared as per accounting standards.
(b) Inspection of books of account (b) Inspection of books of account (b) Inspection of books of account (b) Inspection of books of account (b) Inspection of books of account (section 209A) - -- -- The books of account of a
company shall be open to inspection by:
i) any director during business hours,
ii) the Registrar of Companies,
iii) such officer of Government, as may be authorised by the Central Government in
this behalf,
iv) the Reserve Bank of India.
v) SEBI in respect of listed companies (inserted by Companies (Amendment) Act,
2000).
Although a director has a right of inspection of books of account during business
hours, this right does not extend to a shareholder except where such a right is specifically
given in the Articles.
(c) P (c) P (c) P (c) P (c) Persons responsible for keeping proper books of account ersons responsible for keeping proper books of account ersons responsible for keeping proper books of account ersons responsible for keeping proper books of account ersons responsible for keeping proper books of account - Section 209(6)
primarily makes the managing director or manager, if there is one, liable for keeping
proper books of account. In case the company does not have a managing director or
a manager, every director of the company shall be liable.
Besides the liability extends to every officer, employee, agent and any other person
who has been made responsible to ensure that the requirements of section 209 are
complied with.
(d) P (d) P (d) P (d) P (d) Preparation and presentation of F reparation and presentation of F reparation and presentation of F reparation and presentation of F reparation and presentation of Financial Statements - inancial Statements - inancial Statements - inancial Statements - inancial Statements - Section 211 requires
that every balance sheet of a company shall give a true and fair view of the state of
affairs of the company as at the end of the financial year.
Format of balance sheet: The balance sheet should be in form as given in Part I of
Schedule VI or as near thereto as circumstances permit. The balance sheet may, however,
be drawn in any other form if approved by the Central Government, either generally or
ACCOUNTS AND AUDIT, STATUTORY REGISTERS & DIVIDENDS
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in any particular case. The balance sheet may be either in vertical form or horizontal
form. Previous years figures should be indicated.
Schedule VI does not prescribe any form for profit and loss account. However, the
profit and loss account should give a true and fair view of the profit and loss of the
company for the financial year and should comply with the requirements of Part II of
Schedule VI so far as they are applicable thereto.
Apart from balance sheet and profit and loss account, a summary sheet containing
Balance Sheet abstract and companys General Business Profile should be given in
prescribed form.
Schedule VI is, however, not applicable to insurance or banking companies or any
company engaged in the generation or supply of electricity or any other class of
companies for which a form of balance sheet has been specified in or under the Act
governing such company.
Accounting standards and accounts: Accounting standards and accounts: Accounting standards and accounts: Accounting standards and accounts: Accounting standards and accounts: According to section 211 every profit and
loss account and balance sheet of the company shall comply with the accounting
standards. If the accounts do not comply with the accounting standards, such company
should disclose in its profit & loss account and balance sheet, the following namely,:
a) the deviation from the accounting standard;
b) the reasons for such deviations; and
c) the financial effect, if any, arising due to such deviation.
The accounting standards will be prescribed by the Central Government in
consultation with National Advisory Committee on Accounting Standards, which consist
of one nominee each from ICAI, ICSI, ICWA apart from other members from Govt.
and Chambers of Commerce. Till Accounting Standards are prescribed by the Central
Government, present Accounting Standards specified by ICAI will be the accounting
standards.
A financial year may be less or more than a calendar year, but it cannot be more
than 15 months. A financial year can be extended upto 18 months with special
permission of Registrar of Companies. [section 210(4)].
(e) Authentication of Accounts - (e) Authentication of Accounts - (e) Authentication of Accounts - (e) Authentication of Accounts - (e) Authentication of Accounts - Every balance sheet and profit and loss account
of a company (except a banking company) is required to be signed, on behalf of the
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Board of directors, by its manager or company secretary, if any, and by not less than
two directors of a company one of whom must be the managing director where there is
one. The authentication by a single director shall be valid in case he is the only one
present in India at that time provided the reasons for his signing alone are attached to
the balance sheet and profit and loss account.
CEO/CFO certification: In case of listed company, clause 49(V) of Listing Agreement
provide that CEO (MD) and the CFO (whole-time Finance Director or other person
discharging this function) of the company shall certify to Board that, they have reviewed
the financial statements and the cash flow statements and to the best of their knowledge
and belief these statements are true, there were not fraudulent or illegal transactions,
they accept responsibility of internal control, they have indicated to auditors and audit
committee significant changes and instances of fraud etc.
The certificate should be submitted to Board annually before or at the time when
the annual accounts are presented to Board.
(f) Boards R (f) Boards R (f) Boards R (f) Boards R (f) Boards Report - eport - eport - eport - eport - Section 217(1) requires that there must be attached to every
balance sheet laid before a company in general meeting, a report by its Board of
directors with respect to the state of the companys affairs, reserves to be created,
dividends proposed to be declared and material changes and commitments, if any,
affecting the financial position of a company which have occurred between the end of
the financial year of the company to which the balance sheet relates and the date of the
report, the measures taken in respect of conservation of energy, technology absorption,
foreign exchange earnings and outgo.
The report of the Board of Directors should also contain certain particulars of
employees drawing salary above prescribed limits (present limit is Rs. 2 lakh per month)
in respect of certain employees.
The report of the Board and any addendum thereto must be signed by the Chairman.
Directors Responsibilities Statement: The Companies (Amendment) Act, 2000, has
amended section 217A to provide that the Boards reports will also include a Directors
Responsibilities Statement shall state that the directors had followed,
(a) in the preparation of annual accounts, the applicable accounting standards and
given proper explanation relating to material departures, if any;
(b) selected such accounting policies and applied them consistently to ensure true
and fair view.
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(c) take and proper and sufficient care for the maintenance of adequate records for
safeguarding the assets of the Company and for detecting fraud and other
irregularities.
(d) prepared the annual accounts on a going concern basis.
(g) Circulation of Annual Accounts - (g) Circulation of Annual Accounts - (g) Circulation of Annual Accounts - (g) Circulation of Annual Accounts - (g) Circulation of Annual Accounts - Section 219(1) requires that a copy of every
balance sheet (including the profit and loss account, auditors report and every other
document required to be annexed or attached thereto) which is to be laid before the
annual general meeting of the company shall be sent, not less than twenty-one clear
days before the meeting, to every member of the company and to all other persons so
entitled.
As per SEBI guidelines, unabridged balance sheet with full details as statutorily
required, has to be sent to all members in case of listed companies. A debenture holder
or depositor is also entitled to get a copy of balance sheet with all required documents
free of cost, if he asks for the same[section 219(2)].
(h) Adoption of Accounts - (h) Adoption of Accounts - (h) Adoption of Accounts - (h) Adoption of Accounts - (h) Adoption of Accounts - One of the business to be transacted at an annual
general meeting is adoption of the accounts including the balance sheet, profit and
loss account and the directors report thereon. The annual accounts must be presented
within six months from close of financial year. This period can be extended by further
three months by RoC. In case of the first AGM, the annual general meeting should be
held within nine months from close of financial year.(section 210)
(i) F (i) F (i) F (i) F (i) Filing of Accounts - iling of Accounts - iling of Accounts - iling of Accounts - iling of Accounts - Every company is required to file with the Registrar three
copies of its balance sheet and profit and loss account duly authenticated together with
three copies of all documents required to be annexed to the or attached thereto. Section
220 requires these documents to be filed with the Registrar within thirty days from the
date on which the balance sheet and profit and loss account were laid before the AGM
of the company. Where, however, the AGM has not been held, these documents must
be filed within thirty days from the latest date on or before which the AGM should have
been held.
In case of default, the company, and every officer of the company who is in default,
shall be punishable with fine which may extend to five hundred rupees for every day
during which the default continues.
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(j) Disclosure of accounts of subsidiary companies: (j) Disclosure of accounts of subsidiary companies: (j) Disclosure of accounts of subsidiary companies: (j) Disclosure of accounts of subsidiary companies: (j) Disclosure of accounts of subsidiary companies:
Balance sheet of a holding company should include following details of each
subsidiary company [section 212]-
(a) Balance sheet, P&L account
(b) Report of Board of Directors
(c) Report of Auditors of the subsidiary company.
(d) Statement of holding companys interest in the subsidiary at the end of financial
year.
Audit
(i) Audit - (i) Audit - (i) Audit - (i) Audit - (i) Audit - Audit is the systematic check of books of accounts. The main purpose
of audit is detection and prevention of errors and detection and prevention of fraud. It
is to ensure that the statement of accounts of the relevant financial year truly and fairly
reflect the state of affairs of the company. In the company form of organisation there is
separation of ownership from management hence the need for audit of accounts is a
must. The owners of the funds, namely, shareholders as well as the creditors would like
to see that their investments are safe, are being used for intended purpose(s) and the
annual accounts of the company present a true and fair view of the state of affairs of
the company. The audit by a duly qualified and independent professional serves the
aforesaid purposes. Sections 216, 218 & 224 to 233B contains a provisions relating to
audit and auditors.
(ii) Qualifications of an auditor - (ii) Qualifications of an auditor - (ii) Qualifications of an auditor - (ii) Qualifications of an auditor - (ii) Qualifications of an auditor - According to section 226 of the Companies Act
a person who is a chartered accountant within the meaning of the Chartered Accountants
Act, 1949 and holds a certificate of practice is qualified for appointment as auditor.
According to section 224(8)(aa) inserted by the Companies (Amendment) Act, 2000 an
auditor of a company holding any security which carries voting rights of that company
will not be eligible for appointment as auditor.
(iii) Appointment of first auditors - (iii) Appointment of first auditors - (iii) Appointment of first auditors - (iii) Appointment of first auditors - (iii) Appointment of first auditors - The first auditors of a company are to be
appointed by the Board of directors within one month of the date of registration of the
company. The auditor or auditors so appointed shall hold office until the conclusion of
the first annual general meeting.
If the Board of directors fail to appoint the first auditor / auditors, the company in
general meeting may appoint the first auditor / auditors. The auditor appointed must
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inform (in eForm 23B) his appointment to RoC within 30 days after receiving
communication from company.
(iv) Appointment of subsequent auditors (iv) Appointment of subsequent auditors (iv) Appointment of subsequent auditors (iv) Appointment of subsequent auditors (iv) Appointment of subsequent auditors- -- -- subsequent auditor / auditors of a
company are appointed every year by the member in annual general meeting by passing
an ordinary resolution.
Reappointment of retiring auditor- - - - - A retiring auditor, by what so over authority
appointed, shall be reappointed except : (I) Where he is not qualified for reappointment,
(ii) Where he has, in writing, expressed his unwillingness to be reappointed, (iii) Where
a resolution appointing somebody else instead of him or providing expressly that he
shall not be reappointed, has been passed, (iv) Where a notice for a resolution to
appoint some other auditor was given but because of the death, incapacity, etc, of the
other person(s), the resolution cannot be proceeded with , (v) Where he holds the audit
of specified number of companies or more in terms of section 224(1B). (vi) Where a
special resolution is required for his reappointment.
In the absence of the aforesaid circumstances, the retiring auditor will reappointed
by the member by passing an ordinary resolution,
(v) Appointment by special resolution- (v) Appointment by special resolution- (v) Appointment by special resolution- (v) Appointment by special resolution- (v) Appointment by special resolution- Section 224A requires that in case of a
company in with 25 per cent 25 per cent 25 per cent 25 per cent 25 per cent or more of the subscribed subscribed subscribed subscribed subscribed share capital is held, whether
singly or in any combination by a public financial institution / a Government company
/ Central Government / any State Government or State Financial Institution or a
nationalised bank or an insurance company carrying on general insurance business;
the appointment of an auditor shall be made by a special resolution special resolution special resolution special resolution special resolution only.
(vi) Appointment by Central Government - (vi) Appointment by Central Government - (vi) Appointment by Central Government - (vi) Appointment by Central Government - (vi) Appointment by Central Government - Section 224(3) empowers the Central
Government to appoint an auditor in case no auditor is appointed or reappointed at
an annual general meeting of the company.
(vii) Casual vacancy - (vii) Casual vacancy - (vii) Casual vacancy - (vii) Casual vacancy - (vii) Casual vacancy - Casual vacancy caused by the death, insanity, disqualification
or insolvency, etc., of the auditor may be filed by the Board of directors. However, the
casual vacancy caused by the resignation of the auditor can only be filed by the company
in general meeting.
(viii) Ceiling on audits - (viii) Ceiling on audits - (viii) Ceiling on audits - (viii) Ceiling on audits - (viii) Ceiling on audits - No individuals can be appointed as an auditor of more
than twenty companies at a time twenty companies at a time twenty companies at a time twenty companies at a time twenty companies at a time. Further, out of these twenty companies, not more
than ten should be companies having a paid-up share capital of rupees twenty-five lacs
or more. In case of partnership firms of auditors, the ceiling is twenty companies per
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partner of the firm. However, audit of guarantee companies not having share capital
and private companies will not be counted for the purpose of aforesaid twenty companies.
Likewise, audit of foreign companies are also excluded. Again special audits, investigation
and audits of corporations set up under a separate Act are excluded.
(ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - (ix) Appointment of Auditors of Government Companies - The auditor of a
Government company shall be appointed by the Comptroller and Auditor General of
India (C&AG) who is also given power to direct the manner in which the companys
accounts shall be audited. Thus, the government company are subject to two kinds of
audit. First is the statutory audit done by a Chartered Accountant and the other is the
government audit done by the C&AG. The statutory auditor must submit a copy of his
audit report to the C&AG. C&AG has the right to comment upon or supplement the
audit report.
(x) R (x) R (x) R (x) R (x) Removal of an Auditor emoval of an Auditor emoval of an Auditor emoval of an Auditor emoval of an Auditor An auditor retires automatically at the AGM. For
removal of auditors before the expiry of the term (i.e. before next AGM), besides passing
an ordinary resolution, prior permission of the Central Government must be obtained.
The first auditor, appointed by the Board of directors may be removed by merely
passing an ordinary resolution. For removing an auditor, at the expiry of his term, only
an ordinary resolution of which a special notice has been given to the effect that a
retiring auditor shall not be reappointed is sufficient.
(xi) R (xi) R (xi) R (xi) R (xi) Remuneration of Auditors - emuneration of Auditors - emuneration of Auditors - emuneration of Auditors - emuneration of Auditors - In the case of an auditor appointed by the Board
of directors or the Central Government, his remuneration may be fixed by the Board or
the Central Government, as the case may be. In all other cases, it must be fixed by the
company in general meeting or in such manner as the company in general meeting
may determine.
(xii) Rights of the Company Auditor - (xii) Rights of the Company Auditor - (xii) Rights of the Company Auditor - (xii) Rights of the Company Auditor - (xii) Rights of the Company Auditor - Rights of a companys auditor include
(a) the right of access to books and accounts, etc.,
(b) the right to obtain information or explanations,
(c) the right to inspect branch account,
(d) the right to receive notices of general meetings of a company,
(e) the right to attend general meetings and
(f) the right to remuneration.
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(xiii) Duties of Company Auditor - (xiii) Duties of Company Auditor - (xiii) Duties of Company Auditor - (xiii) Duties of Company Auditor - (xiii) Duties of Company Auditor - Section 227 prescribes the duties of the company
auditor. The auditor has a duty to make inquiries into financial transactions. The duties
include the duty to make a report to the members on the accounts of the company
stating compliance with the various statutory provisions. The auditors report shall state
the following :
a) Whether in his opinion and to the best of his information and according to the
explanations given to him, the accounts depicts a true and fair view of the state of
affairs of the company.
b) Whether he has obtained all the information and explanations which to the best
of his knowledge and belief were necessary for audit,
c) Whether in his opinion, proper books of account as required by law have been
kept by the company,
d) Whether the companys balance sheet and profit and loss account dealt with by
the report are in agreement with the books of account and returns,
e) Whether the report on the accounts of any branch office audited under section
228 by a person other than the companys auditor has been forwarded to him
and how he has dealt with the same in preparing his report.
The auditor s duties also include to report on the matters specified under Companies
(Auditors Report) Order, 2003 (CARO, 2003 has replaced MAOCARO Manufacturing
and Other Companies (Auditors Report) Order, 1988).
Another duty cast upon the auditors is to ensure that the accounting standards
issued by the Institute of Chartered Accountants of India have been implemented in the
presentation of financial statements covered by the auditors report.
Section 227 of the Companies Act as modified by the Amendment Act, 2000
provide to the effect that the auditors report shall also state in thick types or in italics
the observations or comments of the auditors which have any adverse effect on the
functioning of the company. The report shall also state whether any director of a company
is disqualified from being appointed as director under the newly inserted clause (g) of
sub-section (1) of Section 274 of the Act.
(xiv) Special audit - (xiv) Special audit - (xiv) Special audit - (xiv) Special audit - (xiv) Special audit - Under section 233A, the Central Government is empowered
to direct that a special audit of the companys accounts for a specified period shall be
conducted. Such a direction shall be issued where it is of the opinion that -
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a) the affairs of any company are not being managed in accordance with sound
business principles or prudent commercial practices; or
b) that the company is being managed in a manner likely to cause serious injury or
damage to the interest of trade, industry or business to which it pertains ;
c) that the financial position of any company is such as to endanger its solvency.
For the purpose of special audit, the Central Government may either appoint a
chartered accountant or the companys auditor himself.
(xv) Cost audit - (xv) Cost audit - (xv) Cost audit - (xv) Cost audit - (xv) Cost audit - Certain companies which are engaged in the production, processing,
manufacturing or mining activities as referred to section 209(1)(d) are required to
maintain cost accounting records. Cost audit is a process for verifying the cost of
manufacture or production of an article on the basis of the accounts as regards utilisation
of material or labour or other items of costs maintained by the company. It helps the
management in cost control and cost reduction and in improving efficiency.
