Professional Documents
Culture Documents
Notes
Section
1
Ignorance of law excuses no man: Not that all men know the law, but because
it is an excuse every man will plead, and no man can tell how to refute him.
John Seldon
STRUCTURE
1.1
1.2
Meaning of law.
1.3
Branches of law.
1.4
1.5
Self-Learning Material 3
Law pervades almost every part of human life. Without law there will be chaos and confusion in
society. No games, be it cricket, football or hockey can be played without rules to govern the
players. Traffic rules are important to regulate traffic. Knowledge of law is, therefore, necessary
for all persons who live in a society. Moreover, there is a familiar maxim ignorantia juris non
excusat (ignorance of law is no excuse).
1.2
What is Law?
The Oxford English Dictionary defines the word Law as the rule made by authority for the
proper regulation of a community or society or for correct conduct in life. The term law has been
defined by some of the legal scholars in the following words:
A law is a rule of conduct imposed and enforced by the sovereign.
Austin
Law is the body of principles recognised and applied by the state in the administration of justice.
Salmond
Law in its most general and comprehensive sense signifies a rule of action and is applied
indiscriminately to all kinds of actions whether animate or inanimate, rational or irrational.
Blackstone
Law is rule of external human actions enforced by Sovereign Political authority.
Holland
Hence law is a set of rules laying down rights and obligations, which the state enforces. It includes
rules and principles, which regulate our relations with other individuals and with the state.
1.3
Branches of Law
With the growth of civilisation, human beings social and economic behaviour has assumed many
facets. It is therefore essential that multi-dimensional human activities should be controlled through
different set of rules and principles. Almost all civilised societies, therefore, provide and enforce
different set of rules and guiding principles for different kinds of social, economical, and political
objectives. Hence, there are several branches of law, such as International Law, Constitutional
Law, Criminal Law, Civil Law, Business or Mercantile Law.
1.4
The terms Business, Commercial, and Mercantile, in relation to law, are used in the same
sense. Business Law is that branch of law, which comprises laws concerning trade, industry and
commerce. Business law refers to those rules and regulations, which govern the formation and
execution of business transactions made by various persons in the society. These provisions comprise
the legal environment of business. Business law is intended to infuse the much needed certainty
in commercial dealings. Business law includes laws relating to contract, sale of goods, negotiable
instruments, partnership, company and many other economic laws having a bearing on trade,
industry, and commerce.
1.5
The main sources of business law in India are shown in the table and briefly discussed thereafter:
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English Law
Judicial Decisions
or Case Law
English Common
Law
Equity
Customs and
Usages
Law Merchant or
Maritime Usage
Indian Statutes
Statutes Law
English Common Law: It refers to a system of law based upon English customs, usages,
and traditions, which were developed over centuries by the English Courts. These are
unwritten or the non-statutory laws. These are found in the reported decisions of the courts
of law.
b)
Equity: It refers to that branch of the English Law, which was developed separately from
the common law. It is based on the principle of fairness, and concepts of justice developed
by the judges whose decisions became precedents.
c)
Law Merchant or Maritime Usage: It refers to the usages or customs of merchants and
traders that have been ratified by the courts of law. The object is to protect the interest of
trade. The courts in these cases assume that the parties have dealt with each other on the
footing of customs or usages prevailing generally. This law, thus, gets incorporated into the
common law and the courts honour it.
d)
Statute Law: The statute law refers to the law laid down in the Acts of Parliament. It is
superior to and overrides any rules of the common law, equity or law merchant. The courts
of law interpret the meaning of such enactments and apply them.
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The constitution of India confers power to enact law on its parliament and legislatures of states.
When a bill is passed by the parliament/state legislatures and assented to by the President or
Governor of a state, it becomes an Act or Statute. The bulk of Indian Mercantile Law is statute
law. The Indian Contract Act, 1872, The Negotiable Instruments Act, 1881, The Sale of Goods
Act, 1930, The Indian Partnership Act, 1932, The Companies Act, 1956 are instances of the statute
law.
Summary
Law permeates every part of human activity. No civilised society can exist without a legal order.
Ignorance of law is no excuse for any human being. Law is a rule of conduct imposed and enforced
by authority. There are various branches of law like International Law, Constitutional Law, Criminal
Law, Civil Law, Business Law or Mercantile Law. The terms Business, Commercial or Mercantile
Law are used in the same sense. Business law refers to rules and regulations concerning Trade,
Industry, and Commerce. The main sources of business law in India are English law, Judicial
decisions (or Case law), Customs and Usages, and Indian statutes. Knowledge ofbusiness law is
necessary so that various managerial decisions, which managers are required to take in their dayto-day activities, are within the boundaries of law.
Review Questions
True or False
State with reasons whether the following statements are True or False:
6.
What do you
understand by statute
law?
How law and business
are related?
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1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Managers can come to proper decisions when they have working knowledge of law.
Test Questions
1.
2.
3.
4.
5.
Notes
Short Questions
1.
2.
3.
4.
Define Law. What is the need for managers to know about Law?
5.
2) 1.4
3) 1.3
4) 1.5
5) 1.5.4
6) 1.5.5
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Notes
8 Self-Learning Material
Law of Contract
Notes
Section
2
No cause of action arises from a bare promise.
Legal Maxim
STRUCTURE
2.1
2.2
2.3
Meaning of a contract.
2.4
What is an agreement?
2.5
2.6
2.7
Classification of contracts.
2.8
2.9
2.10 Consideration.
2.11 Capacity of parties.
2.12 Free consent.
2.13 Legality of object and consideration.
2.14 Void agreement.
2.15 Contingent contract.
2.16 Quasi contract.
2.17 Performance of contract.
2.18 Discharge of contract.
2.19 Remedies for breach of contract.
2.20 Indemnity and guarantee.
2.21 Bailment and Pledge.
2.22 Agency
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2.1 Introduction
Notes
The law of contracts is the basis upon which the super structure of all business is built. It affects
every person in one way or the other, as all of us enter into some kind of contract every day. All
contracts are based on agreements, which are either express or implied. Everyone of us enters into
a number of contracts almost everyday. Most of the time we do so without realising what we are
doing from the view point of law. A person seldom realises that when he gives clothes for drycleaning,
or when he buys milk, bread or biscuits, or when he goes to the auditorium to see a movie, he is
entering into a contract. In business transactions, normally, first promises are made followed by
performance. If parties were free to go back on their promises without incurring any liability, it
would be impossible to carry on any trade, industry or commerce. Hence, the law of contract was
made laying down rules for performance and discharge of a contract, and the remedies available to
the aggrieved party in case of breach of contract. Explaining the object of law of contract, Sir
William Anson observes that The law of contract determines the circumstances in which promises
made by the parties to a contract shall be legally binding on them. It is intended to ensure that what
a man has been led to expect shall come to pass, and that what has been promised to him shall be
performed. Besides, the law of contract furnishes the basis of the other branches of Business
Law. The enactments relating to sale of goods, negotiable instruments, monopolies, restrictive
trade practices, and intellectual property are all founded upon the general principles of contract
law. That is why the study of the law of contract precedes the study of all other laws relating to
trade and industry.