Section 209(1)(d) makes it compulsory for certain class of companies to maintain
cost record as per Cost Accounting Record Rules. Central Government can order audit
of the cost accounts of the company u/s 233B(1). The cost audit is necessary only when
specific order is issued by Central Government. It is not regular yearly audit as in case
of financial audit. There are 47 industries to which cost audit is prescribed such as
Cement, Cycle, Sugar, Chemical Industries, Textile, Aluminum etc. The cost auditor has
to be a cost accountant within the meaning of the Cost and Works Accountants Act,
1959.
The cost auditor is to be appointed by the Board of directors of the company, with
prior approval of the Central Government. The cost auditor has to submit cost audit
report within 180 days from the closure of financial year to the central government and
to the company.
(xvi) Audit Committee (xvi) Audit Committee (xvi) Audit Committee (xvi) Audit Committee (xvi) Audit Committee - The Company (Amendment) Act, 2000 provides for
constitution of an audit committee in case of a public company having a paid up
capital of not less than Rs. 5 crore (section 292A). All listed companies have to constitute
an audit committee as per the stipulation of clause 49 of the Listing Agreement. The
main functions of the audit committee is to discuss with the auditors periodically about
the internal control systems, the scope of audit including the observations of the auditors.
(xvii) Constitution of National Advisory Committee on Accounting Standards (xvii) Constitution of National Advisory Committee on Accounting Standards (xvii) Constitution of National Advisory Committee on Accounting Standards (xvii) Constitution of National Advisory Committee on Accounting Standards (xvii) Constitution of National Advisory Committee on Accounting Standards -
(section 210A) - The Central Government shall constitute an Advisory Committee on
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Accounting Standards to advise the Central Government on the formulation and laying
down of accounting policies and accounting standards for adoption by companies or
a class of companies. This advisory committee shall comprise of 12 members who shall
be nominated by different professional bodies/authorities mentioned in sub-section
(2). These are ICAI, ICSI, ICWA, RBI, CBDT etc. The committee shall give its
recommendations to the Central Government on matters relating to accounting standards
and auditing. Till Accounting Standards are prescribed by the Central Government,
present Accounting Standards specified by ICAI will be the accounting standards.
13.2 Statutory Registers / Books / Returns to be maintained by a company
STATUTORY REGISTERS, BOOKS, RETURNS AND OTHER RECORDS TO BE
PREPARED OR MAINTAINED BY COMPANIES UNDER THE COMPANIES ACT, 1956.
49(7) Register of investments - where investments of the company in shares or
securities are not held in its own name.
58A Register of Deposits (Read with rule 6 of the Companies (Acceptance of
Deposits) Rules, 1975.
136 Copy of every instrument creating any charge requiring Registration.
#143(1) Register of charges.
#150(1) Register of members.
#151(1) Index of Members, where their number is more than fifty.
#152(1) Register of Debenture holders.
#152(2) Index of Debenture holders where their number is more than fifty.
157-158 Foreign Register of members and debenture holders.
#159-160 Copies of Annual Return.
193-196 Minutes Books of Proceedings of General Meetings and of meetings of the
Board of Directors of Committees of the Board.
209(1) Books of accounts and Cost Records.
301 Register of contracts, Companies and Firms in which the Directors of the
Company are interested.
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302 (6) All contracts entered into by the Company for the appointment of a Manager
or Managing Director.
#303(1) Register of directors, manager and secretary.
307 Register of shareholding or debenture holdings of Directors and Manager.
370(IC) Register of loans made and guarantees given or securities provided to
Companies under the same management.
372(6) Register of all investments made by the Company in the shares of any
other body corporate or bodies corporate (Whether in the same group or
not).
1. Register of members [sec.150]
Particulars to be recorded- section 150 of the Companies Act, 1956 requires every
company to maintain a Register of Members in one or more books. The Register must
contain the prescribed particulars, viz.-
The name and address, and the occupation, if any, of each member,
Shares held by each member with distinctive numbers (except where such shares
are held with a depository), nominal value and the amount paid or agreed to be
considered as paid on those shares.
The date at which the name of each person was entered in the Register as a
member, and
The date at which any person ceased to be a member.
In addition to the aforesaid particulars, the Register of members should also be in
conformity with the format as prescribed under Rule 7 of the companies (Issue of share
Certificate) Rules, 1960.
Further, all entries in this register are required to be authenticated by the secretary
or any other person so authorised by the Board of directors.
Closing of register Closing of register Closing of register Closing of register Closing of register- As per section 154 of the companies Act, 1956, the Register of
members of a company can be closed after giving not less than 7 days previous notice,
by advertisement in some newspaper circulating in the district in which the registered
# To be kept open for public inspection.
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office of the company is situated, But in no case the register be closed for more than
thirty days at a stretch and for an aggregate period of 45 days in a year.
The Register of members is usually closed immediately prior to the annual general
meeting for the purpose of finalising the list of shareholders to whom notice should be
sent as also to determine the entitlement of dividend for shareholders if and when
declared at the annual general meeting. For purposes of rights or bonus issues, the
register may again be closed, though normally a record date is announced for the
purpose of determining the entitlement of rights of bonus, as the case may be. Where
the shares are listed, the company shall be required to comply with the listing agreement
also.
Place of keeping the register Place of keeping the register Place of keeping the register Place of keeping the register Place of keeping the register- Under section 163, the Register of members is required
to be kept at the registered office of the company or any other place in the same city
provided such other place has been approved by a special resolution in general meeting
and the Registrar has been given an advance copy of the proposed resolution.
Inspection of register of members Inspection of register of members Inspection of register of members Inspection of register of members Inspection of register of members- Under section 163, the Register of members
must be kept opened during business hours for inspection of any member or debenture
holder without fee, and for any other person, on payment of the prescribed fee. The
Register must be kept opened for at least two hours on every working day during
business hours.
2. Index of members [sec. 151]
Every company having more than 50 members must maintain an index of members
except where the Register of members in itself constitutes an index. The index may be in
the form of a card index or a bound one. Any alteration made in the Register of members
must be recorded in the index within 14 days.
The index must, in respect of each member, contain a sufficient indication to enable
the entries relating to that member in the register to be readily found.
The index must, at all times, be kept at the same place as the Register of members.
3. Register and Index of beneficial owners [sec. 152A]
The register and index of beneficial owners maintained by a depository under section
11 of the Depositories Act, 1996, shall be deemed to be an index of members and
register and index of debentureholders as the case may be, for the purpose of this Act.
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4. Register of debentureholders [Sec. 152]
A company required to maintain a register of its debenture-holders stating the
prescribed particulars. It is required to maintain an index of debenture-holders in case
it has more than fifty debenture-holders except where the register is in itself an index.
5. Annual return [sec.159 to 162]
Annual Return to be made by Company having share capital [section 159]- Every
company having a share capital shall file with the Registrar of companies an annual
return within 60 days from the date of holding of the Annual General Meeting.
If no Annual General Meeting is held in a particular year then annual return has to
be filed within 60 days from the day on which the meeting should have been held,
which is normally six months from the date of the closing of the accounting year of the
company and in any event not more than 15 months from the last Annual General
Meeting.
If no Annual General Meeting has been held, the company shall along with the
return, file a statement giving the reasons for not holding the Annual General Meeting.
Therefore, not holding the Annual General Meeting cannot be upheld as an excuse for
not filing the annual return- State of Bombay v. Bandhan Ram, AIR 1961 SC 186;
[1961] 31 comp.case. 1 (SC.);
The Annual Return of a company must be prepared in the form prescribed in part II
of schedule V of the Act or as near thereto as possible and must contain the particulars
regarding:
i. its registered office,
ii. the register of its members,
iii. the register of its debenture-holders,
iv. its shares and debentures,
v. its indebtedness,
vi. its members and debenture-holders, past and present, and
vii. its directors, managing directors, managers and secretaries, past and present.
The copy of the Annual Return filed with the Registrar must be signed by a director
and by the manager or secretary, or where there is no manager or secretary, by two
directors including the managing director where there is one.
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Where the annual return is filed by a company whose shares are listed on a
recognised stock exchange, the copy of such annual return shall also be signed by a
secretary in whole-time practice [sec. 161(1)].
Full particulars every 6 years: Annual return is required to give full particulars of
members once in every six years, and for the intervening period, i.e., every year during
the remaining period of 5 years, to state only the changes in membership (Section
159).
13.3 Divisible Profits and Dividend (Sections 205 - 208)
The term dividend has not been defined in the Companies Act, 1956. In commercial
usage, however, dividend is the share of the companys profits distributed among the
members. The term dividend is also used to include distribution of the companys
assets in the event of its winding up.
(i) Types of dividend
F FF FFinal dividend inal dividend inal dividend inal dividend inal dividend It is declared by the shareholders at the annual general meeting.
The final dividend is recommended by the board of directors in its report to the
shareholders u/s 217. The shareholders cannot increase the rate of dividend as
recommended by the board but they can declare dividend at a rate lower than the one
recommended by the directors.
Interim dividend Interim dividend Interim dividend Interim dividend Interim dividend Interim dividend is declared by the board of directors if authorised
by the articles. It is declared between two annual general meetings. The Companies
(Amendment) Act, 2000 has for the first time-defined dividend to include any interim
dividend [section 2(14A)]. Thus interim dividend stands on the same footing as that of
the final dividend. Both interim and final dividend when declared become debt and are
payable within 30 days of declaration.
(ii) Meaning of divisible profits - (ii) Meaning of divisible profits - (ii) Meaning of divisible profits - (ii) Meaning of divisible profits - (ii) Meaning of divisible profits - All the profits of the company cannot be said to
be divisible. Only those profits, which can legally be distributed to the shareholders of
the company in the form of dividend, are called as divisible profits.
According to section 205, dividends may be declared only out of
current profits;
past reserves created out of profit or
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out of moneys provided by the Central or State Govt. for this purpose in pursuance
of a guarantee given by such Government.
Dividend should not be declared out of the securities premium account or the
capital redemption reserve account or revaluation reserve or out of profit on issue of
forfeited shares or out of profit earned prior to the incorporation of the company.
Dividend should be declared only after providing for depreciation for the current Dividend should be declared only after providing for depreciation for the current Dividend should be declared only after providing for depreciation for the current Dividend should be declared only after providing for depreciation for the current Dividend should be declared only after providing for depreciation for the current
year and arrears of depreciation if any year and arrears of depreciation if any year and arrears of depreciation if any year and arrears of depreciation if any year and arrears of depreciation if any. . . . . Dividend may, however, be paid without
providing for depreciation with the prior permission of the Central Government.
In case of loss in any previous financial year or years, an amount of such loss
or depreciation for that year or those years whichever is less is required to
set-off against the profits of the current year.
However However However However However, before declaring dividends, section 205(2A) requires that a , before declaring dividends, section 205(2A) requires that a , before declaring dividends, section 205(2A) requires that a , before declaring dividends, section 205(2A) requires that a , before declaring dividends, section 205(2A) requires that a
company must transfer a prescribed percentage of its profits to its reserves. company must transfer a prescribed percentage of its profits to its reserves. company must transfer a prescribed percentage of its profits to its reserves. company must transfer a prescribed percentage of its profits to its reserves. company must transfer a prescribed percentage of its profits to its reserves.
It may be noted that no transfer to reserves is required if the rate of dividend
proposed is 10% or less. Normally amount transferred to reserves should not
exceed 10% of current profits. However, a company can make transfer of
more than 10% to reserves voluntarily provided it ensures the minimum
distribution specified in Rule 3 of the Companies (Transfer of Profits to Reserves)
Rules, 1975.
T TT TTransfer of profits to reserve before declaring dividend ransfer of profits to reserve before declaring dividend ransfer of profits to reserve before declaring dividend ransfer of profits to reserve before declaring dividend ransfer of profits to reserve before declaring dividend
Before any dividend is declared or paid by a company for any financial year
out of the profits of the company for that year, certain percentage of profits
not exceeding 10%, as may be prescribed by Central Government, will be
transferred to the reserves of the company. The company may, however,
voluntarily transfer a higher percentage of its profits to the reserves.The
percentage of profits which have to be compulsorily transferred to reserves
before declaration of dividend have been prescribed as under the Companies
(Transfer of Profits to Reserves) Rules 1975:
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If the proposed dividend does not exceed 10% then there is no statutory obligation
to transfer any amount to reserves out of current profits.
(iii) Dividend on preference shares (iii) Dividend on preference shares (iii) Dividend on preference shares (iii) Dividend on preference shares (iii) Dividend on preference shares - The distinguishing feature of a preference
share is that its holder is entitled to a dividend of a fixed amount or at a fixed rate. The
dividend on preference shares is payable before any dividend is paid on the ordinary
shares. However, dividend on preference shares is payable before any dividend can be
paid only if the company has earned sufficient profits. Arrears of dividend on cumulative
preference shares should be paid before paying any dividend on equity shares.
(iv) Dividend on equity share (iv) Dividend on equity share (iv) Dividend on equity share (iv) Dividend on equity share (iv) Dividend on equity share - Equity shareholders are entitled to be paid a
dividend on their shares only after all preference dividends have been paid to date.
However, equity shareholders are compensated in terms of generally higher dividend
and the voting power at general meeting.
(v) Declaration of dividend (v) Declaration of dividend (v) Declaration of dividend (v) Declaration of dividend (v) Declaration of dividend - Dividend should be declared only on the
recommendation of the Board. Dividend should be declared only at an Annual General
Meeting. Members may declare a lower of rate dividend than what is recommended by
the Board but have no power to increase the amount or rate of dividend recommended
by the Board.
If redeemable preference shares have not been redeemed on the due date, no
Dividend should be declared on equity shares until such preference shares are redeemed.
(vi) P (vi) P (vi) P (vi) P (vi) Payment of dividend ayment of dividend ayment of dividend ayment of dividend ayment of dividend - According to section 206, dividend shall be paid only to
the registered holder of shares or to his order or to his bankers or to the bearer of a
R RR RRate of proposed dividend as to ate of proposed dividend as to ate of proposed dividend as to ate of proposed dividend as to ate of proposed dividend as to
paid up capital paid up capital paid up capital paid up capital paid up capital
Mi ni mum Amount to be
transferred to reserves out of
current profits.
(a) Where it exceeds 10% but
does not exceed 12.5%
(a) 2.5% of current profits
(b) Where it exceeds 12.5% but
does not exceed 15%
(b) 5% of current profits
(c) Where it exceeds 15% but
does not exceed 20%
(c) 7.5% of current profits
(d) Where it exceeds 20% (d) 10% of current profits
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share warrant. Where shares have been sold but not yet registered, the dividend shall
be paid to the transferee only in case the transferor gives a mandate in writing to that
effect. Otherwise, the dividend in respect of such shares shall be transferred to the
unpaid dividend account.
Dividend shall be payable only in cash or by cheque or warrant sent through post.
Dividend should not be paid in kind. However, capitalisation of profits or reserves of a
company for the purpose of issuing fully paid up bonus share is not prohibited.
(vii) T (vii) T (vii) T (vii) T (vii) Time limit ime limit ime limit ime limit ime limit - The amount of dividend after deducting tax at source should be
deposited in a separate bank account within 5 days 5 days 5 days 5 days 5 days from the date of declaration of
Dividend unless the Dividend has been paid within that period. Dividend should be
paid out of such bank account within 30 days 30 days 30 days 30 days 30 days of declaration. Thus, dividend should be
paid within 30 days of declaration.
Failure to pay dividend (i.e. posting of dividend warrant), within the prescribed
period of thirty days will result in every director of the company who is knowingly a party
to the default punishable with imprisonment which may extend to three years and with
fine of Rs. 1,000 for every day during which the default continues. The defaulting
company shall also pay simple interest @18% per annum during the period for which
such default continues.( Section 207)
(viii) (viii) (viii) (viii) (viii) Dividend Mandate Dividend Mandate Dividend Mandate Dividend Mandate Dividend Mandate - The shareholders who desire that their dividend be credited
direct to their bank accounts have to make the request in prescribed form supplied by
the company. The aforesaid form when duly filled and sent to the company is known as
Dividend Mandate. It authorises the company to pay dividend direct to the shareholders
bank.
(ix) Unpaid and unclaimed dividend (ix) Unpaid and unclaimed dividend (ix) Unpaid and unclaimed dividend (ix) Unpaid and unclaimed dividend (ix) Unpaid and unclaimed dividend - There may be cases where a dividend has
been declared by a company but has not been paid or claimed within thirty days from
the date of the declaration to any shareholder entitled to the payment of the dividend.
In such cases, section 205A provides that the company shall within seven days seven days seven days seven days seven days from the
date of expiry of the said period of thirty days transfer the amount of dividend, which
remains unpaid or unclaimed to a special account special account special account special account special account called Unpaid dividend account of
.. Ltd. The account must be opened by the company in that behalf in any
scheduled bank.
Investor Education and Protection Fund: In case of default in transferring the unpaid
or unclaimed dividend to the said account, the company shall pay interest from the
date of default at the rate of twelve per cent per annum. Any amount transferred to the
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unpaid dividend account but remaining unpaid or unclaimed for a period of seven
years from the date of such transfer must be transferred by the company to the Investor
Education and Protection Fund. The amount credited to the said fund shall be utilised
for promotion of investors awareness and protection of the interests of the investors in
accordance with the rules as may be prescribed. However, no payment shall be made
to any investor in respect of any of his claims.
Before transferring any amount to the investor education and protection fund, the
company should give individual intimation to the Shareholders in respect of whom the
amount is being transferred, at least 6 months 6 months 6 months 6 months 6 months before the due date of such transfer.
(x) P (x) P (x) P (x) P (x) Payment of dividend out of capital ayment of dividend out of capital ayment of dividend out of capital ayment of dividend out of capital ayment of dividend out of capital - Dividends are not allowed to be declared
out of capital. Even where the Memorandum or Articles give power to the company to
pay dividend out of capital, such a power shall be invalid. The only situation where a
return on investment may be allowed out of capital is where interest is paid out of
capital, on the shares of the company, with the previous approval of the Central
Government under section 208.
(xi) Check (xi) Check (xi) Check (xi) Check (xi) Check-list for payment of dividend:- -list for payment of dividend:- -list for payment of dividend:- -list for payment of dividend:- -list for payment of dividend:- What are the precautions to be taken and
procedures to be followed by the company if it intends to pay dividend? Here is the
check-list:
Section Section Section Section Section Checklist Checklist Checklist Checklist Checklist
To pass a resolution in the Board meeting and also in the AGM by an ordinary
resolution by simple majority.
205 (1A) The amount of dividend to be deposited in a separate bank account within five
days of AGM in which it is approved.
205 (1A) The interim dividend should be deposited in a separate bank account within
five days of the Board Meeting. The interim dividend declared by a company
should be confirmed in the next AGM.
205 (5)(b) The dividend should be paid to the shareholders by cheque of warrant within
30 days of declaration. The amount of dividend should be rounded off to the
nearest rupee.
206A Pending registration of transfer of shares, dividend amount should be held in
abeyance. The company must transfer such dividend amounts to the special
account referred to in section 205A unless the registered shareholder has advised
otherwise.
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Let us Revise Dividends
i) There are two statements given in each of the items below. In some cases, both
of them are true statements and in some others, only one is the true statement. Please
identify the TRUE statements.
Q.1
S-1: The term dividend is defined in the Companies Act.
S-2: Dividends are the profits of a Company dividend amongst the shareholders in
proportion to their shares and in accordance with their rights as shareholders.
Q.2
S-1: Dividend is payable only to the registered shareholders, to their order or to their
bankers.
S-2: Dividend on equity shares should be paid in accordance with the rights of the
respective classes of shares.
Section Section Section Section Section Checklist Checklist Checklist Checklist Checklist
I. Tax Act The dividend tax under the Income-tax Act should be deposited on time as
introduced by Finance Act, 2003.
205A(1) Dividend remaining unpaid or unclaimed should be transferred to a special
account called Unpaid dividend account of .. Ltd. within 7 days from
the date of expiry of thirty days from the date of declaration. The above account
may be with any scheduled bank and can be either a current account or fixed
deposit account.
205A(5) Unclaimed or unpaid dividend for a period of 7 years should be transferred to
Investor Education and Protection Fund.
205(1)(C) If the company wants to declare dividend before providing depreciation, the
approval of central Government should be obtained.
Likewise, central Governments permission will be required if the company
wants to declare dividend out of reserves of the company.
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Q.3
S-1: Dividend can be declared only at a general meeting.
S-2: Right to dividend arises only after its declaration.
Q.4
S-1: Dividends are payable only out of distributable profits
S-2: Distributable profits are to be arrived at after
a) Providing for depreciation, and b) Transferring to the reserves.
Q.5
S-1: Transfer of profits to reserves is not obligatory if the dividend proposed is 10% or
less.
S-2: Voluntary transfer to the reserves of a percentage higher than 10% of the profit is
allowed.
Q.6
S-1: Declaration of additional or further dividend is not permissible.
S-2: Final dividend once declared cannot be revoked.
Q.7
S-1: Dividend should be distributed within 30 days from the date of declaration.
S-2: The amount of dividend should be deposited in a separate bank account within
five days from the date of declaration of dividend.
Q.8
S-1: Dividend warrant and Dividend mandate are two different things.
S-2: Dividend is payable only in cash, cheque or by dividend warrant and not in kind.
Q.9
S-1: Interim dividend is the dividend declared between two general meetings by the
Directors is exercise of the specific power given under the Articles.
S-2: The general meeting may super cede the decision of the Directors to pay interim
dividend and rescind its declaration before payment is made.
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Q.10
S-1: Posting of dividend warrant within 30 days will be taken as compliance with the
requirement of distribution within 30 days.
S-2: Bonus shares are income for Income-tax purpose.
Q.11
S-1: The term unclaimed dividend and unpaid dividend means the same thing.
S-2: Dividends remaining unpaid should be transferred to the Special Dividend Account
with a scheduled bank and, if remaining still unpaid for three years from the date
of transfer to that Account, to the Investor, Education and Protection Fund.
Q.12
S-1: The Directors of a Company can be compelled by the Shareholders in a General
Meeting to declare interim or final dividend.
S-2: A Company which has failed to comply with the provisions regarding redemption
of preference shares may also declare dividend even when such failure continues.
Q.13
S-1: In the event of inadequacy or absence of profits in any year, dividend may be
declared for that year out of the accumulated profits of the earlier years, which
stand transferred to the reserves.
S-2: Such declaration is subject to certain conditions and also the Central Governments
approval.
Q.14
S-1: Dividend when declared is an ordinary unsecured debt of the company to its
shareholders.
S-2: When the company goes into liquidation the declared dividend will rank with
other debts due to the creditors
Q.15
S-1: Calls in arrears and any other sum due from a shareholder can be adjusted
against dividend payable to the shareholder.
S-2: Arrears of Dividend on cumulative preference shares should be paid before any
dividend on equity shares.
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QUESTION BANK
I. FAQs
1. List out any five statutory books and registers to be maintained under the Companies
Act, 1956.
2. What is annual return?
3. Distinguish between interim dividend and final dividend.
4. Explain the law relating to declaration and payment of and final dividend. Can all
companies declare dividend?
5. Can dividend be declared out of profits? Subject to what conditions dividend can
be paid out of reserves?
6. Briefly explain: No depreciation, no dividend.
7. Can a company keep its registers and returns at a place other than the registered
office?
8. State the legal provisions relating to disposal of unpaid and unclaimed dividend.
9. How is an auditor of a company appointed?
10. Who are the persons who can inspect books of accounts? Can a shareholder
inspect books of accounts?
11. What do you understand by the term Cost Audit?
12. What Books of Accounts are required to be maintained by a company? Who are
the persons responsible for ensuring proper maintenance of Books of Account?
13. Examine with reference to the provisions of the Companies Act, 1956 : the persons
who have the right to inspect such books.
14. Explain the composition and function of audit committee.
15. The Companies Act, 1956, provides that a copy of the balance sheet which is to
be laid before the company in general meeting, must be sent before the meeting,
to certain persons; as such a copy must be accompanied by certain documents.
State
(i) To whom a copy of the balance sheet must be sent before the meeting?
(ii) What documents must accompany the balance sheet?
(iii) Who are authorised to authenticate the balance sheet?
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II. CASE STUDIES
1. The Board of Director of Nagpur Industries Ltd. decide to prepare balance sheet
& Profit and Loss account for a financial year exceeding 12 months?
(Hint: As per sec. 210, a FY may exceed 12 months, but it shall not exceed 15
months (or 18 months, if special permission of registrar is obtained). Therefore
B?S and P&L account may be prepared for a period exceeding 12 months.)
2. The Board of Directors of Vidharbha Industries Ltd. decide to revise the accounts
which have already been adopted by the shareholders in annual general meeting.
Advise.
(Hint: Rectification or revision of accounts after they have been adopted at the
AGM should not be permitted under any circumstances. However, the Department
of Company Affairs has permitted revision of annual accounts for meeting the
technical requirements of taxation laws or of any other law if such revision will
result in true and fair view.
3. Examine the possibilities of filing of unaudited balance sheet with the registrar of
companies.
(Hint: unaudited B/S and P&L cannot be filed with the ROC. Sec 216, 218, 219
and 220 require that B/S shall be accompanied by the auditors report. As such,
where the accounts are not audited or audit report is not attached to the B/S, it
would result in contravention of these sections.
4. The profit and loss account and balance sheet of Maharashtra Steel Ltd. have
been signed by two directors P and Q. The Board consist of a third director M,
who is also the managing director. The company has also employed a full time
company secretary. Examine whether the authentication of the balance sheet is as
per law.
(Hint: The B/S and P&L account must be signed by two directors one of whom
shall be MD and also by company secretary if there is any.(Sec. 215) in the given
case sec. 215 is violated since it is not signed by the MD or the company secretary.
5. Can a person holding any security of a company be appointed as an auditor of
that company? What will be the position, if his relative holds such securities?
(Hint: A person holding any security of a company shall not be qualified for being
appointed as an auditor of that company. The expression security for this purpose
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means any instrument which carries voting rights [Sec 226(3)(e)]/ However, if
security is held by a relative of an auditor, the above clause is not attracted. But,
the auditor must disclose his interest in his report.
6. What is the liability of an auditor for failure to point out in his report that dividend
is paid out of sale of the companys real estate?
(Hint: The auditor who is a party to payment of improper dividend is liable for
misfeasance, and also to make good the loss caused to the company.
7. The shareholders of ABC Ltd. at the annual general meeting unanimously resolved
for payment of dividend though the Board of Directors did not recommend payment
of any dividend. Is the company bound to give dividend
(Hint: No, dividend can be declared by shareholders only when the directors so
recommend.)
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CHAPTER - XIV
INSPECTION, INVESTIGATION AND
WINDING UP
14.1 Inspection & Investigation
14.2 Winding up
14.1 Inspection & Investigation of the Affairs of a Company
What do you mean by investigation?
What are the different types of investigation that may be carried
out by the Central Government?
What is the required number of members who may apply for
investigation?
In the recent past, certain grave malpractices followed deliberately
by US companies like Enron, Worldcom, Xerox and Qwest have sent
shock waves throughout the corporate world. The net result of the
malpractices was that the shareholders and the public at large were
kept in the dark about the true financial position of the company and
had to suffer losses
An attempt has been made to analyse the provisions of the
Companies Act, relating to inspection and investigation under the
following four heads:
1. Inspection of books of account, etc. of Companies (Section 209A)
2. Power of Registrar to call for information or explanation (Section
234)
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3. Seizure of Documents by Registrar (Section 234A); and
4. Investigation (Section 235 to 251)
1. Inspection of books of account, etc., of Companies (Section 209A)
i) What is inspected?
Books of account and other books and papers (as per section 2(8) books and
papers includes accounts, deeds, vouchers, writings and documents). Thus, inspection
cover all records and registers statutorily required to be maintained by the company.
ii) Who can conduct the inspection?
a) The Registrar of companies, or
b) Any government officer authorized by the Central Government, or
c) Any officer of the Securities and Exchange Board of India authorised by it. Officers
of the Securities and Exchange Board of India can exercise these powers only with
respect to matters covered in section 55A i.e., matters pertaining to issue and
transfer of securities and non payment of dividend.
iii) Why inspection?
a) To ensure that the books are maintained as required by law.
b) To ensure that company is being run in accordance with rules and regulation.
c) To inquire whether further investigation is required.
The Director of Inspection & Investigation heads the Inspection Directorate Inspection Directorate Inspection Directorate Inspection Directorate Inspection Directorate
in the Ministry of Corporate Affairs at its head quarters at New Delhi. At
each of the Regional Directorate at Mumbai, Noida, Kolkata and Chennai,
the Joint Director of Inspection heads the Regional Inspection team. The
Ministry of Corporate Affairs has given guidelines to the inspecting officials
and has prescribed the format in which they have to give the inspection
report.
The Director of Inspection & Investigation goes through the reports and
directs the action to be taken either through the agency of Regional Director
or the Registrar of Companies. In some matters, the Regional Director himself
or the ROCs issues show cause notices on the violation of law pointed in
the inspection report.
INSPECTION, INVESTIGATION AND WINDING UP
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iv) Other points
a) Inspection may be conducted without giving any prior notice to the company.
b) Inspection must be carried out during the business hours of the company.
c) In addition to books, the Inspecting Authorities can also inspect deeds, vouchers,
writings, documents, etc.
d) Inspection is much narrow in scope when compared to investigation. Hence, the
inspecting authorities are not supposed to make roving inquiries about the working
of the company.
e) Directors, officers and employees of the company shall produce books and other
papers to the inspecting authorities and furnish the required information on time.
f) Directors, officers and employees of the company shall extend reasonable
assistance to the Inspecting Authorities during the course of their inspection.
v) Powers/duties of inspecting authorities
a) The inspecting authorities shall have the powers of civil court under Civil Procedure
Code while trying the suit. The Inspecting Officer will have all the powers of
Registrar of Companies in relation to the making of inquiries. They can take
copies of the books or place marks of identification thereon.
b) During the course of inspection they can exercise the following powers that are
vested in civil courts.
Discovery and production of books of account and other documents at such
place and at such time as may be specified.
Summoning and enforcing attendance of persons and examining them on
oath.
Inspecting any books, registers or other documents of the company at any
place.
c) Report of Inspecting authorities. The inspecting authority shall give its report to
the Central Government. Government can take appropriate action on the report.
It may be noted that neither the company is entitled to a copy of the inspection
report nor is the inspection report a public document. The inspection u/s 209A is
a routing inspection.
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vi) Penalties
a) Any person who gives a false statement to the inspecting authority shall be liable
to fine and prosecution. (section 629).
b) Any person who does not comply with the requirements of section 209A shall be
liable for fine upto Rs. 50,000 and also with imprisonment upto one year.
[section 209A(8)].
c) A director who is convicted of an offence under this section, shall be deemed to
have vacated his office forthwith and shall be disqualified from holding such
office in any company for the next five years. [section 209A(9)].
2. Powers of Registrar of companies to call for information (Section 234)
i) When does the Registrar of Companies invoke these powers?
a. Suo motu: While perusing any document filed by a company, if the Registrar
requires additional information, he may order the company to produce
such additional information or an explanation that he thinks fit within the
time stipulated by him. The power to call for information is with respect to
any matter to which such document purports to relate.
b. On a representation made to him by a creditor or a contributory or any other
interested person on any of the following grounds:
the business of the company is carried on to defraud the creditors or any
other person dealing with the company; or
the business of the company is carried out for a fraudulent or unlawful
purpose.
The Registrar of Companies may call upon the company to furnish the requisite
information and explanation. Registrar can issue order for production of books and
papers within prescribed time as he considers necessary [section 234(3A)]. Upon receipt
of such an order, the directors and other officers are duty-bound to produce the
information and explanation called for. If upon inquiry, the Registrar of Companies is
satisfied that any representation on which he took action under this provision was frivolous
or vexatious, he shall disclose the name of the informant to the company.
ii) Default and consequences
a. If such information is not furnished within the specified time or if after perusal of
such information or explanation or books and paper produced, the Registrar is of
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the opinion that the document referred to in section 209A(1), together with such
information or explanation or such books and papers:
discloses an unsatisfactory state of affairs or
does not disclose a full and fair statement of any matter to which the document
purports to relate, the Registrar of Companies shall report the matter in
writing to the Central Government.
The Registrar is empowered to prefer a complaint to the police where organizable
offences punishable under section 406 and 409 (criminal breach of trust) of the Indian
Penal Code are suspected M. Vaidyanathan v. Sub-Divisional Magistrate (1957) 27
Comp. Cas. 97 (Mad).
b. If the company or its officials refuses or neglects to furnish information or
explanation they will be liable for fine upto Rs. 5,000 and further fine of Rs. 500
per day [section 234(4)(a)]. The Registrar of Companies can approach the Court,
and the Court may direct the company to produce the books, etc., before the
Registrar of Companies
iii) Applicability to foreign companies
These provisions shall apply in relation to documents that are to be filed by a
foreign company in India with the Registrar(s) of Companies
3. Seizure of documents by Registrar of Companies (Section 234A)
i) Grounds: Where the Registrar of Companies has reasonable grounds to believe
that the books and papers of a company may be destroyed, mutilated, altered,
falsified or secreted, he may apply to the Magistrate of the First Class for an order
to seize such books and papers.
ii) Course of action
a. On receipt of an order from the Magistrate, the Registrar of Companies can:
Enter the place or places where the books, etc., are kept;
Search those places; and
Seize such books and papers as he considers necessary.
b. He can take copies or extracts from them or place marks of identification on
them in any manner, as he thinks fir.
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iii) Return of books / papers within 30
days: Registrar of Companies shall
return the books, etc., within 30 days
and i nform that matter to the
Magistrate.
4. Investigation
The Central Government reserves its
right to investigate companies, especially
in cases of alleged fraud or oppression of
minority shareholders. The following three
types of investigation can take place:
i) Investigation into the affairs of
companies (sections 235 & 237)
ii) Investigation into the affairs of related
companies/persons (section 239)
iii) Investigation into the ownership of
companies (section 247).
4.1 Investigation into affairs of
companies
This can be studied under two heads:
Mandatory Powers
Discretionary Powers
4.1a Mandatory powers
i) Appointment under section 237(a)
The Central Government shal l
appoint one or more inspectors to
investigate into the affairs of the
company and to report thereon if:
a. the company by speci al
resolution [section 237(a)(I)]; or
b. the court by an order [section
237(a)(ii)] declare that the affairs
Govt. orders probe against Ispat Govt. orders probe against Ispat Govt. orders probe against Ispat Govt. orders probe against Ispat Govt. orders probe against Ispat
New Delhi; The government has
ordered a probe against steel giant Ispat
Industries for alleged exposure to Rs. 8,500
crore of public funds, erosion of networth
and high accumulated losses, highly paced
official sources said on Tuesday.
The investigation has been ordered
under section 235 of the Companies Act
(investigation into a companys affairs) and
the case has been referred by the department
of company affairs to Serious Frauds
Investigation Office (SFIO), they said. When
contacted an Ispat Industries spokesperson
declined to comment on the issue whereas
its executive director finance Anil Surekha
was out of the country and also declined to
comment.
SFIO, set up to look into large-scale
fraud and misappropriation of funds by
companies takes up only those cases which
DCA refers have ordered an investigation
under section 235 of the Companies Act
against Ispat Industries and the case has
been referred to the SFIO. The probe is
being ordered because of the companys
exposure of Rs. 8500 crore of public funds,
erosion of net worth and high accumulated
losses the sources added
Sources said while DCA ordered the
probe about a week back, the order is
awaiting a nod from the finance minister.
Since the SFIO was set up late last year
Ispat is the fifth case to be referred to it for
thorough investigation. Daewoo Motors,
DSQ Software, Design Auto and Benonza
Biotech are the other cases already being
probed by SFIO, sources said PTI.
(Time of India dtd. 10-02-2004)
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of the company ought to be investigated by an inspector appointed by the
Central Government.