2.2
In India, the law of contract is contained in the Indian Contract Act, 1872, hereinafter referred to
as the Act. It extends to whole of India except the State of J&K and came into force on the first
day of September, 1872. The Act is not exhaustive. It does not deal with all the branches of the
law of contract. There are separate Acts which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc.
A contract is an agreement enforceable at law made between two or more persons, by which
rights are acquired by one or more to acts or forbearances on the part of the other or others.
Sir William Anson
An analysis of these definitions would show that a contract must have the following two elements:
(a)
An agreement, and
(b)
Notes
Example - Ram offers to sell his car to Shyam for Rs. 2,00,000/-. Shyam accepts the offer. This
offer after acceptance becomes promise and this promise is treated as an agreement between Ram
and Shyam.
Thus an agreement consists of a proposal (offer) by one party and its acceptance by the other. In
the form of an equation it can be shown as under:
1.
2.
3.
Define a Contract.
(b)
Consensus-ad-idem: Both the parties to an agreement must agree about the subject matter
of the agreement in the same sense and at the same time.
Example - Madhur invites his friend Vidur to a dinner and Vidur accepts the invitation. If Vidur
fails to turn up for dinner, Madhur cannot go to the Court to claim his loss.
In commercial or business agreements the usual presumption is that the parties intend to create
legal relations. Example - Vikreta offers to sell his car to Kreta for Rs. 1 lakh. Kreta accepts the
offer. Such an agreement is a contract because it creates legal obligation, i.e. a duty enforceable by
law. From this, it will be clear that all contracts are agreements, but all agreements are not contract.
Salmond has rightly observed 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.
Lawful Considerations
d) Capacity of Parties
e)
Free Consent
f)
Lawful Object
Possibility of Performance
j)
There must be a lawful proposal and a lawful acceptance of that proposal, thus resulting in an
agreement. The word lawful before offer and acceptance signifies that proposal and acceptance
must satisfy the requirements of the law of contract. There must be two parties to an agreement, i.e.
one party making the proposal and the other party accepting it. The terms of the proposal must be
definite and the acceptance of the proposal must be absolute and unconditional. The acceptance
must also be according to the mode prescribed and must be communicated to the proposer.
Illustration:
A husband promised to pay his wife a household allowance of $30 every month. Later the parties
separated and the husband failed to pay the amount. The wife sued for the allowance. Held,
agreements such as these were outside the realm of contract altogether.4
In commercial and business agreements, an intention to create legal relations is presumed. But this
presumption is rebuttable, which means that it must be shown that the parties did not intend to be
legally bound.
Illustration:
There was an agreement between R Company and C Company by means of which the former was
appointed as the agent of the latter. One clause in the agreement was: This agreement is not entered
into... as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts.
Held, there was no binding contract as there was no intention to create legal relationship.5
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Notes
5.
What do you
understand by
Possibility of
Performance?
6.
7.
2.6.8 Certainty
In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain.
If it is vague and it is not possible to ascertain its meaning, it cannot be enforced. Example - Amar
agrees to sell Bharat hundred tons of oil. This agreement is void on the ground of uncertainty
because it is not clear what kind of oil is intended to be sold.
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2.7
Notes
Classification of Contracts
Valid Contracts: Contracts which satisfy all the essential elements of a valid contract,12 are
enforceable in a court of law.
b)
Void Contract: A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable.13 A void contract is a nullity from its inception. No rights accrue
thereunder.
c)
Voidable Contract: 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.14 A
contract is voidable when one of the parties to the contract has not exercised his free consent.
One of the essential elements of a formation of a contract is free consent. All voidable
contracts are those which are induced by coercion, undue influence, fraud or
misrepresentation.
d)
e)
Express Contract: When the terms of a contract are reduced in writing or are agreed upon
by spoken words at the time of its formation, the contract is express.
b)
Implied Contract: The terms of a contract are inferred from the conduct or dealings between
the parties. When the proposal or acceptance of any promise is made otherwise than in
words, the promise is said to be implied. Such an implied promise leads to an implied
contract. Example - A boards a bus. It is implied from his conduct that A has entered into an
implied promise to purchase a ticket.
c)
Quasi Contract: Constructive or Quasi contracts arise out of obligations enjoyed by one
person from the voluntary acts of the other which are intended to be performed only on the
happening of some future uncertain event.(See paragraph 2.16)
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a)
Executed Contract: Where both the parties have performed their obligations, it is an
executed contract. Even when one party to the contract has performed his share of the
obligation, the contract is executed, though the other party is still under an outstanding
obligation to perform his part of the promise.
b)
Executory Contract: Where neither party to the contract has performed his share of the
obligation, i.e. both the parties have yet to perform their promises, the contract is executory.
c)
2.8
b)
c)
This must be made with a view to obtaining the assent of the other person.
Illustration:
i.
A says to B that he will sell hs car to him for Rs. 80,000. This is an express
proposal.
ii. The Delhi Transport Corporation (D.T.C) runs Omni buses on different routes
to carry passengers at the scheduled fares. This is an implied proposal by the DTC.
b)
Terms Certain & Not Loose or Vague: If the terms of a proposal are vague or
indefinite, its acceptance cannot create any contractual relationship.
Illustration:
i.
X says to Y I will sell you a car. X owns three different cars. The proposal is
not definite.
ii. T offered to take a house on lease for three years at $ 285 per annum if the
house was put into thorough repair and drawing rooms handsomely decorated
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according to the present style. Held, the proposal was too vague to result in
a contractual relation.16
Notes
c)
To give Rise to Legal Consequences and be Capable of Creating Legal Relations: A proposal
will not become a promise even after it has been accepted unless it was made with a view to
create legal relations, e.g. invitation to a dinner which has no intention to create legal
relationship.
d)
e)
Illustration:
The leading case on the subject of general offer is that of Carlill vs. Carbolic Smoke Ball Co. In
the above case, the Carbolic Smoke Ball Co. issued an advertisement in which the Company offered
to pay 100 to any person who contracts influenza, after having used their Smoke Balls three times
daily for two weeks, according to the printed directions. Mrs. Carlill, on the faith of the advertisment,
bought and used the Balls according to the directions but she, nevertheless, subsequently suffered
from influenza. She sued the company for the promised reward. The company was held liable.17
f)
Illustration:
The defendants nephew absconded from home. He sent his servant, the plaintiff, in search of the
boy. After the servant had left, the defendant announced a reward of Rs. 501 to anybody giving
information relating to the boy. The servant, before seeing the announcement, had traced the boy
and informed the defendant. Later, on reading the notice of reward, the servant claimed it. His suit
was dismissed on the ground that he could not accept the offer, unless he had knowledge of it.18
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g)
h)
Can be Made Subject to Any Terms and Conditions: A proposer may attach any
terms and conditions to the proposal he makes. He may even prescribe the mode
of acceptance. The proposee will have to accept all the terms and conditions of
the proposal.