The Court cannot appoint directly inspectors u/s 237(a)(ii) to investigate the
affairs of the company but only make a declaration that the affairs of the
company ought to be investigated by an inspector(s) appointed by the Central
Government. Once such an order is passed it is mandatory for the Central
Government to conduct such investigation by appointing competent persons
as inspectors.
4.1b Discretionary powers [Section 235(1)]
Sec. 235 enables the Central Government and the Company Law Board to appoint
inspectors for investigation in the following cases:
i) On a report of R On a report of R On a report of R On a report of R On a report of Registrar of Companies under section 234(6) egistrar of Companies under section 234(6) egistrar of Companies under section 234(6) egistrar of Companies under section 234(6) egistrar of Companies under section 234(6) The Central
Government may appoint one or more competent persons to investigate into the
affairs of the company if a report has been made to it by the Registrar of Companies
that a document filed with him discloses an unsatisfactory state of affairs or does
not disclose full and fair statement of matter to which it purports to.
ii) Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB Appointment on members application & declaration by the CLB
On a declaration being made by the CLB that the affairs of the company ought to
be investigated, the Central Government shall appoint one or more competent
inspectors to investigate into the affairs of the company and to report thereon in
such manner as the Central Government may direct.
When will CLB make such a declaration?
For this purpose the following members can apply to the CLB:
i) Where the company has share capital
Not less than 200 members or Members holding not less than 1/10
th
of
the total voting power therein.
ii) Where the company does not have share capital
Not less than 1/5th of the persons in the companys register of members.
Before making a declaration as aforesaid, the CLB may give the parties concerned
an opportunity of being heard.
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The application by members mentioned above should be supported by necessary
evidence to show that the applicants have good and sufficient reasons for requiring
investigation. The Central Government may, before appointing the inspectors, require
the applicants to give security not exceeding Rs. 1000 to meet the costs of investigation
(section 236).
iii) Based on the opinion of the CLB [Section 237(b)]
The Central Government may appoint one or more competent persons as inspectors
to investigate he affairs of the company if in the opinion the CLB, there are circumstances
suggesting:
a. Fraud, etc., in any of the manner given below:
the business of the company is conducted to defraud its members, creditors,
or other persons or
the business of the company is conducted for a fraudulent or unlawful purpose
or oppressive to any member or
the company was formed for any unlawful or fraudulent purpose.
b. Persons connected with the formation or management of the company have been
found guilty of fraud, misfeasance or other misconduct towards the company or
any of its members.
c. The members of the company are deprived of any information, which they are
entitled to, including particulars of commission, if any, payable to managing or
other director or manager.
The CLB can form an opinion as aforesaid, even based on a complaint received
from a single shareholder irrespective of the fact that he didnt have the requisite number
of shares as mentioned in section 235(2). The reason is that sections 235(2) and
237(b) are two independent provisions.
Thus, the powers to appoint inspectors and to conduct investigation is vested with
Central Government, whereas the power to consider application made by the members
vests with the Company Law Board.
Instances where investigation orders were passed
Where a company, for an unreasonable time does not send to its members the
annual accounts and reports as required by the Act Miles Aircraft Ltd., In re
91948) 18 Comp. Cas. 250 (Ch. D).
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Where a dividend paying company immediately turns into a loss making company
Miles Aircraft Ltd. (supra)
In spite of keeping large sums of money in reserves, a company consistently
reduces shareholders dividend from about Rs. 37 to Rs. 10 per share within two
years Ashoka Marketing Ltd. v. Union of India (1966) 1 Comp. LJ 267 (Cal).
Where a foreign shareholder of a company complained of diversion of its funds,
discrepancies in its share capital account and failure to have its statutory audit
done and the audited accounts presented before the general body for several
years Eshwar Usha Corporation v. Richimen Silks Ltd. (1999) 34 CLA 236 (CLB).
The government has ordered a probe against steel giant Ispat Industries for alleged
exposure to Rs. 8,500 crore of public funds, erosion of networth and high
accumulated losses. (Times of India dtd. 10-02-2004).
14.2 Winding- Up
Winding up of a company is the process whereby its life is ended and its property
administered for the benefit of its creditors and members. An administrator, called a
liquidator, is appointed and he takes control of the company. The liquidator collects
its assets, pays its debt and finally distributes any surplus among the members in
accordance with their respective rights.
Modes of W Modes of W Modes of W Modes of W Modes of Winding up - inding up - inding up - inding up - inding up - A company may be would up in any one of the two ways,
1. Compulsory winding up (sec. 433 to 483);
2. Voluntary winding up (sec. 489 to 509);
3. Voluntary winding up subject to the supervision of the court (sec. 522 to 527)
1. W 1. W 1. W 1. W 1. Winding up by the Court/Compulsory W inding up by the Court/Compulsory W inding up by the Court/Compulsory W inding up by the Court/Compulsory W inding up by the Court/Compulsory Winding up inding up inding up inding up inding up - Winding up be the Court
may be ordered in cases mentioned in section 433.
Section 433 provides that a company may be wound up by the Court:
(a) W WW WWinding up by special resolution: inding up by special resolution: inding up by special resolution: inding up by special resolution: inding up by special resolution: if the company has, by special resolution, so
resolved;
(b) Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: Default in delivering statutory report or holding statutory meeting: if default is
made in delivering the statutory report to the Registrar or in holding the statutory
meeting, where applicable;
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(c) F FF FFailure to commence business: ailure to commence business: ailure to commence business: ailure to commence business: ailure to commence business: if the company does not commence its business
within a year from its incorporation, or suspend its business for a whole year,
(d) R RR RReduction in membership below statutory minimum: eduction in membership below statutory minimum: eduction in membership below statutory minimum: eduction in membership below statutory minimum: eduction in membership below statutory minimum: if the number of members
is reduced, in the case of a public company, below 7, and in the case or a private
company, below 2;
(e) Inability to pay its debts: Inability to pay its debts: Inability to pay its debts: Inability to pay its debts: Inability to pay its debts: if the company is unable to pay its debts;
(f) Just and equitable: Just and equitable: Just and equitable: Just and equitable: Just and equitable: if the court is of the opinion that it is just and equitable that
the company should be wound up. Disappearance of substratum, objects of the
company becoming illegal, information of a company to perpetuate a fraud,
deadlock in management, where company never had any real business, oppression
of the minority have been held to be falling under just and equitable ground
contemplated under section 433.
The Companies (Second Amendment) Act, 2002 has added following three more
clauses under which the NCLT may order winding-up. (the Amendment Act is yet to be
notified)
(g) if the company has made a default in filing with the Registrar its balance sheet
and profit and loss account or annual return for any five consecutive financial
years;
(h) if the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order,
decency or morality;
(i) if the Tribunal is of the opinion that the company should be wound up under the
circumstances specified in section 424G.(As per section 424G, Tribunal can order
winding up, if it is of the opinion that the sick industrial company is unlikely to
revive.)
When Company deemed unable to pay its debts (section 434) When Company deemed unable to pay its debts (section 434) When Company deemed unable to pay its debts (section 434) When Company deemed unable to pay its debts (section 434) When Company deemed unable to pay its debts (section 434) Presently, a
creditor can file winding up petition if the company is indebted in sum exceeding Rs.
500.(exceeding one lakh rupees by the Second Amendment Act) Similarly, if any
execution or decree issued by court in favour of a creditor is returned unsatisfied in
whole or part, company will be deemed unable to pay its debts. [section 434].
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P PP PPractice in America: ractice in America: ractice in America: ractice in America: ractice in America: Bankruptcy cases in USA are taken up speedily unlike
India, where it takes years to complete the liquidation process. A sick unit
can file petition either under chapter 7 or 11 of Bankruptcy Act. Petition
under chapter 7 leads to liquidation, whereas petition under chapter 11
leads to rehabilitation. Chapter 11 allows the company to continue its
business and restructure its operations as per laid down criteria.
Who may petition Who may petition Who may petition Who may petition Who may petition (Sec.439) Petition for the compulsory winding up of the company
may be presented by:
i) the company itself, or
ii) any creditor or creditors, including any contingent or prospective creditor or
creditors; or
iii) a contributory or contributories; or
iv) any combination of creditors, company or contributories acting jointly or separately; or
v) the Registrar; or
vi) any person authorised by the Central Government as per section 243; or
vii) the official Liquidator
viii) Central or State government under clause (h)
Commencement of W Commencement of W Commencement of W Commencement of W Commencement of Winding up inding up inding up inding up inding up (Sec. 441) The winding up of a company by the
court shall be deemed to commence at the time of the presentation of the petition for
the winding up
Appointment of Liquidator Appointment of Liquidator Appointment of Liquidator Appointment of Liquidator Appointment of Liquidator At any time after the presentation of a winding up
petition and before the making of a winding up order, the Court may appoint the
Official Liquidator to be the liquidator provisionally. On such appointment, he is called
the provisional liquidator. On a winding up order being made, the Official Liquidator
shall become the liquidator of the company. He shall cease to hold office as provisional
liquidator. (Section 450) The object of appointment is protection and preservation of
the companys assets.
Consequences of W Consequences of W Consequences of W Consequences of W Consequences of Winding up order inding up order inding up order inding up order inding up order (Sec. 444 to 447) The consequences of the
winding up order by the Court shall be:
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(I) firstly, an intimation shall be caused to be sent by the Court to the Official Liquidator
and the Registrar,
(II) secondly, the petitioner and the company must also file with the Registrar within
30 days a certified copy of the order,
(III) thirdly, the winding up of the order is deemed to be a notice of discharge to the
Officers and employees of the company, except when the business of the company
is continued;
(IV) fourthly, all actions and suits against the company are stayed except to the extent
the Tribunal grants leave;
(V) fifthly, the order operators in the interests of all the creditors and all the
contributories, no matter who in fact asked for it;
(VI) sixthly, the Official Liquidator becomes the liquidator of the company and takes
possession and control of the assets of the company;
(VII) seventhly, all the powers of the Board of directors cease and the same are then
exercisable by the liquidator except for exceptions provided in section491 and
505;
(VIII) eighthly, on the commencement of the winding up, the limitation remains
suspended in favour of the company till one year after the winding up order is
made.
Statement of affairs : Statement of affairs : Statement of affairs : Statement of affairs : Statement of affairs :The company shall submit within prescribed time a statement
of affairs to the official liquidator. The statement of affairs contains details of the assets,
debts and liabilities of the company. (Sec. 454)
Where the affairs of a company have been completely wound up, the court may
make order of dissolution. The company shall be dissolved from the date of the order
of the court.
W WW WWinding up precedes dissolution: inding up precedes dissolution: inding up precedes dissolution: inding up precedes dissolution: inding up precedes dissolution: A winding up order does not by itself, put
an end to the companys existence. Its existence comes to an end after an
order for its dissolution is passed by the Court, however, in a scheme of
amalgamation the transferor company can be dissolved by an order of the
Court passed under section 394(1)(iv), without following the process of
winding up.
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2. V 2. V 2. V 2. V 2. Voluntary W oluntary W oluntary W oluntary W oluntary Winding up inding up inding up inding up inding up (Section 484 to 487) Winding up by the members or
creditors without any intervention of the court is called voluntary winding up.
In voluntary winding up, the company and its creditors are left free to settle their
affairs without going to the court. They may, however, apply, to the court for directions
or orders if and when necessary.
As per section 484, a company may be wound up voluntarily by passing an ordinary ordinary ordinary ordinary ordinary
resolution resolution resolution resolution resolution in general meeting where either either either either either the period fixed by the articles for the duration
of the company has expired or the event has occurred on which under the articles the
company is to be dissolved.
In any other case, the company may resolve to be wound up voluntarily by passing
a special resolution special resolution special resolution special resolution special resolution in general body meeting of shareholders.
A voluntary winding up is deemed to commence from the time the resolution for
voluntary winding up is passed.
Consequences of V Consequences of V Consequences of V Consequences of V Consequences of Voluntary W oluntary W oluntary W oluntary W oluntary Winding inding inding inding inding-up - -up - -up - -up - -up - From the commencement of the winding
up, the company shall cease to carry on its business except so far as may be required
to secure a beneficial winding up of the company. All the powers of the Board of
directors, managing director or manager shall cease except:
(a) for the purpose of giving notice to the Registrar about the name(s) of the liquidator(s)
appointed, or
(b) insofar as the company in general meeting or the liquidator(s) may sanction the
continuance of their powers. Further, all transfer of shares and alterations in the
status of members, made after the commencement, are void unless sanctioned
by the liquidator. Besides, the winding up resolution operates as notice of discharge
to the employees of the company except where the liquidation is for the purpose
of reconstruction or where the business is continued by the liquidator for the
beneficial winding up of the company.
T TT TTypes of V ypes of V ypes of V ypes of V ypes of Voluntary W oluntary W oluntary W oluntary W oluntary Winding up - inding up - inding up - inding up - inding up - Voluntary winding up may be of two types, namely,
(a) Members voluntary winding up (sec. 489 to 498);
(b) Creditors voluntary winding up (sec. 499 to 509.
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Members V Members V Members V Members V Members Voluntary W oluntary W oluntary W oluntary W oluntary Winding up inding up inding up inding up inding up - -- -- Members voluntary winding up is possible only
in case of solvent companies solvent companies solvent companies solvent companies solvent companies. To ensure that the company being would up is solvent,
section 488 requires the Board of directors to make a declaration to the effect that the
company has no debts, or that it will be able to pay its debts in full within such period
not exceeding three years from the commencement of the winding up as may be specified
in the declaration. This declaration is called as declaration of solvency declaration of solvency declaration of solvency declaration of solvency declaration of solvency . In order to be
effective, this declaration must be made within 5 weeks within 5 weeks within 5 weeks within 5 weeks within 5 weeks immediately preceding the
date of passing of the winding up resolution by the members; delivered to the Registrar
for filing; and must be accompanied by a copy of the report of the auditors of the
company on the profit and loss account prepared since the date of the last such account
to a date immediately preceding the declaration, as may be practicable and the balance
sheet of the company made out as on the last mentioned date.
Creditors voluntary winding up Creditors voluntary winding up Creditors voluntary winding up Creditors voluntary winding up Creditors voluntary winding up - -- -- Where the Board of directors does not file a
declaration as to solvency of the company, the voluntary winding up is called the the the the the
Creditors Creditors Creditors Creditors Creditors voluntary winding up.
Difference:
(a) Only a solvent company can advantage of members voluntary winding up.
Creditors voluntary winding up is resorted to by insolvent companies.
(b) Declaration of solvency must be filed if the company intends to take the advantage
of members voluntary winding up. However, no declaration of solvency can be
filed in case of creditors voluntary winding up.
(c) Whereas, in the case of members winding up, the liquidator is appointed by the
members exclusively. In the case of creditors winding up, if the members and
creditors nominate two different persons as liquidators, creditors nominee shall
become the liquidator of the company.
(d) Besides, in the case of creditors winding up, if the creditors so wish, a committee
of inspection may be appointed to work along with the liquidator(s).
(e) Another difference between the two relates to the fixation of the liquidations
remuneration. Whereas in case of members voluntary winding up, the
remuneration of liquidator is fixed by the members, the same is to be fixed by the
committee of inspection, if any, or by the creditors in case of creditors voluntary
winding up.
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3. Voluntary winding up subject to the supervision of the court (Sec. 522
to 527)
Winding up subject to supervision of the Court implies voluntary winding up which
is conducted under the supervision of the Court. As such, the winding up commences
when the company passes a resolution for voluntary winding up, but is continued under
the supervision of the court. Generally, the Court would make such an order when it is
satisfied that
(a) the liquidator is negligent;
(b) the liquidator is guilty of partiality;
(c) the rules of winding up have been violated;
(d) the powers of the liquidator are insufficient for the purposes of winding up; or
(e) the voluntary winding up is likely to prejudice the shareholders or that some
undue benefit will result to the shareholders.
Note: Note: Note: Note: Note: Provision in respect of winding up under supervision of Court have been
deleted vide Companies (Second Amendment) Act, 2002 which is yet to be implemented.
Contributory - Contributory - Contributory - Contributory - Contributory - the term contributory is defined under section 428 to mean every
person liable to contribute to the assets of a company in the event of its being wound
up. The expression includes the holder of any shares, which are fully paid up.
Thus every member becomes a contributory is not to be regarded as a member.
Only those contributories shall be regarded as members whose names are entered in
the register of members. The persons who may be held liable as contributories include
present and past members, directors and managers whose liability is unlimited, legal
representatives of a deceased member, assignee of a contributory, liquidator of body
corporate member and subscribers to the memorandum.
A past member shall however be not liable to contribute if he ceased to be a
member for one year or more before the commencement of the winding up.
Defunct Company - Defunct Company - Defunct Company - Defunct Company - Defunct Company - A defunct company means a company which never commenced
business or which is not carrying on business and has either no assets or has such
assets as shall not be sufficient to meet the costs of liquidation. However, a company is
not considered as defunct if the cessation of business is due to the conduct of winding
up. Also, the mere reduction of members below the statutory minimum does not render
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a company defunct. Under section 560 a defunct company can be dissolved without
going through the process of winding up by following a procedure stated under the
said section.
Section 560 also provides for the restoration of a companys name previously
struck off the register. However, the application must be made by the company, member
or creditor before the expiry of 20 years. The effect of an order of restoration shall be
that the company shall be deemed to have continued in existence as if its name had not
been struck off.
NOTE: In a scheme of amalgamation, a company may be dissolved without winding-up.
QUESTION BANK
I. FAQs
1. What registers of a company can be inspected by its members?
2. Explain the difference between Inspection and Investigation under provision of
the Companies Act, 1956.
3. State the circumstances on the basis of which Central Government may order
investigation into the affairs of a company.
4. When (i) may; and (ii) must the Central Government order investigation into the
affairs of a company?
5. What do you understand by winding-up of a company?
What are the various modes of winding-up?
6. When can a company be wound-up by the Court?
7. What are the consequences of a winding-up order by the Court?
8. Write short notes on Declaration of Solvency
9. Distinguish between : Members winding-up and creditors winding-up.
10. Explain the circumstances in which a company may be wound up by the Court on
the ground that the company is unable to pay its debts.