i)
Two Identical Cross-offers do not Make a Contract: When two parties make identical
offers to each other, in ignorance of each others offers, the offers are crossoffers. They do not constitute acceptance of ones offer by the other and as such
there is no completed agreement.
b)
A proposal lapses by not being accepted in the mode prescribed, or if no mode is prescribed,
in some usual and reasonable manner.20
c)
d)
A proposal lapses by the death or insanity of the proposer or the proposee before acceptance.
e)
f)
g)
Notes
2.8.5 Acceptance
A contract as already observed, emerges from the acceptance of an offer. Acceptance is defined
when the person to whom a proposal is made signifies his assent thereto the proposal is said to be
accepted. A proposal when accepted becomes a promise.23 The person making the proposal is
called the Promisor, and the person accepting the proposal is called the Promisee.24 Performance of
the conditions of a proposal, the acceptance of any consideration for reciprocal promise which may
be offered with a proposal is an acceptance of the proposal (Sec. 8). An acceptance need not
always be expressed in words. Performance of the conditions of a proposal is an acceptance of the
proposal. In order that there must be a binding contract, there must be absolute and unconditional
acceptance of the terms of a proposal.
Illustration:
A offers to sell his house for Rs. 2,50,000 to B. B accepts the offer to purchase the house for Rs.
2,50,000. This is acceptance.
b)
Acceptance Must be Expressed in Some Usual and Reasonable Manner - Mode of Accept
ance: Acceptance may be made either by words or by conduct. It may also be expressed by
post or by telegram. If the proposer prescribes the manner in which the proposal is to be
accepted and the acceptance is not made in such manner, the proposer may, within a rea
sonable time after the acceptance is communicted 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. Usual and reasonable manner would mean the parties intended to perform the
contract in the ordinary course of trade or business. The proposer has the right to prescribe
the manner in which the proposal can be accepted but not the manner in which it may be
refused.
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c)
Notes
Mental Acceptance is not Sufficient in Law: Silence cannot amount to acceptance. Mere
uncommunicated or mental acceptance is not enough. Acceptance to be complete must be
communicated by words or conduct by an offeree to the proposer. There must be some
external manifestation (overt act) of that intent by speech, writing or other act.
Illustration:
A tells B that he intends to buy Cs office, but does not tell anything to C of his intention. This is no
contract.
d)
e)
Acceptance Must be Given Within Reasonable Time and Before the Proposal Lapses and/
or is Revoked: To be legally effective acceptance must be given within the specified time
limit, if any, and if no time is stipulated, acceptance must be given within a reasonable time.
Again, the acceptance must be given before the proposal is revoked or lapses by reason of
proposees knowledge of death or insanity of the proposer.
f)
Acceptance of the Proposal: Acceptance of the proposal is the acceptance of all the terms
even though the proposee is ignorant of some of the terms of the proposal, except where the
terms are not apparent on the face and no resonable cautionis taken to draw attention of the
acceptor, e.g. a ticket issued by the Railways with the terms and conditions printed over
leaf. Even if the proposee does not read the terms and conditions, it will be assumed that the
proposee has accepted the terms and conditions of travel, provided the terms and condi
tions are legible and if reasonable notice thereof is given.
Illustration:
A who travels by a ship sustains injury on account of the negligence of the crew. The Shipping
Company raised a plea that the terms and conditions were printed overleaf and the liability of the
company was limited in various ways. However, the clause limiting the liability of the Shipping
Company was obscured by the words stamped across in red ink. The company did not take reasonable
care to make the conditions legible and therefore, A was entitled to recover damages. If the terms
and conditions had not been so obliterated, then the company would not have been held liable.
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g)
h)
Illustration:
A gives an advertisement in the newspaper offering Rs. 10,000 to one who gives information of his
lost son. B gives the information. B is entiled to the reward of Rs. 10,000.
i)
Notes
If the Act is done in Ignorance of the Proposal, it is no Acceptance of the Proposal: Act
done in ignorance of the proposal is no acceptance, because to anuncommunicated
offer, there can be no consent or assent.
Illustration:
A advertises a reward of Rs. 10,000 to anyone who gives information of his lost son: B gives the
information but is ignorant of the reward. After some time, he claims the reward. It was held that B
is not entitled to the reward as he gave the information without being aware of the offer.
b)
ii. as against the acceptor, when it comes to the knowledge of the proposer i.e.
when the letter of acceptance is received by the proposer.
c)
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
revoking, i.e. when the letter of revocation is posted, and
ii. as against the person to whom it is made, when it comes to his knowledge, i.e.
when the letter of revocation is received by him.
d)
2.10 Consideration
2.10.1 Meaning of Consideration
Consideration is one of the essential elements of a valid contract. When a person promises to do
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Notes
something, he must get something in return. If he does not get something in return, the contract
is, generally, not valid. This something is known as consideration. In other words, consideration
is the price for which the promise of the other party is bought. 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 to abstain from doing, something, such
act or abstinence or promise is called a consideration for the promise.27
llustration:
A agrees to sell his house to B for Rs. 5,00,000. Here As promise to sell his house is for Bs
consideration to pay Rs. 5,00,000. Similarly, Bs promise to pay Rs. 5,00,000 is for As consideration
to sell his house to B.
Thus the essential condition for the enforceability of the contract is consideration. The rule is
expressed by the Latin maxim ex nudo-pacto non-oritur actio, i.e. out of a bare promise no
cause of action can arise. Therefore, a gratuitous promise, such as a promise to make a gift or
charity for no return is not supported by consideration. Hence it is unenforceable by the promisee.
The basis of consideration is that of reciprocity. A promisee would be able to enforce the promise
only if he has given or promised to give or unless the promisor has obtained or has been promised
something in exchange of it. The word consideration implies something in return for the promise
or the price of promise or quid pro quo. According to Sir Frederick Pollock, an act or forbearance
of one party of the promise thereof, is the price for which the promise of the other is bought and the
promise thus given for value is enforceable. Blackstone defines consideration as the recompense
given by the party contracting to the other.
Consideration Must Move at the Desire of the Promisor: The act or abstinence forming the
Consideration must be done at the desire or request of the promisor. If it is done at the
instance of the third party or without the desire of the promisor it is not consideration.