11. What are the circumstances in which a company may be wound up on the ground
that it is just and equitable to wind up a company?
12. Distinguish between winding-up and dissolution of a company.
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II. CASE STUDIES
1. The Central Government appointed inspectors under section 237(b) to investigate
the affairs of the company on the following grounds:
(a) Delay, bungling and faulty planning, entailing double expenditure to install
the plant.
(b) Continuous losses wiping out one-third of the share capital.
(c) Shares quoted at half the face value.
(d) Some eminent directors severed their connections with the company.
The company challenges the order of the Central Government:
(i) Discuss whether the appointment is proper.
(ii) What are the grounds on which the Central Government may suo motu (on
its own) appoint inspectors?
(Hint: Part (ii) should in fact be answered first. Under section 237(b), the Central
Government may appoint inspectors only on grounds stated thereunder.
Accordingly, in the given problem, appointment of the Inspector on the four given
grounds is improper since they are in variance with the grounds stated under
section 237(b).
2. Golden Tea Estates Ltd. had taken a term loan of Rs. 50 lakh from a bank secured
by some of its assets. The company has defaulted in the matter of payment of two
instalments to term loan amounting to Rs. 5 lakhs as per the terms of the loan
agreement. The bank filed winding up petition in the court. The company opposed
the petition for winding up on the ground that it has employed 500 workers, paid
their salaries regularly and that it has paid all the taxes due to the Government.
The company requested for some time to repay the loan instalments. The company
is also supported by some major creditors. Explain the circumstances under which
a company be ordered to be wound up by the court on the ground of inability to
pay its debts and whether the bank will succeed in this case.
(Hint: Bank will not succeed)
3. Veer Ltd. has a subsidiary company Zara Ltd. which is formed to carryout some of
the objectives of Veer Ltd. Veer Ltd. suspended one of its several businesses by
passing a resolution at the companys extraordinary general meeting with effect
from 1
st
January, 2006. The business so suspended continued to be suspended
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until November 2004. On 1
st
December, 2006, a group of shareholders of Veer
Ltd. filed a petition in the court for winding up of the company on the ground of
suspension of business by the company. Having regard to the provisions of the
Companies Act, 1956, decide
a. Whether the shareholders contention is tenable?
b. What would be your answer in case Veer Ltd. has suspended all its business?
c. Can shareholders of Zara Ltd. file a petition in the court for winding-up of
their company on the ground that the holding company, viz., Veer Ltd. has
suspended its entire business though Zara Ltd. has not suspended any of its
business?
(Hints: (i) No; (ii)If all the businesses remain suspended for a whole year, then
Veer Ltd. may be would up at the discretion of the court, (iii) No
4. Company was incorporated for the purpose of manufacturing machine tools,
implements, etc. It spent a substantial part of its subscribed capital on fixed assets.
It borrowed a sum of Rs. 30 lakhs from a bank for providing working capital. As
the company was unable to pay back this loan otherwise, the stock-in-trade,
plant and machinery and all the fixed assets of the company were sold out in
execution of a decree obtained by the bank, leaving no surplus for the company.
Would it be just and equitable to wind up the company in the circumstances?
(Hint: In a case where the subject-matter (substratum) of the company has gone
or the objects for which the company was incorporated have substantially failed,
it was held in re Kaithal General Mills Co. Ltd. [1951] 31 Comp. Cas 461 that it
shall be just and equitable to wind up the company. The substratum of the company
is deemed to have gone in such a case.
Thus, the company in question may be wound up on just and equitable grounds
since its substratum is gone.
5. Y Estates Ltd. was incorporated with the object of development land for residential
houses as well as purchase and sale of flats. It had, therefore, purchased 5 acres
of land near the airport at Calcutta. But Government acquired the same for
defence purposes. The company would not replace the land as the prices of land
of other places were prohibitive.
What will be the decision of the court in the following cases:
(i) The company suspends its business for a whole year?
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(ii) The company fails to resume its operations (business) for 5 years and the
prospects seemed gloomy?
(Hint: (i) The court may refuse to grant winding-up order, Suspension of business
for a whole year is a ground under section 433(c) seeking winding-up by the court
but the power of the Court in this regard is discretionary. The Court shall refuse
winding-up on this ground if the intention of the company not to resume its business
is absent. Thus, in the given case, winding-up order shall not be issued. Similar
decision was given under similar circumstances in the case of Murlidhar v. Bengal
Steamship Co. Ltd. AIR 1920 Cal. 722. (ii) Where the company fails to resume its
operations for 5 years and prospects also seem gloomy, the Court may order the
winding-up of the company [Rupa Bharati Ltd. v. Registrar of Companies [1969]
Comp. L.J. 290].
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Dr. K.V. S. Sarma
Professor of Law
PART V
LAW OF PARTNERSHIP
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THE INDIANPARTNERSHIP ACT, 1932
The Act contains 74 sections. These 74 sections are divided into 8 chapters. The
Law of Partnership originally formed part of the Indian Contract Act. 1872. It was
contained in Chapter XI, Ss. 239 to 266 of the Act. This chapter was repealed and was
replaced by a separate Act, the Indian Partnership Act in 1932.
Chapter-I - Preliminary- ss.1, 2, 3.
Chapter-II - The Nature of Partnership-ss. 4-8
Chapter-III - Relations of Partners to One Another-ss. 9-17
Chapter-IV - Relations of Partners to Third Parties-ss. 18-30
Chapter-V - Incoming and Outgoing Partners-ss.31-38
Chapter-VI - Dissolution of a Firm-ss. 39-55
Chapter-VII - Registration of Firms-ss. 56-71
Chapter-VIII - Supplemental-ss. 72, 73, 74
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CHAPTER - I
PRELIMINARY
S.1. Short Title, Extent and Commencement
1) This Act may be called the Indian Partnership Act, 1932.
2) It extends to whole of India except the State of Jammu and Kashmir.
S.2: Interpretation Clause
In this Act, unless there is anything repugnant in the subject or context:
a) An act of a firm means any act or omission by all the partners, or
by any partner or agent of the firm, which gives rise to a right
enforceable by or against the firm.
b) business includes every trade, occupation and profession;
c) Prescribed means prescribed by rules made under the Act.
d) Expressions used but not defined in this Act and defined in the
Indian Contract Act, 1872, shall have the meanings assigned to
them in that Act.
S.3. Application of Provisions of Act IX of 1872
The unrepealed provisions of the Indian Contract Act, 1872, save in
so far as they are inconsistent with the express provisions of this Act, shall
continue to apply to firms.
On various occasions it was held that chapter XI of the Indian Contract
Act was not exhaustive; hence this Act was enacted.
The Indian Partnership Act is based mainly on the English law and
incorporates many of its provisions. Though the law relating to partnership
is contained in this separate enactment, many of the general principles
of contract in the Indian Contract Act, continue to be applicable to
partnership transactions and firms.
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CHAPTER - II
THE NATURE OF PARTNERSHIP
S.4: Definition of Partnership
Partnership is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them acting for
all.
Partner, Firm and Firm name:-Persons who have entered into
partnership with one another are called individually Partners and
collectively a firm, and the name under which their business carried
on is called the firm-name.
It is very difficult to give a precise definition of the term partnership.
Some regard partnership as a relation between persons; others speak
of it, as an association between two or more persons for a certain purpose;
still some others regard it as a group of persons between whom a certain
relation exists. To avoid such confusion, the present Act uses the word
partnership in the sense of relationship.
Essential Elements of Partnership:-
From the definition of partnership, as given above, it is clear that the
following are the essential elements in partnership:-
1) Partnership is an association of two or more persons.
2) Partnership is the result of an agreement entered into by all the
persons concerned.
3) Partnership is organized to carry on some business.
4) The agreement must be to share the profits of the business.
5) Such business must be carried on by all or any of them acting for
all.
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Essentials of Partnership:-
1) Relation between Partners:-
The partnership is an association between two or more persons. Thus, there can be
no partnership consisting of a single individual. Only persons recognized by law can
enter into an agreement of partnership. There must exist a partnership of two adults,
before a minor can be admitted to the benefits of a partnership. The Partnership Act
does not say anything about the maximum number of partners. But section 11 of the
Companies Act, 1956 fixes the maximum number of partners at 10 for a partnership
carrying on banking business and at 20 for a partnership carrying on any other business.
In M. Kasam v. Commissioner of Income Tax ILR 1937(2) Cal.160 It is essential in
order to constitute a partnership that there should be a plurality of persons. Just as no
man can contract with himself, similarly no man can become a partner with himself
A Partnership has its source in a contract. It is not a creature of law arising from
status such as a Hindu Joint family trading firm.
In Chedilal v. C.I.T AIR 1942 Oudh 100, it was pointed out A Hindu Joint Family
partnership is outside the provisions of the partnership Act, the rights and liabilities of
the coparceners being governed by the Hindu Law. The Hindu Joint Family partnership
is not based on agreement but rests on status; it is a creature of Hindu Law
In Haji Isa v. Sarnbai, AIR Nag. 324, it was observed that an agreement is sine
qua non of every partnership which may be oral or in writing, may be expressed or
implied. It has thus been held that a partnership need not necessarily be express; it can
arise by mutual understanding evidenced by consistent course of conduct and by the
express admission of the parties concerned.
In Mahabir Cold Storage v. CIT AIR 1991 SC 1357, it was pointed out: under the
Indian Partnership Act, 1932, the partnership firm registered there under is neither a
person nor a legal entity. It is merely a collective name for the individual members of
the partnership. A firm as such cannot be a partner in another firm though its Partners
may be partners in another firm in their individual capacity.
2) Agreement:-
There must be an agreement entered into by all the persons concerned. An
agreement is an essential ingredient; without it no partnership can come into existence.
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Members of Joint Hindu Family carrying on a family business as such are not partners
for their relation arises not from any agreement but from status. This is clearly laid down
in section 5 of the Act.The agreement which forms the basis of partnership may be
either express or implied. It may be in writing or formed verbally, or by conduct.
3) Business:-
To constitute a partnership, the parties must have agreed to carry on a business.
Where there is no business to be done, there can be no question of partnership. Business
here includes any trade, occupation or profession. It means any activity which if successful
would result in profit. Mere holding of property in common does not create partnership.
It is not necessary that the business should consist of a long and permanent
undertaking. A partnership may be constituted for the execution of a single business
venture. Thus where two persons agreed to produce a film and share the profits of
hiring it out, it was held that the agreement constituted a partnership.
4) Agreement to Share Profits of Business:-
The next essential element of partnership is that there must be an agreement to
share the profits of a business. The sharing of profits is an essential feature of partnership
and there would be no partnership where only one of the partners is entitled to the
whole of the profits of the business. The partners may agree to share the profits in any
manner they like. It is essential that what are shared are the profits of the business in the
sense of the net gain resulting after payment of all outgoings. Thus, if a share is payable
out of gross returns the recipient would not be a partner in the business.
The agreements to share the profits are essential, but it is not necessary that the
partners should agree to share losses. It is open to one or more partners to agree to
share all the losses.
Though sharing in the profits of a business is essential to constitute partnership, it
does not follow that every one who participates in the profits of a business is a partner.
In any such case he cannot be regarded as a partner unless where the business can be
said to have been conducted on his behalf. An assistant who receives a salary and also
a share of the profits does not become a partner by the mere fact that he receives a
share of the profits.
The contract which gives rise to a partnership has to provide for the sharing of
profits among the partners. Profits mean the net return after deduction of all expenses.
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Suppose a theatre-owner and a theatrical company enter into an agreement by
which the theatre owner will provide the stage and look to advertisement while the
theatrical company will provide the actors and the gross returns are to be shared between
them in the proportion of 60% and 40%, such a contract does not make the owner of
the theatre and the managers of the theatrical company partners. It was so held in Cox
v.Coulson (1916) 2 K.B177.
A debtor assigned his business to trustees for the benefit of his creditors. The
trustees carried on the business with the object of paying of the creditors out of the
profits of the business. It was held that the creditors were not partners in the business. It
was so held in Cox v. Hickman (1861) 8 H.L.C.268.
5) Mutual Agency: -
The business should be carried on by all or any of the partners acting for all of
them. The decisive test for determining whether or not an association of persons
constitutes a partnership is to consider whether each of them is or is not an agent of all
the others. It is only when there is such mutual agency that a partnership arises. So the
business must be carried on by all the partners or some of them acting for all. In other
words there should be a binding contract of mutual agency between the partners. It is
this element of agency which distinguished partnership from various other relations
many of which are considered in section 6 of the Act. The essential characteristic of a
firm is that each partner is a representative of the other partners. Each of the partners is
an agent and a principal. He is an agent in so far as he can bind the other partners by
his acts within the scope of the partnership business and he is a principal to the extent
that he is bound by the act of the other partners. This indicates that if this essential
element of agency is lacking, the relation of partnership can not be said to exist. What
is essential is that the business must be carried on, on behalf of all the partners.
As was said in Emperor v. Jwala Prasad, (1923) 45 All. 642 The law of partnership
is a branch of the law of agency. Group of co-owner merely collecting rent from the
property without the fact of carrying on any business by or all of them is not partnership
and the co-ownership could be terminated by partition. A mere executory agreement of
partnership will not make the parties partners till they actually start business. (Dickman
v. Valpy) (1829) 109 ER 399.
The question as to the existence of a partnership depends on the real intention of
the parties to be spelt out of the contract, the conduct of the parties, the nature of the
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accounts, and other circumstances of the case. (LalaBaj Nath v. Ram Gopal) ILR (1938)
1 Cal. 369; Cox v. Hickman 1860 (11) ER 431
a) Nominal partner: Nominal partner: Nominal partner: Nominal partner: Nominal partner: A Partner who does not contribute any capital or share in profits,
but lends his name and credit to the firm is called a nominal partner. A nominal
partner may be held liable to third persons who deal with the firm of the supposition
that he is a partner.
b) Sleeping partner: Sleeping partner: Sleeping partner: Sleeping partner: Sleeping partner: He is also called dormant partner. A dormant partner is a
partner who is not known as such to the third parties dealing with the firm. He is
generally one who contributes property without labour and is not known as a
partner to third parties. The term sleeping partner implies one who is neither an
active partner nor known to the public as a partner. His connection with the firm
is concealed with the world.
The distinction between an active and dormant partner exists as regards third
parties only. A dormant partner is liable for the debts of the firm like an active
partner, but his liability ceases immediately on his retirement. He is not required,
unlike other partners, to give a notice on his retirement.
c) P PP PPartner only for profits: artner only for profits: artner only for profits: artner only for profits: artner only for profits: A partner sharing the profits of the business without making
himself responsible for losses, if any, is called a partner in profits only. He shall,
however, be liable to third parties for the acts of the firm. He may not generally
participate in the management of the firm.
d) Sub Sub Sub Sub Sub-P -P -P -P -Partner: artner: artner: artner: artner: A sub-partnership is a partnership within a partnership. It comes
into existence when one of the partners agrees to share the profits derived by him
from the firm with a stranger. That stranger is called a sub-partner. A sub-partner
is not liable for the debts of the firm. He has none of the rights of a partner in the
business. A sub-partner can claim the agreed share from the actual partner, but
he can have no right against the main firm.
e) A AA AActual or ostensible partner: ctual or ostensible partner: ctual or ostensible partner: ctual or ostensible partner: ctual or ostensible partner: A partner who is actively engaged in the conduct of
a business is called actual or ostensible partner. Such a partner is an agent of all
other partners for the purposes of the business of the firm. He can bind himself
and other partners for the acts done in the ordinary course of the business.
S.5: Partnership not Created by Status
The relation of partnership arises from contract and not from status; and, in particular,
the members of a Hindu undivided family carrying on a family business as such, or a
Burmese, Buddhist husband and wife carrying business as such, are not partners in
such business.
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Partnership can be distinguished from the following:-
a) P PP PPartnership and Hindu undivided trading family: artnership and Hindu undivided trading family: artnership and Hindu undivided trading family: artnership and Hindu undivided trading family: artnership and Hindu undivided trading family: In Hindu Law, business descends
like any other property upon members of the undivided family. When a joint
Hindu family takes to trading and the trade is handed down from one generation
to the next and so on, it is called a trading family. The interest of the family in the
trade passes by survivorship. But this does not result in a partnership which arises
out of a contract; it is the case of joint ownership in a trading business created
through the operation of Hindu Law.
No agreement is necessary to constitute a joint family firm. It is created by operation
of law. It is not on the death of any member thereof. A coparcener in a Joint
Hindu Family becomes a member just by birth. In the case of a Joint Hindu Family
business it is the manager alone who can take part in the business. The coparceners
are merely owners of property. In Joint Hindu Family the manager and no other
coparcener has an implied authority to contract debts and pledge the property
for the ordinary purpose of the family business. In Joint Hindu Family Business
only the manager is personally liable i.e., his separate property besides his share
in the joint family property is liable. Other members of the family are liable only to
the extent of their interest in the Joint Hindu Family property is liable.
b) P PP PPartnership from Co artnership from Co artnership from Co artnership from Co artnership from Co- -- --Ownership: Ownership: Ownership: Ownership: Ownership: Co-ownership need not arise from any contract.
Thus two persons may inherit property from a deceased relation and thus become
co-owners irrespective of any agreement between them. One co-owner can
generally transfer his interest in favour of a third party and make the transferee a
co-owner even without the consent of the other co-owners. A partnership, however,
cannot arise unless there is mutual agency, each partner being the agent of all
the others. There is no mutual agency in co-ownership.
c) P PP PPartnership and a Joint Stock Company: artnership and a Joint Stock Company: artnership and a Joint Stock Company: artnership and a Joint Stock Company: artnership and a Joint Stock Company: A company incorporated under the
Companies Act, 1956 becomes a juristic person, which can sue and be sued in
its own name. A joint stock company continues in spite of the death of its
shareholders. A partnership, however, becomes dissolved by the death of a partner.