Example - Amar sees Bhushans house on fire and helps in extinguishing it. Amar cannot
demand payment for his services because Bhushan never asked him to come for help.
b)
Consideration May Move from the Promisee or any other Person: The consideration need
not move from the promisee alone but may proceed from any third person. Thus, as long as
there is a consideration for a promise, it is immaterial who has furnished it. This means that
even a stranger to the consideration can sue on a contract, provided he is a party to the
contract. This is also called as Doctrine of Constructive Consideration. For example - X
by a deed of gift transferred certain property to her daughter Y with a direction that Y
should pay Z an annuity. Y executed a deed in writing in favour of Z and agreed thereby to
pay the annuity. Later Y refused to pay annuity on the plea that no consideration had
moved from Z. It was held that Z was entitled to maintain suit because a consideration
need not necessarily move from the promisee, it may move from any other person (i.e. X in
the present case).28
c)
d)
e)
f)
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Notes
Agreement to Compensate for past Voluntary Service: Example - A finds Bs purse and
gives it to B. B promises to give A Rs. 100/-. This is a Contract.
c)
Agreement to Pay a Time Barred Debt: Where there is an agreement, made in writing
and signed by the debtor or his authorised agent, to pay wholly or in part a debt barred
by the law of limitation, the agreement is valid even though it is not supported by any
consideration.
d)
Completed Gift: A completed gift does not require consideration in order to be valid.
e)
f)
g)
b)
c)
An Agreement by a Minor is Absolutely Void and Inoperative as Against Him: Law protects
the rights of the minors, because their mental faculties are not mature -they donot possess
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the capacity to judge what is good or bad for them. In the leading case of Mohori Bibi vs.
Dharam das Ghose,33 a minor executed a mortgage for Rs. 20000/- and received Rs. 8000/from the mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and
for sale of the property in case of default. It was held that an agreement by a minor was
absolutely void as against him and therefore the mortgagee could not recover the mortgage
money nor could he have the minors property sold under his mortgage.
Notes
22 Self-Learning Material
b)
c)
Beneficial Agreements are Valid Contracts: Any agreement which is of some benefit to the
minor and under which he is required to bear no obligation, is valid. In other words, a
minor can be a beneficiary.
d)
e)
The Rule of Estoppel does not Apply to a Minor: A minor is not estopped from pleading
minority in a suit against him, even in those cases, where he had earlier misrepresented
himself as a major to the other party.
f)
Minors Liability for Necessaries: Minors property is liable for reimbursing the person
who has supplied necessaries to a minor (Sec. 68).
g)
Specific Performance: Specific performance means the actual carrying out of the
contract as agreed. Only a contract entered on behalf of a minor, by his guardian
is binding on the minor and can be specifically enforced by or against the minor.
Other than this, no other minors agreement can be ordered for a specific
performance.
h)
Minor Agent: A minor can be an agent.35 He binds his principal by his acts but is
not liable to him in any manner for losses suffered by the principal.
i)
j)
k)
Contract by Minor and Adult Jointly: Where a minor and an adult jointly enter into an
agreement with another person, the minor has no liability but the contract as a whole can be
enforced against the adult.
l)
Surety for a Minor: When an adult stands surety for a minor, the adult is liable under the
contract, and the minor is not.
m)
Position of Minors Parents: The parents of a minor are not liable for agreements made by
a minor, whether the agreement is for the purchase of necessaries or not. The parents can be
held liable only when the child is contracting as an agent for the parents.
n)
Notes
Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other
personal experience. He suffers from intermittent intervals of sanity and insanity. He can
enter into contracts during the period when he is of sound mind.
b)
Idiots: An idiot is a person who has completely lost his mental powers. Idiocy is permanent
whereas lunacy denotes periodical insanity with lucid intervals. An agreement of an idiot is
void.
c)
d)
Agreements Entered into by Persons of Unsound Mind are Void: However, there is one
exception. Persons of unsound mind are liable for necessities supplied to them or to anyone
whom they are legally bound to support. But even in such cases, no personal liability attaches
to them. It is only their estate (property) which is liable.37
Alien Enemies: An alien (citizen of a foreign state) is a person who is not a citizen of India.
When there is a war between India and another country, that countrys citizen becomes an
alien enemy and cannot enter into contract.
b)
Foreign Sovereigns and Ambassadors: They can enter into contracts and enforce those
contracts in our courts but they cannot be sued in our courts without the sanction of the
Central Government unless they choose to submit themselves to the jurisdiction of our courts.
c)
Convict: A convict is one who is found guilty by a court and is undergoing sentence of
imprisonment. During the period of his imprisonment, he is incompetent to contract and
also to sue on contract made before conviction.
d)
e)
Insolvents: When a persons debts exceed his assets, he is adjudged insolvent and his property
stands vested in the Official Receiver or Official Assignee appointed by the court. Such a
person cannot enter into contracts relating to his property.
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Consent means an act of assenting to an offer. Two or more persons are said to consent when they
agree upon the same thing in the same sense.38
Coercion, or
b)
Undue Influence, or
c)
Fraud, or
d)
Misrepresentation, or
e)
Mistake.39
2.12.4 Coercion
Coercion means compelling a person to enter into a contract under a pressure or a threat. The Act
defines Coercion as follows:
Coercion is the committing or threatening to commit, any act forbidden by the Indian Penal Code,
or the 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.40
Example - A Hindu widow was forced to adopt a boy under threat that her husbands dead body
would not be allowed to be removed if she does not adopt the boy, She adopted the boy. Here,
Widows consent has been obtained by co-ercion because preventing the dead body from being
removed for cremation is an offence under section 297 of the Indian Penal Code. (Ranganayakamma
V. Alwar Setti).
Coercion may proceed from any person and it is not necessary that it must be exercised by a
party to the contract.
b)
It may be directed against any person and not necessarily against the other contracting party.
c)
Coercion may be an act causing physical hardship or unlawful detention of property belonging
to another. It may also include those cases where the party is subjected to mental agony.
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.41
Notes
The Act further lays down that a person is deemed to be in a position to dominate the will of
another.
a)
If he holds a real or apparent authoring over the other (e.g. the relationship between father
and son, or master and servant).
b)
If he stands in a fiduciary relation to the other (e.g. the relationship between doctor and
patient, spiritual guru and disciple, lawyer and client).
c)
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 (e.g. old illiterate persons).42
Coercion
Undue Influence
1. Basis
2. Nature
It is mainly of physical
character.
It is moral character.
3. Character
It is of violent character.
2.12.8 Fraud
According to the Act, Fraud means and includes any of the following acts committed by the party
to a contract, or with his convinance, or by his agents, with intent to deceive another party there to
or his agent, or to induce him to enter into the contract:
a)
The suggestion as a fact, of that which is not true, by one who does not believe it to be true;
b)
The active concealment of a fact by one having knowledge or belief of the fact;
c)
d)
e)
The fraud must be committed by a party to a contract or by anyone with his connivance or by
his agent.
b)
There must be a false representation and it must be made with the knowledge of its falsehood.
c)
d)
e)
2.12.10 Misrepresentation
Notes
The positive assertion, in a manner not warranted by the information to the person making
it, of that which is not true, though he believes it to be true.
b)
Any breach of duty which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claming under him, by misleading another to his prejudice or to the
prejudice of anyone claiming under him.
c)
b)
False Representation: These must be a false representation and it must be made without
knowledge of its falsehood.
c)
Representation as to Fact: The representation must relate to a fact. In other words, a mere
opinion, a statement of expression or intention does not amount to misrepresentation.
d)
Object: The representation must be made with a view to inducing the other party to enter
into contract but without the intention of deceiving the other party.
e)
Actually Acted: The other party must have acted on the faith of the representation.
26 Self-Learning Material
Points of
Distinction
Misrepresentation
Fraud
1. Intention
to deceive
2. False
Statement
3. Belief of the
person making
statement
4. Effects of
breach
5. Effect of
discovering
the truth
2.12.13 Mistake
The Act does not define the term mistake. Mistake is an erroneous belief concerning something.
The types of mistake are shown below :
Notes
Type of Mistake
Mistake of Fact
Mistake of Law
Of Foreign Law
Of Indian
Law
As to Subject
As to Possibility
Matter
Performance
Bilateral
Identity of
Persons
Unilateral
Nature of
Contract
Any person who has received any advantage under the agreement is bound to restore it.47
b)
A person to whom money has been paid or anything delivered by mistake must repay or
return it.48
law when it is punishable under any enactment. For example -Rangeela, a Hindu already
married and his wife alive, entered into a marriage agreement with Kumari an unmarried
girl. This agreement is void because the second marriage is forbidden by Hindu Law.
Notes
b)
If it is of such a Nature that, if Permitted it would Defeat the Provisions of any Law: Such an
agreement is void. For example - Nirdhan borrowed Rs. 1 lakh from Kuber and agreed not
to raise any objection as to the limitation and that Kuber may recover the amount even after
the expiry of limitation period (i.e. three years). This agreement is void as it defeats the
provisions of Limitation Act.
c)
d)
e)
If the Court Regards it as Immoral or Opposed to Public Policy: If the object or considera
tion of an agreement is immoral or opposed to public policy, the agreement is void. Any
agreement which interferes with marital relations of persons is regarded as immoral. When
ever an agreement is harmful to the public welfare or any established interest of society, it
would be void as being against public policy.49
Example - 1
X gave Rs. 1 lakh to Y a married woman to obtain a divorce from her husband. X agreed to marry
her as soon as she obtained a divorce. It was held that X could not recover back the amount because
the agreement was void as its object was immoral.
Example - 2
A agrees to pay B, a major in the Army, Rs. 50,000 if he will assist his brother to desert the army.
The object of the agreement is opposed to public policy and hence void.
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a)
b)
c)
d)
e)
f)
b)
c)
i.
ii.
Notes
Exceptions - Agreements or clause referring the dispute to arbitration or subject to one courts
jurisdiction are valid.
d)
An insurance contract which seems to have a trace of speculation is not a wagering contract. There
is an insurable interest in an insurance contract while there is no such interest in a wagering contract.
Self-Learning Material 29
Distinction
Points of Distinction
Insurance Agreement
Wagering Agreements
1. Insurable Interest
There is an insurable
interest
3. Validity
4. Types of contract
b)
Collateral Event: The event must be collateral (i.e. incidental) to the contract.
c)
Illustration:
A makes a contract with B to buy Bs house if A survives C. This contract cannot be enforced by
law unless and until C dies in As life time.
30 Self-Learning Material
b)
Notes
Illustration:
A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract
can be enforced when the ship sinks.
c)
Illustration:
A agrees to pay B a sum of money if B marries C. C married D. The marriage of B to C must now
be considered impossible although it is possible that D may die and that C may afterwards marry B.
d)
Illustration:
A promises to pay B a sum of money if a certain ship returns within a year. The contract may be
enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.
e)
Illustration:
A promises to pay B a sum of money if a certain ship does not return within a year. The contract
may be enforced if the ship does not return within the year, or is burnt within the year.
f)
Illustration:
A agrees to pay B Rs. 1,000 if B will marry As daughter, C.C was dead at the time of the agreement.
The agreement is void.
Self-Learning Material 31
Distinction
Points of
Distinction
Contingent Contracts
Wagering Contracts
1. Mutual
promise as
a basis
2. Sole
Condition
3. Void
agreement
4. Interest of
the parties
5. Future
event
2.16 Quasi-Contract
2.16.1 Meaning of Quasi-Contract
A Quasi-Contract is not a contract at all because the essential elements for the formation of a
contract are absent. It is an obligation imposed by law upon a person for the benefit of another even
in the absence of a contract. It is based on the principle of equity (i.e. fairness, moral justice or
ethics), which means no person shall be allowed to unjustly enrich himself at the expense of another.
Such obligations are called quasi-contracts or implied contracts because the outcome of such
obligations resemble those created by a contract.
32 Self-Learning Material
b)
c)
d)
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.65 For example
- X a guest found a diamond ring on a birthday party of Y. X told Y and other guests about
it. He has performed his duty to find the owner. If he does not able to find the owner he can
retain the ring as bailee.
e)
Notes
Contract
Quasi Contract
1. Purpose
2. Agreement
A contract is an agreement.
3. Essential
Elements
4. Nature
Notes
obligations by the parties under the contract or attempted where an offer to perform ones obligations
has been made by the promisor, but the performance is not complete unless the offer of performance
is accepted by the promisee. Such offer to perform ones obligation under a contract is called
tender. The second part of the definition lays down that the parties are excused from performance
under the provisions of this Act or any other law. For example, an insolvent is excused from
performing his part of the contract by law.
Promises bind the legal representatives of the promisors in case of death of such promisors before
performance, unless a contrary intention appears from the contract. The liability of the legal
representative is limited to the extent of the value of the property inherited from the deceased.
Illustration:
a)
A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before
that day. As representatives are bound to deliver the goods to B and B is bound to pay Rs.
1,000 to As representatives.
b)
A promises to paint a picture for B by a certain day, at a certain price. A dies before the day.
The contract cannot be enforced either by As representatives or by B.
b)
Actual - When the parties to the contract perform their promises in accordance
with the terms of the contract.
ii. Attempted - When the promisor has made an offer of performance to the
34 Self-Learning Material
promisee but the offer has not been accepted by the promisee.
b)
Notes
ii. Rescission69 - Recission means cancellation of the contract by any party or all
the parties to a contract.
iii. Alteration 69 - Alteration means a change in the terms of a contract with the
mutual consent. Alteration discharges the original contract and creates a
new contract.
iv. Remission 70 - Remission is the acceptance of a lesser sum than what was
contracted for or a lesser fulfillment of the promise made.
v.
c)
2.
d)
e)
ii. By insolvency.
iii. By merger.
iv. By unauthorised material alteration.
f)
Anticipatory breach of contract - It occurs when the party declares his intention
of not performing the contract before the performance is due.
ii. Actual breach of contract - It can occur either on due date of performance or
during the course of performance.
Self-Learning Material 35
b)
Suit for Damages: Damages are monetary compensation allowed for loss suffered by the
aggrieved party due to breach of contract. Damages may be of five kinds:
i.
ii. Special Damages: (i.e. damages in contemplation of the parties at the time of
contract).
iii. Exemplary, Punitive or Vindictive Damages: (i.e. damages which are in the
nature of punishment).
iv. Nominal Damages: (i.e. awarded only for the name sake).
v.