S.6: Mode of Determining Existence of Partnership
In determining whether a group of persons is or is not a firm, whether a person is or
is not a partner in a firm, regard shall be had to the real relation between the parties, as
shown by all relevant facts taken together.
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Explanation I:- The sharing of profits or of gross returns arising from property by
persons holding a joint or common interest in that property does not of itself make such
persons partners.
Explanation II:- The receipt by a person of a share of the profits of a business, or of
a payment contingent upon the earning of profits or varying with the profits earned by
a business, does not of itself make him a partner with the persons carrying on the
business; and, in particular, the receipt of such share or payment:-
a) By a lender of money to persons engaged or about to engage in any business,
b) by a servant or agent as remuneration,
c) by the widow or child of a deceased partner, as annuity, or by a previous owner or
d) by a previous owner or part owner of the business, as consideration for the sale
of the good will or share thereof, does not of itself make the receiver a partner
with the persons carrying on the business.
Right to participate in the profits of a business is a strong evidence of the existence
of partnership. So, where a person takes away all the profits of a business carried on by
a number of persons, there is no partnership. Where a person actually works in a
partnership firm and shares in the profits and losses in a fixed proportion, there is a
strong presumption in favour of his being a partner. However, the right to receive a
share of profits is not a conclusive test of partnership. Section 6 enumerates a number
of cases where persons may share in the profits of a business and still may not be
partners.
Creditors jointly advancing money do not become partners even tough they possess
a right to share the profits. If a persons acting as servant is to be paid by a share in the
profits and is not to be liable for losses, no partnership is created. The fact that the
lender shares in the profits or takes an active interest in the business does not make him
a partner. Similarly, an agreement between a trader and his customers, under which the
trader is to distribute a portion of his profits amongst his customers in proportion to the
purchases made by them, does not make a partnership.
Explanation I of section 6 provides that owners of a property do not become partners
merely by sharing profits or gross returns arising there from. If each owner does nothing
more than take his share of the gross return obtained by the use of the common property,
partnership is not created thereby. Thus, if two joint owners of a house let it and divide
the rent equally between themselves they are not partners.
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Explanation II of section 6 clearly adds that the receipt by a person of the share of
the profits of a business does not of itself make him a partner with the persons carrying
on the business.
The leading case on this particular point is Mullow March and Co., v. Court of
Wards (1872) L.R. 4 PC 419 The partners of a firm had borrowed large sum of money
from X, a creditor. They agreed to give him a share in the profits and powers in the
conduct of the business. Partners could not sell, purchase or consign goods without his
consent. Privy Council held that X was not a partner as he himself could not purchase or
sell on behalf of the firm. He had control over sales and purchases as a measure of a
security for the loan advanced to the firm.
S.7: Partnership-at-will
Where no provision is made by contract between the partners for the duration of
the partnership, or for the determination of the partnership, the partnership is partnership-
at-will. It may be dissolved by any partner by giving a notice in writing to all other
partners of his intention to dissolve the firm. When such a notice is given, the firm is
dissolved as from the date mentioned in the notice as the date of dissolution or, if no
date is so mentioned, as from the date of the communication of the notice. (s.43)
Partnership for a fixed term: In this case, the partnership is entered into for a fixed
period of time. When the fixed period is over, it comes to an end. The partner, may,
however, continue to carry on the business after the expiry of the fixed period. In such a
case the mutual rights and duties of partners remain the same as they were before the
expiry of fixed period and the partnership becomes partnership-at-will. (s.17(b)).
S.8: Particular Partnership
When a person becomes a partner with another person or persons in a particular
adventure, or undertaking, such a partnership is known as Particular Partnership. It
comes to an end as soon as that adventure is completed. If it is continued after the
completion of that adventure for which it was entered into, it becomes partnership-at-
will.
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CHAPTER - III
RELATIONS OF PARTNERS TO
ONE ANOTHER
S.9:General Duties of Partners
The partners are bound to carry on the business of the firm to the
greatest common advantage, to be just and faithful to each other, and
to render true accounts and full information of all things affecting the
firm to any partner or his legal representative. Just like agency, mutual
confidence is the foundation of the partnership relationship.
The utmost good faith is due from every member of partnership
towards every other member. They have to render true accounts and full
information of all things, affecting the firm to any partner or his legal
representative.
It is the duty of every partner to indemnify the firm for any loss caused
to it by his fraud in the conduct of the business of the firm: Robertson v.
Southgate, (1848) 67 ER 1276.
S SS SS.10 .10 .10 .10 .10 of the Act casts an absolute liability to indemnity for loss caused
by a partners fraud.
S SS SS.11 .11 .11 .11 .11 (1) of the Act provides that subject to the provisions of the Act,
the mutual rights and duties of the partners of a firm may be determined
by contract between the partners and such contract may be express or
implied by course of dealing.
Such contract may be varied by consent of all the partners, and such
consent may be express or may be implied by a course of dealing.
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S. 11(2) The general rule is that a contract in restraint of trade is void. To this rule,
however, some exceptions are recognised in the Partnership Act.
a) In a contract of partnership it may be provided that a partner should not while he
remains a partner carry on any business, other than that of the firm.
b) S.55(3): When the goodwill of a firm is sold, the buyer may enter into an agreement
with any partner by which the partner is restrained from carrying on any business
similar to that of the firm whose goodwill is sold. Such restraint, however, should
be for a specified period and operate within specified local limits.
If the restriction thus imposes is reasonable it can be enforced.
c) S.54: When a firm is dissolved or in anticipation of its dissolution, the partners
may enter into an agreement by which some or all of them are restrained from
carrying on a similar business.
Such a restriction should operate only for a specified period and within specified
local limits. If the restrictions are reasonable such agreements are valid.
S.12: The Conduct of the Business
Subject to contract between the partners-
a) Every partner has a right to take part in the conduct of the business
b) every partner is bound to attend diligently to his duties in the conduct of the
business;
c) any difference arising as to ordinary matters connected with the business may be
decided by a majority of the partners, and every partner shall have the right to
express his opinion before the matter is decided, but no change may be made in
the nature of the business without the consent of all the partners; and
d) Every partner has a right to have access to and to inspect and copy any of the
books of the firm.
a) All the partners have the right to take part in the management of the business.
Hall v. Hall (1850) 50 ER 1119: Even the mortgage of the interest of a
partner to another partner does not divest the mortgaging partner of his right
of management.
Haramohan v. Sudarsan (1922) 25 CWN 847: But as the section operates
only in the absence of any contrary agreement, it is open to the partners to
agree that some alone shall manage the business.
RELATIONS OF PARTNERS TO ONE ANOTHER
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b) Duty of diligence: - He may be required to use the diligence required of an
agent under s. 212 of the Contract Act, 1872
Sasti Kenker v. Man Govindu (1919) Pat.419: It was held that a partner is
not liable for negligence if he can show that he used such skill and judgment
as he possessed in the conduct of the business.
Krishnamachariar v. Sankar Sah (1920) 39 MLJ 257 the refusal and neglect
on the part of any one partner to perform the duties undertaken, would give
the others the right to apply for dissolution.
c) Difference of opinion:- Difference arises as to a routine or ordinary matter
between him and the other partners decision by majority would be necessary,
provided that every partner is previously consulted before the final decision
is made and the decision of the majority is arrived at bona fide.
With reference to the special matters, a change in the nature of the business
cannot be made without the consent of all the partners.
Attorney General v. G.N. Rly., Co., (1860) 62 ER 337:- This Rule applies
even where the new business is profitable. No majority can expel any partner
unless the agreement provides such a power.
d) Inspection of firms books: - Pickering v. Pickering (1883) 25 Ch.D 247:
Every partner may either in person or through an unobjectionable agent
inspects and copies the books of the firm.
In Goa Petha v. N.H. Moss (1931) 10 Pat. 792: An Assignee of a partners
share has no right during the continuance of the partnership; require any
accounts of the partnership transactions, or to inspect the account books.
He cannot interfere in any way with the management or administration of
the partnership.
S.13: Mutual Rights and Liabilities
Subject to contract between the partners:-
a) A partner is not entitled to receive remuneration for taking part in the conduct of
the business;
b) The partners are entitled to share equally in the profits earned, and shall contribute
equally to the losses sustained by the firm;
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c) Where a partner is entitled to the interest on the capital subscribed by him, such
interest shall be payable only out of profits;
d) A partner making, for the purposes of the business, any payment or advance
beyond the amount of capital he has agreed to subscribe is entitled to interest
thereon at the rate of six per cent per annum.
e) The firm shall indemnify a partner in respect of payments made and liabilities
incurred by him-
i) In the ordinary and proper conduct of the business, and
ii) in doing such act, in an emergency, for the purpose of protecting the firm
from loss, as would be done by a person of ordinary prudence, in his own
case, under similar circumstances; and
f) A partner shall indemnify the firm for any loss caused to it by his willful neglect in
the conduct of the business of the firm.
a) Right to remuneration:- Bentley v. Craven (1852) 52 ER 29: Unless there is
a specific agreement, a partner is not entitled to remuneration for his services.
But remuneration can be had only in case profits are realized.
b) Equal share of profits and losses: Syres v. Syres, (1876) 1 AC 174 in the
absence of agreement, the presumption is that losses are to be shared equally.
Pitchiah Chettiar v. Subramaniam Chettiar (1934) 40 LW 60: Where the
agreement is to share profits in a certain proportion, there may arise a
presumption that losses are to be borne in the same proportion.
c) Interest on subscribed capital: - Commissioner of Income-Tax v. Subramanian
(1928) 51 Mad.787: In the absence of an express or implied agreement for
interest on capital, no interest can be claimed either during the partnership
or after dissolution of the same.
Where a partner is entitled to the interest on the capital subscribed by him,
such interest shall be payable only out of profits;
d) Interest on advance: - Bhola Shah v. CIT (1930) 12 Lah. 88 Amounts
advanced by a partner beyond the capital agreed to be subscribed, are
treated as a loan, and therefore ordinarily carry interest.
e) Contribution and indemnity: - Burden v. Burden (1813) 35 ER 67: That the
firm must reimburse a partner as to payments made or liabilities incurred by
such partner in the ordinary and proper conduct of the partnership business.
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Pawsey v. Armstrong (1881) 18 Ch.D 698 this right to indemnity subsists
even though the expense may turn out to have been useless provided the
same has been acquiesced in by the other partner.
Barden v. barkus (1862) 45 ER 1098: Where for the preservation of the
business or the property of the firm, the partner incurs expenses in an
emergency, the firm is bound to reimburse him.
f) Willful neglect of partner: - The partner is bound to indemnify the firm for
losses occasioned by his willful neglect.
S.14: The Property of the Firm
Subject to contract between the partners, the property of the firm includes all property
and rights and interests in property originally brought into the stock of the firm, or
acquired, by purchase or otherwise, by or for the firm or for the purposes and in the
course of the business of the firm, and includes also the goodwill of the business.
Unless the contrary intention appears, property and rights and interests in property
acquired with money belonging to the firm, are deemed to have been acquired for the
firm.
The real test as to whether any property is partnership property is, among other
things, the agreement between the parties, and in its absence the circumstances in
which the property was acquired and the mode in which it has been dealt with by the
parties. Furthermore, it is open to partners by agreement among themselves to convert
what is the joint property of all into the separate property of one or more, and vice
versa.
All property thrown into the common stock at the beginning of the partnership and
added thereto during the continuance of the partnership or obtained by means of the
partnership, whether directly by purchase or otherwise by employment in trade belongs
to the firm unless the contrary is shown.
Appaya v. Subbarao, ILR (1938) Bom. 102: Property bought with money belonging
to the firm is deemed to have been ought on account of the firm.
Boda Narayana Murthy & Sons v. Valluri Venkata suguna (1977) 2 An.W.R 480:
That the property used for partnership purposes is not necessarily partnership property.
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Property belonging to a partner does not become partnership property by being
used for purposes of the partnership. There must be some evidence of an intention to
treat the property as part of the capital of the business.
The Act has specifically included the goodwill among the property of the firm.
S.15: Application of the Property of the Firm
Subject to contract between the partners, the property of the firm shall be held and
used by the partners exclusively for the purposes of the business.
S.16: Personal Profits Earned by Partners
Subject to contract between the partners:-
a) if a partner derives any profit for himself from any transaction of the firm, or from
the use of the property or business connection of the firm or the firm name, he
shall account for that profit and pay it to the firm.
Accountability for private profits:-
i) Transaction of the firm: - For example, a partner is buying or selling for a
firm; he cannot sell to it or buy from it, at a profit to himself.
In Bentley v. Craven (1853) 52 ER 29 Where a partner employed to purchase
goods for the firm, supplied at market rate, goods bought by himself when
prices were lower, he was held accountable for the profit made.
Dunne v. English (1874) 18 Eq. 524 where the parties had agreed to buy a
mine with a view to resale at a profit, and it was arranged that the defendant
should sell it to certain third parties for a sum named, and the profit was to
be divided equally, it was held that the defendant who had secretly sold it for
more than the sum named was liable to account for the difference.
ii) Use of partnership property: - No partner shall derive any exclusive advantage
by the employment of the partnership property or by engaging in transaction
in rivalry with the firm.
In Gardner v. Mc Cutcheon (1842) 49 ER 446: Plaintiff and defendant were
part owners of a ship and employed it for the common benefit. But the
defendant, who happened to be also the master of the ship, traded on his
own account and made profit. The court held he was bound to account for
it to his partner.
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iii) Use of Business connection of the firm: - In Clegg v. Edmondson (1857) 44
ER 593Where, in a case of partnership at will, the managing partners gave
notice of dissolution, and openly renewed the partnership lease, it was held
that the benefit of the lease renewed also in favour of the other partners.
iv) Use of firm name: - It is not open to a partner to use the firm name in
furtherance of his own private purposes. Awe v. Benham 2 ch. 244.
b) if a partner carries on any business of the same nature as and competing with that
of the firm, he shall account for and pay to the firm all profits made by him in that
business.
S.17: Rights and duties of partners:-
Subject to contract between the partners-
a) After a change in the firm:- Where a change occurs in the constitution of a firm,
the mutual rights and duties of the partners in the reconstituted firm remain the
same as they were immediately before the change, as far as may be.
b) After the expiry of the term of the firm, Where a firm constituted for a fixed term
continues to carry on business after the expiry of that term, the mutual rights and
duties of the partners remain the same as they were before the expiry, so far as
they may be consistent with the incidents of partnership at will; and
c) Where additional undertakings are carried out:- Where a firm constituted to carry
out one or more adventures or undertakings carries out other adventures or
undertakings, the mutual rights and duties of the partners in respect of the other
adventures or undertakings are the same as those in respect of the original
adventures or undertakings.
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CHAPTER - IV
RELATIONS OF PARTNERS TO
THIRD PARTIES (Ss. 18-30)
S.18: Partner to be Agent of the Firm
Subject to the provisions of this Act, a partner is the agent of the firm
for the purpose of the business of the firm.
Concept of mutual agency is the basis or root of the partnership.
Wallace Brothers v. C.I.T. AIR 1948 PC 128: The principle that every
partner is an agent of the other partners and where he has acted within
the scope of his authority his acts would bind the other partners who
would be his principals in such transactions applies even if one of the
partners is a sleeping partner.
S.22: Mode of doing Act to Bind Firm
In order to bind a firm, an act or instrument done or executed by a
partner or other person on behalf of the firm shall be done or executed
in the firm name, or in any other manner expressing or implying an
intention to bind the firm.
Ordinarily, when a person contracts for another, the fact of agency
may or may not be disclosed. In the latter case, the other party to the
contract has the option to hold the principal liable when he becomes
disclosed.
In case of a partner entering into a contract in his own name, if, in
making the contract, he was acting as the agent of the firm, the other
partners will be in the position of undisclosed principals and may therefore
be liable on the contract, though not expressly mentioned.Beckham v.
Darke (1843) 152 ER 823
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In Induri Pattabhirami Reddi v. Kamisetty Ballaiah (1928) 55 MLJ 574: Where two
partners signed in their own names, without qualification, a promissory note, but the
promissory note was stated to be executed by the partnership, it was held that the name
of the firm as the party liable was sufficiently disclosed and that the defendant partner
whose name did not appear on the face of the instrument was also liable.
Devji v. Magan Lal AIR 1965 SC 139 : where a partner took a lease of premises in
his own name, the S.C. held that he cannot be regarded as having acted on behalf of
the firm.
Lakshmi Shanker v. Moti Ram (1904) 6 Bom. L.R. 1106: Where, however, monies
borrowed by a partner have been expended for the firms benefit, the lender is entitled
in equity to the payment of the portion so applied.
Venkatachalapathi v. Ramakrishnayya (1930) Mad. 168: In the case of a negotiable
instrument, as a general rule, where the drawing, acceptance or endorsement has not
been made expressly by or for the firm, but only personally by a partner, other partner
will not be liable.
Burn v. Burn (1798) 30 ER 1162: where a partner executes a deed for himself and
his partner in the presence of the latter, it will be operative against the non-executants
also.
S.19: Implied Authority of Partner as Agent of the Firm: - (1)
Subject to the provisions of section 22, the act of a partner which is done to carry
on, in the usual way, business of the kind carried on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by this section is called implied
authority.
Essentials: - In order that partners acts may bind the firm, the following conditions
must be satisfied.
1) The act must have been done by the partner in his capacity as a partner. Babu v.
Gokuldas (1930) Mad. 393:
Hepp. V. Dobson (1863) 143 ER 864: Thus an act done by a partner before he
becomes a member of the firm will not bind the firm.
Saville v. Robertson (1792) 100 ER 1264: and Gouthwaite v. Duckworth (1810)
104 ER 1264: In both the cases, goods were ordered by a person who had
RELATIONS OF PARTNERS TO THIRD PARTIES (Ss. 18-30)
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agreed to become a partner, and goods were in fact supplied and used for the
partnership adventure. But as the order was given before the partnership was
formed, no liability could be fixed on the other partners.
2) The act must have been done on behalf of the firm and not on the partners own
behalf. Underwood v. Bank of Liverpool (1924) 1 KB 775:
3) The act must relate to a matter, which is within the scope of the business of the
firm. (For the purposes of the firm)
If the matter is out-side the business of the firm, it must be proved either:
i) that the particular transaction had been authorised or
ii) that the other partners ratified it subsequently.
4) The act must be done in the firm name.
5) The act must be done to carry on the business in the usual way.
Kadiyala Seshagiri Rao v. Kanneganti dosaiah AIR 2000 AP 263 Where a
partnership deed expressly states that any business other than the one specified in
deed could be carried on with the consent of partners, the Managing Partners
cannot be said to have an implied authority to carry on such business in the
absence of the consent of the partners.
Examples for Implied Authority of Partner:-
a) Accounts: - Fergusson v. Fyffe (1841) 8 ER 49: An account rendered by one
partner in relation to a partnership transaction is deemed equivalent to an account
rendered by the firm.
b) Power to enter into contracts:- Mathura Nath v. Sree Jukla Bageswari (1928) Cal.
57: A partner has power to enter into contracts on behalf of the firm, if they are
necessary, or are made in the course of carrying on the business of the firm in the
usual way.
c) Power to borrow: - Lane v. Williams (1692) 23 ER 779: The sudden exigencies
of commerce render it absolutely necessary that a power to borrow should exist in
the members of a trading partnership.
d) Power to acknowledge debts: - Godwin v. Parton (1880) 42 LT 568: Under the
English law, one partner is presumed to be the agent of the others for making part
payments.
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Oriental Bank of commerce v. M/s S.R. Kishore & Co., AIR 1992 Del.174: An
acknowledgment of debt by one partner of the firm shall be binding on all partners
of firm and also sufficient to extend the period of limitation.
e) Power to bind by negotiable instruments:-In a trading partnership as said already,
every member of an ordinary trading partnership has implied power to bind the
firm by drawing, accepting or endorsing bills of exchange or by making and
indorsing promissory notes in its name, and for the purposes of the firm in the
ordinary course of business.
f) Non-Trading Partnership: - But with regard to non-trading partnerships, the question
of implied authority depends on the nature of the business of the partnership.
The power to borrow has not been recognised in the case of solicitors, farmers,
auctioneers.
g) Power to receive moneys due to firm:- Powell v. Brodhurst (1901) 2 Ch. 160:
Where a debt is owing to a firm, payment of a debt to one partner is good as
against the others also.
Lal Singh v. Dhanna Singh (1928) Lah. 832: It is open to a partner to release:
Henderson v. Wild (1872) 107 ER 1252: One partner can give a valid receipt for
a debt due to the firm.
h) Power to pledge: - In General Auction Estate v. Smith (1891) 3 ch. 432 it was
held that power to pledge partnership property is incidental to a power to borrow
for partnership purposes.
i) Power to purchase and sell:- Hyatt v. Hare (1698) 90 ER 543: It has been long
settled that every member of an ordinary trading partnership has implied power
to purchase on the credit of the firm goods necessary for carrying on its business
in the usual way.
j) Among other implied powers of a partner is the power to engage and dismiss
servants for the business, to insure the firms goods and also goods entrusted to
the firm, to engage lawyers to defend actions against the firm.
S SS SS.19(2): .19(2): .19(2): .19(2): .19(2): No implied authority:- In the absence of any usage or custom of trade to
the contrary, the implied authority of a partner does not empower him:-
a) To submit a dispute to arbitration
b) To open a bank account
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c) To compromise a claim
d) To withdraw suits
e) To admit liability
f) To acquire immovable property
g) To transfer immovable property
h) To set off:- A partner has no implied authority to set-off his own separate
debt against the debt due to the firm.
S.20: Extension and Restriction of Partners Implied Authority
The partners in a firm may, by contract between the partners, extend or restrict the
implied authority of any partner.
Notwithstanding any such restriction, any act done by a partner on behalf of the
firm, which falls within his implied authority, binds the firm, unless the person with
whom he is dealing knows of the restriction or does not know or believe that partner to
be a partner.
As it is but proper that third parties ought not to be made to suffer on account of
any restriction of the implied authority, the second paragraph provides that such limitations
operate only where the party affected has notice of it.
S.21: Partners Authority in an Emergency
A partner has authority, in an emergency; to do all such acts for the purpose of
protection of the firm from loss as would be done by a person of ordinary prudence, in
his own case, acting under similar circumstances, and such acts bind the firm.
S.23: Effect of Admissions by a Partner
An admission on representation made by a partner concerning the affairs of the
firm is evidence against the firm, it if is made in the ordinary course of business.
S.24: Effect of Notice to Acting Partner
Notice to a partner who habitually acts in the business of the firm of any matter
relating to the affairs of the firm operates as notice to the firm, except in the case of a
fraud on the firm committed by or with the consent of that partner.
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S.25: Liability of a Partner for Acts of the Firm
Every partner is liable, jointly with all the other partners and also severally, for all
acts of the firm done while he is a partner.
I.T.O, Salem v. Arungiri Chettiar, AIR 1996 SC 2160 under section 25, the liability
of every partner is both joint and several and there and there cannot be any distinction
between continuing partner and retired partner. A partner continues to be liable for the
act of the firm done while he was a partner and his liability does not cease merely
because he ceased to be a partner subsequently.
Appa Dada v. Ramakrishna (1930) 53 Bom. 652: The creditor of a firm may sue
any one of the partners or all of them and failure to implead all of them is no defence
to a suit against the third party.Veerappa v. Arunachalam chetty (1924) 47 MLJ 168:
Any internal arrangements between the partners, as to the liquidation of certain liability
will not be binding on the creditor.
Nilakanth v. Raj and company (1982) Mah.L.J 285 Decree passed against the firm
and its partners can be executed against any one of the partners of the firm.
Bhagwati v. Miyan Murat, (1931) 10 Pat. 528: Right to contribution principle is
applicable to the partners of the firm. S. 43(2) of the Contract Act.
S.26: Liability of the Firm for Wrongful Acts of a Partner
Where, by the wrongful act or omission of a partner acting in the ordinary course of
business of a firm, or with the authority of his partners, loss or injury is caused to any
third party, or any penalty is incurred, the firm is liable therefore to the same extent as
the partner.
Liability of firm for partners torts: - Lloyd v. grace Smith (1912) AC 716: It is not
necessary that the principal should have derived any benefit by the tortious act.
Collman v. Mills (1897) 1 QB 396: The principal may be liable for the act of his
agent even where the act has been expressly forbidden. This is based on the principle
of agency.
Blyth v. Fladgate, (1891) 1 Ch. 337: A firm of solicitors has been held liable for
negligent advice given by one member of the firm.
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S.27: Liability of Firm for Misapplication by Partners
a) a partner acting within his apparent authority receives money or property from a
third party and misapplies it, or
b) A firm in the course of its business receives money or property from a third party,
and the money or property is misapplied by any of the partners while it is in the
custody of the firm, the firm is liable to make good the loss.
If a partner, in the course of some transaction unconnected with the business of the
firm or not within the scope of such business, obtains money and then misapplied it, the
firm is not liable. Thus in Harman v. Johnson (1853) 118 ER 691: where one of a firm
of a solicitors was entrusted with money for investment on mortgage as opportunity
occurred, and he misapplied it, the firm was held not liable because it was not part of
the business of solicitors to act as scrivener.
S.28: Holding Out
1) Any one who by words spoken or written or by conduct represents himself, or
knowingly permits himself to be represented, to be a partner in a firm, is liable as
a partner in that firm to any one who has on the faith of any such representation
given credit to the firm, whether the person representing himself or represented to
be a partner does or does not know that the representation has reached the
person so giving credit.
2) Where after a partners death the business is continued in the old firms name, the
continued use of that name or of the deceased partners name as a part thereof
shall not of itself make his legal representative or his estate liable for any act of
the firm done after his death.
Essentials: -
i) There must be a representation made or suffered to be made by the person
holding out.
ii) It must have been relied on by the other person. It is immaterial whether the
person making the representation does or does not know that it has reached
the person so giving credit.
iii) Credit must have been given to the partnership on the faith of the
representation.
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iv) A person cannot be liable on the ground of having held himself out, unless
he did so before the contract on which he is charged with liability was entered
into.- Baird v. Planque (1858) 175 ER 756.
Newsome v. Coles (1811) 170 ER 1271: Where the representation is not known
to and relied on by the person charging the supposed partner, there is no question of
misleading and so no estoppel will arise.
S.29: Rights of Transferee of a Partners Interest
1) A transfer by a partner of his interest in the firm, either absolute or by mortgage,
or by the creation by him of a charge on such interest, does not entitle the
transferee, during the continuance of the firm, to interfere in the conduct of the
business, or to require accounts, or to inspect the books of the firm but entitles the
transferee only to receive the share of profits of the transferring partner, and the
transferee shall accept the account of profits agreed to by the partners.
2) If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled as against the remaining partners to receive the share of the
assets of the firm to which the transferring partner is entitled, and, for the purpose
of ascertaining that share, to an accounts as from the date of the dissolution.
Rights of assignee of partners interest: - Domaty Narsiah v. Raman Chetty (1899)
27 Cal. 93: The assignment is valid as between the immediate parties.
Suganchand v. lukhe (1938) Nag. 182: But the assignee cannot during the
continuance of the firm interferes in the conduct of the business, or ask for accounts; he
is entitled only to receive the assignors share of profits.
Addanki Narayanappa v. Bhaskara Krishnappa (1966) SCJ 490: He must accept
the accounts of profits agreed to by the partners.
Mathura Singh v. Arjun Singh AIR 1979 P & H 40: The assignee would have no
right to interfere in the management of the business so long as the business is continuing,
but he would be entitled only to the actual profits.
P. Ananda Rao v. G.Raja Rao (1976) 1 An. W.R 338: The transferee does not
become a partner of the firm: the transferor continues to be a partner along with the
other partners. There is no dissolution of the partnership by such transfer.
Public Trustee v. Eldon (1926) 1 ch. 776: On such dissolution, he is entitled to the
transferors share of assets and to an account as from the date of dissolution.
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Palariappa Chettiar v. Vaidyanatha Iyer (1969) 82 LW 63: A sub-partner will come
within the scope of section 29.
Health v. Samsom (1832) 110 ER 420: A transfer of a partners share may however
be a good ground for dissolution.
Dhanaraju v. Motilal (1929) 52 Mad. 563: The section applies to cases of involuntary
assignment also.
S.30: Minors Admitted to the Benefits of Partnership
(1) Minor admitted to the benefits of partnership:- A person who is a minor according
to the law to which he is subject may not be a partner in a firm, but, with the
consent of all the partners for the time being, he may be admitted to the benefits
of partnership.
A.A. Khan v. Amer Karim AIR 1952 Mys. 131: That a minor cannot create a
partnership.
Devi Ditta v. Than Mal(1933) 142 IC 203: There must be partnership already
subsisting, to which he is admitted.
Palaniappa v. Official Assignee (1917) MWN 150: that admission to the benefits
must be by some definite act such as, by allotment of a share or distribution of profits
or something of an analogous character.
Jaffer Ali v. Standard Bank of South Africa (1928) PC 135: By being admitted to
the benefits the minor incurs no personal liability for any of the obligations of the firm.
(2) Such a minor has a right to such share of the property and of the profits of the firm
as may be agreed upon, and he may have access to and inspect and copy any of
the accounts of the firm.
(3) Such minors share is liable for the acts of the firm, but the minor is not personally
liable for any such act.
Liability of minor: - Sanyasi Charan v. Krishnadhan (1922) 49 Cal. 560:
The minor is liable only to the extent of his share, in the partnership and is not
personally liable for partnership debts.
Official Assignee v. Palaniappa (1918) 41 Mad. 824: The minors separate property
cannot be proceeded against for realization of a partnership debt.
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(4) Such minor may not sue the partners for an account or payment of his share of
the property or profits of the firm, save when severing his connection with the firm,
and in such case the amount of his share shall be determined by a valuation
made as far as possible in accordance with the rules contained in section 48.
Provided that all the partners acting together or any partner entitled to dissolve
the firm upon notice to other partners may elect in such suit to dissolve the firm,
and thereupon the court shall proceed with the suit as one for dissolution and for
settling accounts between the partners, and the amount of the share of the minor
shall be determined along with the shares of the partners.
(5) At any time within six months of his attaining majority, or of his obtaining knowledge
that he had been admitted to the benefits of partnership, whichever date is later,
such person may give public notice that he has elected to become or that he has
elected not to become a partner in the firm, and such notice shall determine his
position as regards the firm. Provided that, if he fails to give such notice, he shall
become a partner in the firm on the expiry of the said six months.
Comments: - That the minor has, on attaining majority, an option of becoming a
partner or of severing his connection with it. This option he must exercise by giving
notice of his election. The period within which such notice is to be given is six months
after majority or knowledge of admission to the benefits of partnership. Omission to
give such notice makes him a partner automatically at the end of the six months.
In C.I.T. v. Shah Mohandas Sadhuram AIR 1966 SC 15: It was observed: first it is
clear from S.30 (2) that a minor cannot be held liable for losses. Secondly s.30
(3) enables a minor to sever his connection with the firm and if he does so the
amount of his share has to be determined in accordance with the rules contained
in s.48.There is no difficulty in holding that the severance may be effected on
behalf of a minor by his guardian.
6) Where any person has been admitted as a minor to the benefits of partnership in
a firm, the burden of proving the fact that such person had no knowledge of such
admission until a particular date after the expiry of six months of his attaining
majority shall lie on the persons asserting that fact.
(7) Where such person becomes a partner-
a) his rights and liabilities as a minor continue up to the date on which he
becomes a partner, but he also becomes personally liable to third parties for
all acts of the firm done since he was admitted to the benefits of partnership, and
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b) his share in the property and profits of the firm shall be the share to which he
was entitled as a minor.
Comment: - Goode v. Harrison (1821) 106 ER 1147: Harmohan v. Sudarsan
(1921) 25 CWN 847: Palaniappa v. Official Assignee (1917) MWN 150:
He becomes personally liable for all the acts of the firm done since the date of his
admission. This constitutes a wide departure from English Law, under which it would
appear that the personal liability attaches only to obligations incurred by the firm after
the minor attaining majority.
Where such person elects not to become a partner
a) his rights and liabilities shall continue to be those of a minor under this section up
to the date, on which he gives public notice,
b) his share shall not be liable for any acts of the firm done after the date of the
notice, and
c) He shall be entitled to sue the partner for his share of the property and profits in
accordance with sub-section (4) and (9). Nothing in sub-sections (7) and (8) shall
affect the provisions of section 28.
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CHAPTER - V
INCOMING AND OUTGOING PARTNER
S.31: Introduction of a Partner
(1) Subject to contract between partners and to the provisions of s.
30, no person shall be introduced as a partner into a firm without
the consent of all the existing partners.
(2) Subject to the provisions of section 30, a person who is introduced
as a partner into a firm does not thereby become liable for any act
of the firm done before he became a partner.
S.32: Retirement of a Partner
(1) A partner may retire: -
a) with the consent of all the partners,
b) in accordance with an express agreement by the partners, or
c) Where the partnership is at will, by giving notice in writing to
all the other partners of his intention to retire.
2) A retiring partner may be discharged from any liability to any third
party for acts of the firm done before his retirement by an agreement
made by him with such third party and the partners of the
reconstituted firm, and such agreement may be implied by course
of dealing between such third party and the reconstituted firm after
he had knowledge of the retirement.
Sarma v. Phanindranath (1931) 35 CWN 593: Where the
arrangement is not with the concurrence of the creditor, the
creditors rights against the retiring partner are unaffected.
3) Notwithstanding the retirement of a partner from a firm, he and
the partners continue to be liable as partners to third parties for
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any act done by anys them which would have been an act of the firm if done
before the retirement, until public notice is given of the retirement: Provided that
a retired partner is not liable to any third party who deals with the firm without
knowing that he was a partner.
4) Notices under sub-section (3) may be given by the retired partner or by any
partner of the reconstituted firm.
S.33: Expulsion of a Partner
(1) A partner may not be expelled from a firm by any majority of the partners, save in
the exercise in good faith of powers conferred by contract between the partners.
(2) The provisions of sub-section (2), (3) and (4) of section 32 shall apply to an
expelled partner as if he were a retired partner.
S.34: Insolvency of a Partner
1) Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on
the date on which the order of adjudication is made, whether or not the firm is
thereby dissolved.
2) Where under a contract between the partners, the firm is not dissolved by the
adjudication of a partner as an insolvent, the estate of a partner so adjudicated is
not liable for any act of the firm and the firm is not liable for any act of the
insolvent, done after the date on which the order of adjudication is made.
S.35: Liability of Estate of Deceased Partner
Where under a contract between the Partners the firm is not dissolved by the death
of a partner, the estate of a deceased partner is not liable for any act of the firm done
after his death.
S.36: Rights of Outgoing Partner to Carry on Competing Business
1) an outgoing partner may carry on a business competing with that of the firm and
he may advertise such business, but, subject to contract to the contrary, he may
not
a) Use the firm-name,
b) represent himself as carrying on the business of the firm, or
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c) solicit the custom of persons who were dealing with the firm before he ceased
to be a partner.
2) A partner may make an agreement with his partners that on ceasing to be a
partner he will not carry on any business similar to that of the firm within a specified
period or within specified period or within specified local limits; and, not
withstanding any thing contained in section 27 of the Contract Act, such agreement
shall be valid if the restrictions imposed are reasonable.
S.37: Right of Outgoing Partner in Certain Cases to Share Subsequent
Profits
Where any member of a firm has died or otherwise ceased to be a partner, and the
surviving or continuing partners carry on the business of the firm with the property of the
firm without any final settlement of accounts as between them and to the contrary, the
outgoing partner or his estate is entitled at the option of himself or his representatives to
such share of the profits made since he ceased to be a partner as may be attributable
to the use of his share of the property of the firm or to interest at the rate of six percent
per annum on the amount of his share in the property of the firm:
Provided that where by contract between the partners an option is given to surviving
or continuing partners to purchase the interest of a deceased or outgoing partner, and
that option is duly exercised, the estate of the deceased partner, or the outgoing partner
or his estate, as the case may be, is not entitled to any further or other share of profits;
but if any partner assuming to act in exercise of the option does not in all material
respects comply with the terms thereof, he is liable to account under the foregoing
provisions of this section.