36 Self-Learning Material
c)
Suit for Specific Performance: means demanding the courts direction to the
defaulting party to carry out the promise according to the terms of the contract. For example
- X agreed to sell an old painting to Y for Rs. 50000. Subsequently X refused to sell the
painting. Here, Y may file a suit against X for the specific performance of the contract.
d)
Suit for Injunction: means demanding courts stay order Injunction means an order of the
court which prohibits a person to do a particular act. For example -W agreed to sing at Ls
theatre only during the contract period. During the contract period, W made contract with Z
to sing at another theatre and refused to perform the contract with L. It was held that W
could be restrained by injunction from singing for Z.
e)
Suit for Quantum Meruit: Quantum - meruit means as much as is earned. In this suit, claim
is made to compensate for the work already done. For example -C an owner of a magazine
engaged P to write a book to be published by instalments in his magazine. After a few
instalments were published, the publication of the magazine was stopped. It was held that P
could claim payment for the part already published.
2.20.1B Parties
The person who promises to make good the loss is called the Indemnifier (promisor), and the
person whose loss is to be made good is called the Indemnified or Indemnity holder (promisee).
Principal Debtor: The person in respect of whose default the guarantee is given is called
the principal debtor. In the above example B is the principal debtor.
ii.
Creditor: The person to whom the guarantee is given is called the creditor. C is the
creditor in the above said example.
iii.
Surety: The person who gives the guarantee is called the surety A is the surety in the
above said example.
b)
a)
Notice of Revocation: A specific guarantee cannot be revoked once it is acted upon. But a
continuing guarantee may at any time, be revoked by the surety as to future transactions by
giving notice to the creditor.74
b)
Death of Surety75: In case of a continuing guarantee the death of a surety also discharges
him from liability as regards transactions after his death, unless there is a contract to the
contrary.
c)
Variance in Terms of Contract76: Any variance made without the suretys consent, in the
terms of the contract between the principal debtor and the creditor, discharges the surety as
to transactions subsequent to the variance.
d)
Release or Discharge of Principal Debtor77: The surety is discharged by any contract between
the creditor and the principal debtor, by which the principal debtor is released, or by any
act of omissions of the creditor, the legal consequence of which is the discharge of the
principal debtor.
e)
f)
Creditors Act or Omission Impairing Suretys Eventual Remedy79: If a creditor does any
act which is inconsistent with the rights of the surety, or omits to do any act, which is his
duty to the surety requires him to do, and the eventual remedy of the surety himself against
the principal debtor is thereby impaired, the surety is discharged.
g)
Loss of Security80 :If the creditor loses (by negligence or carelessness) or without the consent
of the surety, parts with security given to him, the surety is discharged from liability to the
extent of the value of security.
h)
Invalidation of the Contract of Guarantee: (In between the creditor and the surety)
A surety is also discharged from liability when the contract of guarantee (in
between the creditor and the surety) is invalid. A contract of guarantee is invalid
where such a contract has been obtained by means of misrepresentation or fraud
or keeping silence as to material part of the transaction, by the creditor or with
creditors knowledge or assent81. Failure of co-surety to join a surety also makes
the guarantee invalid.82
Notes
38 Self-Learning Material
Indemnity
Guarantee
1. Number of
parties
2. Object or
purpose
3. Number of
contracts
Distinction
Points of
Distinction
Indemnity
Guarantee
4. Nature of
liability
5. Request by
the debtor
The
indemnifier
acts
independently without any request
of the indemnity holder or the third
party.
6. Existing
debt or duty
7. Right to sue
Notes
b)
c)
Return of specific goods - The goods which form the subject matter of a bailment must be
returned to the bailor or otherwise disposed of according to the directions of the bailor,
after the accomplishment of purpose or after the expiry of period of bailment.
Gratuitous: Neither the bailor nor the bailee is entitled to any remuneration i.e. loan of
Self-Learning Material 39
Notes
book to a friend, depositing of goods for safe custody. It is for the exclusive benefit of the
bailor or bailee.
b)
Non Gratuitous: Here the goods are given for reward, remuneration or for some consideration,
e.g. car let out on hire, goods given for repairs or tailoring for charges.
c)
Pawn or Pledge: Goods delivered to another as a security for money borrowed is called
Pledge.
b)
c)
d)
e)
f)
b)
c)
d)
To indemnify bailee.
e)
b)
c)
d)
Lien - is of two types - general or particular. Bailee has particular lien unless the contract
provides otherwise. Particular lien means the right to retain that particular property in
respect of which the charge is due. General lien means the right to retain all the goods of
the other party until all the claims of the holder against the party are satisfied.
40 Self-Learning Material
a)
b)
c)
Notes
Pledge
Bailment
1. Purpose
2. Right of sale
2.22 Agency
2.22.1 General
It is not always possible for a person to do everything himself, hence it becomes necessary to
delegate some of the acts to be performed by another person. Such other person is called an agent.
What one person can himself lawfully do, can as well get it done by any other person. This
rule is of course, subject to some exceptions, e.g. in case of acts required to be performed
personally like marriage.
b)
What a person does by another, he does by himself. In other words the acts of the agent are,
for all legal purposes, the acts of the principal.
Self-Learning Material 41
Any person who is competent to contract may employ an agent. A minor or a person of unsound
mind cannot employ an agent.86
b)
Agency by Implied Agreement: Implied agency arises when agency is inferred from the
circumstances of the case, or from the conduct of the parties on a particular occasion, or
from the relationship between parties.89 Implied agency includes the following:
i.
ii. Agency by Holding Out: This is a type of agency by estopped. Such agency
arises when a person by his past affirmative and positive conduct leads third
person to believe that person doing some act on his behalf is doing with
authority. For example - X allows Y, his servant to purchase goods for him on
credit from Z, and later on pays for them, one day X pays cash to Y to purchase
goods. Y misappropriates the money and purchases goods on credit from Z. Z
can recover the price of goods from X because X had held out before Z that Y is
his agent.
iii. Agency by Necessity: Agency by necessity arises under the following two
conditions:
42 Self-Learning Material
c)
a.
There is an actual and definite necessity for acting on behalf of the principal, and
b.
Agency by Ratification: Where acts are done by one person on behalf of another, but with
out his knowledge or authority, the latter may elect to ratify (adopt and accept) or to disown
such acts. If he ratifies them, the same effect will follow as if they had been performed by
his authority.(Section 196) Ratification may be express or implied in the conduct of person
on whose behalf the acts are done. For example - A, without authority, buys goods for B.