S.38: Revocation of Continuing Guarantee by Change in Firm
A continuing guarantee given to a firm, or to a third party in respect of the transactions
of a firm, is, in the absence of agreement to the contrary, revoked as to future transactions
from the date of any change in the constitution of the firm.
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CHAPTER - VI
DISSOLUTION OF A FIRM
S.39: Dissolution of a Firm
The dissolution of partnership between all the partners of a firm is
called the dissolution of the firm.
S.40: Dissolution by Agreement
A firm may be dissolved with the consent of all the partners or in
accordance with a contract between the partners.
S.41: Compulsory Dissolution
A firm is dissolved
a) by the adjudication of all the partners or of all the partners but one
as insolvent, or
b) by the happening of any event which makes it unlawful for the
business of the firm to be carried on or for the partners to carry it
on in partnership.
Provided that, where more than one separate adventure or
undertaking is carried on by the firm, the illegality of one or more shall
not of itself cause the dissolution of the firm in respect of its lawful
adventures and undertakings.
S.42: Dissolution on the Happening of Certain Contingencies
Subject to contract between the partners a firm is dissolved
a) if constituted for a fixed term, by the expiry of that term;
b) if constituted to carry out one or more adventures or undertakings,
by the completion thereof;
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c) by the death of a partner; and
d) by the adjudication of a partner as an insolvent.
Contract to the contrary: -
Sayyed Abdul Hawk v. Vaikuntam (1927)52 MLJ318: The section operates only in
the absence of a contract to the contrary. It has been held that the contracts to the
contrary need not be express.
RamNiwas v. Diwan Chand (1933) Lah.618: The burden of proving a contract to
the contrary is on the party asserting it.
S.43: Dissolution by Notice of Partnership at Will
(1) Where the partnership is at will, the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.
(2) The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the communication
of the notice.
S.44: Dissolution by the Court
At the suit of a partner, the court may dissolve a firm on any of the following
grounds, namely:
a) that a partner has become of unsound mind, in which case the suit may be
brought as well by the next friend of the partner who has become of unsound
mind as by any other partner;
b) that a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner;
c) that a partner, other than the partner suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of the business, regard being had to the nature
of the business;
d) that a partner, other than the partner suing, willfully or persistently commits breach
of agreements relating to the management of the affairs of the firm or the conduct
of its business, or otherwise so conducts himself in matters relating to the business
that it is not reasonably practicable for the other partners to carry on the business
in partnership with him;
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e) that a partner, other than the partner suing, has in any way transferred the whole
of his interest in the firm to a third party, or has allowed his share to be charged
under the provisions of Rule 49 of Order XXI of the First Schedule to the C.P.C. or
has allowed it to be sold in the recovery of arrears of land-revenue or of any dues
recoverable as arrears of land-revenue due by the partner;
f) that the business of the firm cannot be carried on save at a loss; or
g) on any other ground which renders it just and equitable that the firm should be
dissolved.
S.45: Liability for Acts of Partners done after Dissolution
(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as
such to third parties for any act done by any of them which would have been an
act of the firm if done before the dissolution, until public notice is given of the
dissolution;
Provided that the estate of a partner who dies, or who is adjudicated an insolvent,
or of a partner who, not having been known to the person dealing with the firm to
be a partner, retires from the firm, is not liable under this section for acts done
after the date on which he ceases to be a partner.
(2) Notices under sub-section (1) may be given by any partner.
S.46: Right of Partners to have Business wound up after Dissolution:
On the dissolution of a firm every partner or his representative is entitled, as against
all the other partners or their representatives, to have the property of the firm applied in
payment of the debts and liabilities of the firm, and to have the surplus distributed
among the partners or their representatives according to their rights.
S.47: Continuing Authority of Partners for Purposes of Winding up
After the dissolution of a firm, the authority of each partner to bind the firm, and the
other mutual rights and obligations of the partners, continue notwithstanding the
dissolution, so far as may be necessary to wind up the affairs of the firm and to complete
transactions begun but unfinished at the time of the dissolution, but not otherwise;
Provided that the firm is in no case bound by the acts of a partner who has been
adjudicated insolvent; but this proviso does not affect the liability of any person who
has after the adjudication represented himself or knowingly permitted himself to be
represented as a partner of the insolvent.
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S.48: Mode of Settlement of Accounts between Partners
In settling the accounts of a firm after dissolution, the following rules shall, subject
to agreement by the partners, be observed:-
a) losses, including deficiencies of capital, shall be paid first out of profits, next out
of capital, and, lastly, if necessary, by the partners individually in the proportions
in which they were entitled to share profits;
b) The assets of the firm including any sums contributed by the partners to make up
deficiencies of capital shall be applied in the following manner and order:-
i) in paying the debts of the firm to third parties;
ii) In paying to each partner rateably what is due to him from the firm for
advances as distinguished from capital;
iii ) in paying to each partner rateably what is due to him on account of capital;
and
iv) The residue, if any, shall be divided among the partners in the proportions in
which they were entitled to share profits.
S.49: Payment of Firm Debts and of Separate Debts
Where there are joint debts due from the firm, and also separate debts due from
any partner, the property of the firm shall be applied in the first instance in payment of
the debts of the firm, and, if there is any surplus, then the share of each partner shall be
applied in payment of his separate debts or paid to him. The separate property of any
partner shall be applied first in the payment of his separate debts, and the surplus (if
any) in the payment of the debts of the firm.
S.50: Personal Profits Earned after Dissolution
Subject to the contract between the partners, the provisions of clause (a) of section
16 shall apply to transaction by any surviving partner or by the representatives of a
deceased partner, undertaken after the firm is dissolved on account of the death of a
partner and before its affairs have been completely wound up;
Provided that where any partner or his representative has bought the goodwill of
the firm, nothing in this section shall affect his right to use the firm name.
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S.51: Return of Premium on Premature Dissolution
Where a partner has paid a premium on entering into partnership for a fixed term,
and the firm is dissolved before the expiration of that term otherwise than by the death
of a partner, he shall be entitled to repayment of the premium or of such part thereof as
may be reasonable, regard being had to the terms upon which he became a partner
and to the length of time during which he was partner unless:-
a) the dissolution is mainly due to his own misconduct; or
b) the dissolution is in pursuance of an agreement containing no provision for the
return of the premium or any part of it.
S.52: Rights where Partnership Contract is Rescinded for Fraud or
Misrepresentation
Where contract creating partnership is rescinded on the ground of the fraud or
misrepresentation of any of the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitled:-
a) to a lien on, or a right of retention of, the surplus of the assets of the firm remaining
after the debts of the firm have been paid, for any sum paid by him for the
purchase of a share in the firm and for any capital contributed by him;
b) to rank as a creditor of the firm in respect of any payment made by him towards
the debts of the firm; and
c) to be indemnified by the partner or partners guilty of the fraud or misrepresentation
against all the debts of the firm.
S.53: Right to Restrain from Use of Firm Name or Firm Property
After a firm is dissolved, every partner or his representative may, in the absence of
a contract between the partners to the contrary, restrain any other partner or his
representative from carrying on a similar business in the firm name or from using any of
the property of the firm for his own benefit, until the affairs of the firm have been
completely wound up;
Provided that where any partner or his representative has bought the goodwill of
the firm, nothing in this section shall affect his rights to use the firm name.
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S.54: Agreement in Restraint of Trade
Partners may, upon or in anticipation of the dissolution of the firm, make an
agreement that some or all of them will not carry on a business similar to that of the firm
within a specified period or within specified local limits; and notwithstanding anything
contained in section 27 of the Indian Contract Act, 1872, such agreement shall be
valid if the restrictions imposed are reasonable.
S.55 Sale of Goodwill after Dissolution
1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to
contract between the partners, be included in the assets, and it may be sold either
separately or along with other property of the firm.
2) Rights of buyer and seller of goodwill: Where the goodwill of a firm is sold after
dissolution, a partner may carry on a business competing with that of the buyer
and he may advertise such business, but, subject to agreement between him and
the buyer, he may not:-
a) use the firm name;
b) represent himself as carrying on the business of the firm; or
c) Solicit the custom of persons who were dealing with the firm before its
dissolution.
3) Agreement in restraint of trade: - Any partner may, upon the sale of the goodwill
of a firm, make an agreement with the buyer that such partner will not carry on
any business similar to that of the firm within a specified period or within specified
local limits, and, notwithstanding anything contained in section 27 of the India
Contract Act, 1872 such agreement shall be valid if the restrictions imposed are
reasonable.
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CHAPTER - VII
REGISTRATION OF FIRMS
S.56. Power to Exempt from Application of this Chapter
The State Government of any State may, by notification in the Official
Gazette, direct that the provisions of this Chapter shall not apply to that
State or to any part thereof specified in the notification.
S.57. Appointment of Registrars
1) The State Government may appoint Registrars of Firms for the
purposes of this Act, and may define the areas within which they
shall exercise their powers and perform their duties.
2) Every Registrar shall be deemed to be a public servant within the
meaning of section 21 of the Indian Penal Code.
S.58. Application for registration:-
1) The Registration of a firm may be effected at any time by sending
by post or delivering to the Registrar of the area in which any place
of business of the firm is situated or proposed to be situated, a
statement in the prescribed form and accompanied by the
prescribed fee, stating
a) the firm name;
b) the place or principal place of business of the firm;
c) the names of any other places where the firm carries on
business;
d) the date when each partner joined the firm;
e) the names in full and permanent addresses of the partners,
and
f) the duration of the firm,
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The Statement shall be signed by all the partners, or by their agents specially
authorized in this behalf.
2) Each person signing the statement shall also verify it in the manner prescribed.
3) A firm name shall not contain any of the following words, namely:-Crown, Emperor,
Empress, Empire, Imperial, King, Queen, Royal or words expressing or implying
the sanction approval or patronage of Government signifies its consent to the use
of such words as part of the firm name by order in writing.
S.59. Registration
When the Registrar is satisfied that the provisions of section 58 have been duly
complied with, he shall record an entry of the statement in a register called the Register
of Firms, and shall file the statement.
S.60. Recording of alterations in firm name and principal place of business
1) When an alteration is made in the firm name or in the location of the principal
place of business of a registered firm, a statement may be sent to the Registrar
accompanied by the prescribed fee, specifying the alteration, and signed and
verified in the manner required under s.58.
2) When the Registrar is satisfied that the provisions of sub-section (1) have been
duly complied with, he shall amend that entry relating to the firm in the Register of
Firms in accordance with the statement, and shall file it along with the statement,
relating to the firm filed under s.59.
S.61. Noting of Closing and Opening of Branches
When a registered firm discontinues business at any place or begins to carry on
business at any place, such place not being its principal place of business, any partner
or agent of the firm may send intimation thereof to the Registrar, who shall make a note
of such intimation in the entry relating the firm in the Register of Forms, and shall file the
intimation along with the statement relating to the firm filed under s. 59.
S.62. Noting of Changes in Names and Addresses of Partners
When any partner in a registered firm alters his name or permanent address, an
intimation of the alteration may be sent by any partner or agent of the firm to the
Registrar, who shall deal with it in the manner provided in section 61.
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S.63. Recording of Changes in and Dissolution of a Firm
1) When a change occurs in the constitution of a registered firm any incoming,
continuing or outgoing partner, and when a registered firm is dissolved, any person
who was a partner immediately before the dissolution, or the agent of any such
partner or person specially authorized in this behalf, may give notice to the Registrar
of such change or dissolution, specifying the date thereof, and the Registrar shall
make a record of the notice in the entry relating to the firm in the Register of
Firms, and shall file the notice along with the statement relating to the firm filed
under s.59.
2) Recording of withdrawal of a minor: - When a minor who has been admitted to
the benefits of partnership in a firm attains majority and elects to become or not
to become a partner, and the firm is then a registered firm, he, or his agent
specially authorized in this behalf, may give notice to the Registrar that he has or
has not become a partner, and the Registrar shall deal with the notice in the
manner provided in sub-section (1).
S.64. Rectification of Mistakes
1) The Registrar shall have power at all times to rectify any mistake in order to being
the entry in the Register of Firms relating to any firm into conformity with the
documents relating to that firm filed under this chapter.
2) On application made by all the parties who have signed any document relating
to a firm filed under this Chapter, the Registrar may rectify any mistake in such
document or in the record or note thereof made in the Register of Firms.
S.65. Amendment of Register by Order of Court
A court deciding any matter relating to a registered firm may direct that the Registrar
shall make any amendment in the entry in the Register of Firms relating to such firm
which is consequential upon its decisions and the Registrar shall amend the entry
accordingly.
S.66. Inspection of Register and filed Documents
1) The Register of Firms shall be open to inspection by any person on payment of
such fee as may be prescribed.
2) All statements, notices and intimations filed under this chapter shall be open to
inspection, subject to such conditions and on payment of such fee as may be
prescribed.
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S.67. Grant of Copies
The Registrar shall on application furnish to any person, on payment of such fee as
may be prescribed, a copy, certified under his hand, of any entry or portion thereof in
the Register of Firms.
S.68. Rules of Evidence
1) Any statement, intimation or notice recorded or noted in the Register of Firms
shall, as against any person by whom or on whose behalf such statement, intimation
or notice was signed, be conclusive proof of any fact therein stated.
2) A certified copy of any entry relating to a firm in the Register of Firms may be
produced in proof of the fact of the registration of such firm, and of the contents
of any statement, intimation or notice recorded or noted therein.
S.69. Effect of non-registration
1) No suit to enforce a right arising from a contract or conferred by this Act shall be
instituted in any court by or on behalf of any person suing as a partner in a firm
against the firm or any person alleged to be or to have been a partner in the firm
unless the firm is registered and the person suing is or has been shown in the
Register of Firms as a partner in the firm.
2) No suit to enforce a right arising from a contract shall be instituted in any court by
or on behalf of a firm against any third party unless the firm is registered and the
persons suing are or have been shown in the Register of Firms as partners in the
firm.
3) The provisions of sub-section (1) and (2) shall apply also to a claim of set-off or
other proceeding to enforce a right arising from a contract, but shall not affect:-
a) the enforcement of any right to sue for the dissolution of a firm or for accounts
of a dissolved firm, or any right or power to realize the property of a dissolved
firm; or
b) the powers of an official assignee, receiver or court under the Presidency
Towns Insolvency Act, 1909 or the Provincial Towns Insolvency Act, 1920 to
realize the property of an insolvent partner.
4) This section shall not apply:-
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a) to firms or to partners in firms which have no place of business in the territories
to which this Act extends, or whose place of business in the said territories
are situated in areas to which, by notification under section 56, this chapter
does not apply; or
b) to any suit or claim of set-off not exceeding one hundred rupees in value
which, in the Presidency-towns, is not of a kind specified in section 19 of the
Presidency Small Causes Courts Act, 1882 or outside the Presidency Towns,
is not of a kind specified in the Second Schedule to the Provincial Small
Causes Courts Act, 1887 or to any proceeding in execution or other
proceeding incidental to or arising from any such suit or claim.
Though the Act does not require the firm to be compulsorily registered nor does it
imposes penalties such as are imposed under the English Law, yet the effect of the rules
relating to the consequences of non-registration is such, as will practically necessitate
the registration of the firm at one time or the other. It may be noted that registration of
firms under this Act is distinct from registration of partnership firms under the Income
Tax Act for the purposes of assessment Income Tax.
The following disabilities are imposed during the subsistence of the partnership:-
a) A partner cannot institute a suit against the firm or any partner of the firm to
enforce a right arising from a contract or conferred under the partnership Act.
b) The firm cannot sue a third party to enforce a right arising from a contract.
c) In a proceeding instituted against it to enforce a right arising from contract, set off
cannot be pleaded by the firm or a partner as the case may be.
The following suits can be maintained even if a firm has not been registered:-
a) suit for accounts of a dissolved firm;
b) suit for dissolution of the firm;
c) suit for realizing the property of a dissolved firm;
d) proceeding by an Official Assignee or Receiver to realize the property of an
insolvent partner;
e) Claim of set off not exceeding Rs. 100/- provided it is not of a small cause
nature.
Time of Registration:-
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The registration of a firm may be effected at any time by filling an application in the
form of a statement, giving the necessary information, with the Registrar of Firms of the
area. As to the time of the registration of a firm, there is no definite provision in the Act.
Sec. 69(2), however, lays down that no suit to enforce a right arising from a contract
can be instituted in any court by or on behalf of a firm against any third party unless the
firm is registered and the persons suing are or have been shown in the Register of Firms
as partners in the firm. In other words, no suit by an unregistered firm is maintainable
and the only course open to the court is to dismiss it. Malhotra & Co., Ramesh Mistri,
A.I.R. (1971) Punj.212;
The point of time contemplated in sec. 69(2) is the time of the institution of the suit.
That is to say, the firm must be a registered firm by the date of the institution of the suit.-
Shanker Housing Corporation v. Mohan Devi A.I.R. (1978) Del.255.
This means before any suit is filed in a Law Court, registration must be effected.
Subsequent registration does not cure the initial defect at the time of the institution of
the suit. The right course in such a case is to withdraw the suit from the court, get the
firm registered and then file a fresh suit.
S.70. Penalty for Furnishing False Particulars
Any person who signs any statement, amending statement, notice or intimation
under this Chapter containing any particular which he knows to be false or does not
believe to be true, or containing particulars which he knows to be incomplete or does
not believe to be complete, shall be punishable with imprisonment which may extend to
three months, or with fine, or with both.
S.71. Power to Make Rules
1) The State Government may by notification in the Official Gazette make rules
prescribing the fees which shall accompany documents sent to the Registrar of
Firms, or which shall be payable for the inspection of documents in the custody of
the Registrar of Firms, or for copies from the Register of Firms.

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