After wards B sells them to C on his own account. Bs conduct implies a ratification of the
purchases made for him by A.
d)
Notes
Agency by Operation of Law: Agency by operation of law is said to arise where the law
treats one person as an agent of another. For example - on formation of a partnership,
every partner becomes the agent of other partners. Such agency is said to arise by
operation of law.
b)
c)
To render accounts.
d)
e)
f)
Not to make any profit out of his agency except his remuneration.
g)
h)
To receive remuneration.
b)
c)
Lien - to retain goods. Agent has a particular lien unless the contract provides otherwise.
d)
e)
f)
To compensation for injuries sustained by him due to principals neglect or want of skill.
g)
By Act of Parties
Agreement
Revocation by the Principal
By Operation of Law
Completion of Business of agency
Expiry of time
Death of Principal or Agent
Summary
Contract
A contract is an agreement made between two parties and enforceable by law. An agreement consists
of a proposal by one party and its acceptance by the other party. Two or more parties who enter into
an agreement must agree upon the subject matter in the same sense and at the same time, i.e.
consensus ad idem. An agreement, in order to be a contract, must give rise to legal consequences
and remedies in the Law Court in case of its breach.
Essentials of a Contract: There must be 1. an agreement i.e. proposal and acceptance 2. an intention
to create legal relations 3. Lawful consideration 4. parties competent to contract 5. free consent 6.
lawful object 7. certainty 8. possibility of performance 9. not expressly declared void, and 10. in
writing or registered / stamped where there is such a requirement by law.
Classification of Contract: Contract can be classified as below:
Valid - enforceable by law.
Void - Not enforceable by law.
Voidable - Enforceable at the option of one party only. Illegal - Contrary to law
Unenforceable - Due to lack of proof or some technical defect cannot be enforced in a
Court of law.
Executed - Performed by both the parties or by one party.
44 Self-Learning Material
Notes
Notes
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.
Minor: A minor is one who has not completed the age of 18 years. The position of agreements by
a minor is 1. Absolutely void and inoperative as against him 2. That there is no restitution 3.
Agreement beneficial to a minor is valid 4. No ratification on attaining the age of majority 5. The
rule of estoppel does not apply 6. Minors property is liable for necessaries 1. Minor can be an agent
8. Minor can be admitted in partnership only for profit 9. Minor can be admitted in partnership ony
for profit 9. Minor cannot be declared insolvent 10. Specific performance can not be ordered for
minors agreement 11. Surety for a minor is liable 12. A minor cannot be a shareholder of the
company, unless the shares are fully paidup and the articles of association donot prohibit.
Persons of Unsound Mind: Agreemetns entered in by person of unsound mind are void. A Lunatic
or a Drunken or Intoxicated person can enter itno a contract when he is of sound mind. Agreements
of an idiot are void. Persons of unsound mind are liable (only their property) for necessaries supplied
to them or their legal dependants.
Persons disqualified by law: Such persons are - 1. Alien enemy 2. Foreign sovereigns and
ambassadors 3. Convict 4. Company beyond the objects contained in its memorandum of association
5 Insolvents.
Free Consent: two or more persons are said to consent when they agree upon the same thing in the
same sense. Contracts in order to be valid must be made by the free consent. Consent is said to free
when it is not casued by 1. Coercion, or 2. Undue influence, or 3. Fraud, or 4. Misrepresentation, or
5. Mistake. When Consent is not free, the contract is voidable at the option of the party whose
consent was so caused.
Coercion: Coercion is the committing or threatening to commit any act forbidden by the Indian
Penal Code, or the 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 agreement.
Undue Influence: 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.
Fraud: Fraud exists 1. When a false representation has been made 2. Knowingly, or without belief
in its truth, or 3. Recklessly, not caring whether it is true or false, and 4. The maker intended the
other party to act upon it 5. With an intention to deceive. It also exists when there is a concealment
of a material fact.
Misrepresentation: It is a misstatement of a material fact made innocently with an honest belief as
to its truth or non-disclosure of a material fact, without any intent to deceive the other party.
Mistake: It is an erroneous belief concerning something. Mistake is of two types 1. Mistake of Law
2. Mistake of Fact.
Mistake of Law: is again of two types 1. Mistake of Indian law. It does not vitiate a contract
because ignorance of law is no excuse 2. Mistake of foreign law. It is treated as a mistake of fact.
Mistake of Fact: It may be a 1. Bilateral mistake. 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. 2. Unilateral
mistake - where only one of the parties is under a mistake as to a matter of fact, the contract is not
voidable.
Legality of Object and Consideration: The object and the consideration of an agreement must be
lawful. Otherwise the agreement is void. It is unlawful, if 1. It is forbidden by law 2. It is of such
a nature that if permitted it would defeat the provisions of any law 3. It is fraudulent 4. It involves
or implies injury to a person or property of another 5. The court regards it as immoral or opposed
to public policy.
Agreements Expressly Declared Void: 1. Made by incompetent persons 2. Made under a bilateral
mistake of fact 3. Made without consideration 4. The meaning of which is uncertain 5. The
consideration or object is unlawful 6. To do impossible acts 7. In restraint of marriage 8. In restraints
46 Self-Learning Material
Notes
Self-Learning Material 47
Bailment: A bailment is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or otherwise desposed by
according to the direction of the person delivering them. The person delivering the goods is called
the bailor. The person to whom the goods are delivered is called the bailee. There are three kinds of
bailment, gratuitous, non-gratuitous or Pawn (Pledge). The duties of bailee are 1. To take reasonable
case of goods delivered to him 2. Not to make unauthorised use of goods entrustd to him 3. Not to
mix good bailed with his own goods 4. To return the goods 5. To return accretions to the goods, and
6. Not to set up any adverse title. The duties of bailor are 1. To disclose faults / defects in goods
bailed 2. To repay necessary expenses in case of gratuitous bailement 3. To repay any extra ordinary
expenses in case of non-gratuitous bailment 4. To indemnify bailee, and to receive back the goods.
The Right of bailee are 1. Enforcement of bailors duties 2. To deliver goods to one of several joint
bailors 3. To deliver goods, in good faith, to bailor without title, and 4. Lien which may be general
or particular. The Right of bailor are 1. Enforcement of bailees duties 2. To terminate bailment if
the bailee uses the goods wrongfully, and 3. To demand return of goods at any time in case of
gratuitous bailment.
Pledge or Pawn
The bailment of goods as security for payment of a debt or performance of a promise is called
pledge. Pledge is a kind of bailment.
Agency
An agent is a person employed to do any act for another or to represent another in dealings with
third persons. The person for whom such act is done, or who is represented, is called the principal.
The contract which creates the relationship of principal and agent is called an agency. Principal
must be a person competent to contract. A minor or a person of unsound mind can be appointed as
agent, but in such a case the principal shall be liable. No consideration is necessary to create an
agency.
Creation of Agency: Can be done by 1. Express agreement, 2. Implied agreement -which may be by
estoppel, or by holding out or by necessity 3. Ratification 4. Operation of law. Sub-agent is a
person employed by an agent. Substituted agent is one who is appointed at request of the principal
and then the agent drops out altogether from the scene. The Duties of agent are 1. To follow
principals directions or customs 2. To carry out the work with reasonable skill and diligence 3. To
render accounts 4. To communicate, in case of difficulty 5. Not to deal on his own account in the
business 6. Not to make any profit out of his agency except his remmuneration 1. On termination of
agency by principals death or insanity to protect and preserve the interests entrusted to him; and 8.
Not to delegate authority. The rights of agent are 1. To receive remuneration 2. Retainer 3. Lein 4.
To be indemnified against consequences of lawful acts 5. To be indemnified against consequences
of acts done in good faith 6. To compensation for injuries sustained by him due to principals
neglect or want of skill, and 1. Stoppage of goods in transit. The Duties of principal are indirectly
the rights of an agent and the Rights of principal are indirectly the duties of an agent. An agency can
be terminated by 1. Act of parties - which include agreement, revocation by the principal or by the
agent, and 2. Operation of law which would cover completion of business of agency, expiry of
time, death or insanity of principal or agent, insolvency of the principal, destruction of the subject
matter, principal or agent becoming an alien enemy, and dissolution of company.
48 Self-Learning Material
Review Questions
Notes
True or False
1.
Law of contract is the whole law of agreements and the whole law of obligations.
2.
A contract is usually treated as voidable when the consent of a party has not been free.
3.
4.
5.
6.
7.
8.
9.
In case of several joint promisors, the promisee can demand the performance from anyone
or more of joint promisors.
10.
Actual breach of a contract may take place during the performance of the contract.
11.
12.
A continuing guarantee can be revoked as to the past transaction by giving notice to the
creditor.
13.
14.
15.
Practical Problems
Attempt the following problems giving reasons:
1.
Madhur of Mussourie invites Mitr of Mumbai to stay with him during summer vacation.
Mitr accepts the invitation and informs Madhur accordingly. When Mitr reaches Madhurs
home, he finds it locked and he has to stay in a five star hotel. Can Mitr claim damages from
Madhur?
2.
Amar sold his business to Bharat but this fact was not known to an old customer Chander.
Chander placed an order for certain goods to Amar by name. Bharat supplied the goods to
Chander. Is there a valid contract?
3.
Dhaniram, executed a mortgage in favour of Chotu, a minor who has advanced the money.
Is this mortgage valid?
4.
Pratinidhi, an agent, refused to hand over the account books of the principal to the new
agent appointed in his place unless the principal released him from all liabilities. The principal
had to give a release deed as demanded. Is this release deed binding upon the principal?
5.
Kuber gifted Rs. 50000 to Sundari his neighbours wife by executing a registered gift deed
without any consideration. There is no near relation between Kuber and Sundari. Is this gift
valid?
6.
Amir granted a loan to Garib a guardian of kumari who is of 14 years of age, to enable Garib
to celebrate Kumaris marriage. Can Amir recover his loan from Garib?
7.
Adhar agreed to pay Bhushan Rs. 50000 if Bhushan marries Chandra. Chandra was already
married to Deepak at the time of agreement. Is the agreement valid?
8.
Shaitan asks Kathore to beat Komal and promises to indemnify Kathore against the
Self-Learning Material 49
Notes
consequences. Kathore beats Komal and is fined Rs. 1000. Can Kathore claim Rs. 1000
from Shaitan?
9.
Swaranlata delivered her gold jewellery to Joharimal her husband who is a goldsmith for
the purpose of making new one out of it. Every evening she used to receive the unfinished
jewellery and to put it into a box kept at Joharimals shop. She kept the key of that box with
herself. Is there a contract of bailment?
10.
Mukhiya, the principal, instructed Sevak his agent to put goods in Bhandaris warehouse.
Sevak puts half of the goods in Bhandaris warehouse and the balance in another equally
safe warehouse. All the goods were destroyed by fire without any negligence on part of
Sevak. Is Sevak liable to Mukhiya?
Test Questions
1.
2.
3.
4.
5.
All contracts are agreements, but all agreements are not contracts.
b) The law of contracts is not the whole law of agreements, nor is it the whole
law of obligations.
50 Self-Learning Material
6.
7.
8.
9.
10.
What do you understand by the term acceptance? What are the essentials of a valid
acceptance?
11.
12.
Define and explain consideration in a contract. State exceptions to the rule that
an agreement without consideration is void.
13.
14.
15.
16.
A stranger to a contract cannot sue. Are there any exceptions to this rule?
17.
What do you understand by capacity to contract? What is the effect of agreements made
by persons of unsound mind?
18.
19.
20.
21.
Examine the legal position of i) a minor promisor, ii) a minor promisse, and iii) a minor
agent.
22.
23.
24.
25.
Notes
Two or more persons are said to consent when they agree upon the same thing in the
same sense. Explain this statement and give illustrations.
27.
28.
29.
Enumerate the agreements expressly declared to be void under the Indian Contract
Act. Is the party who has received some benefit under a void contract bound to
restore it to the other party?
30.
31.
32.
33.
34.
35.
36.
37.
Explain the meaning or a contingent contract. What are the rules relating to contingent
contracts?
38.
A Quasi-contract is not a contract at all. It is an obligation which the law creates. Amplify
and state the quasi contracts recognised under the Indian Contract Act.
39.
40.
What are the remedies available to an aggrieved party in case of breach of contract?
41.
What are the rules laid down by the Indian Contract Act with regards to the assessment of
damages on a breach of contract?
42.
43.
44.
45.
46.
If a contract is broken, the law will endeavour, so far as money can do it, to place the
injured party in the same position as if the contract had been performed.
47.
48.
What are quasi-contracts? Enumerate the quasi-contracts dealt with under the Indian Contract
Act, 1872.
49
Quasi-contracts rest on the ground of equity that a person shall not be allowed to enrich
himself unjustly at the expense of another. Explain.
Self-Learning Material 51
Notes
50.
51.
52.
53.
54.
What is bailment? Is the bailor under any duty to disclose to the bailee any defects or faults
in the goods bailed?
55.
56.
57.
The position of a finder of goods is exacly that of a bailee in the case of a deposit.
Comment and discuss.
58.
59.
60.
Write notes on i) Agency by estoppel, ii) Agency by holding out, and iii) Agency by necessity.
61.
62.
Explain Principals rights and duties for the agent and what are the Agents rights and
duties for the Principal?
63.
Termination
Practical Problems
52 Self-Learning Material
1.
Mitr cannot claim any damages from Madhur because the agreement between Madhur
and Mitr is not enforceable by law. It is a social agreement and the usual presumption in
such agreement is that the parties do not intend to create legal relationship.
2.
These was no contract at all between Bharat and Chander because chanders offer was a
specific offer to Amar and Amar alone could accept it. (Leading Case: Boulton v Jones).
3.
The mortgage is valid and hence the money advanced to Dhaniram can be recovered because
a minor can be a promissee (Leading Case: Raghave Charier v. Srinivasa).
4.
The release deed is not binding on the principal and he can avoid the contract on the
ground of coercion, Principals consent is not free as it has been obtained by unlawful
detaining of the property (i.e. account books) (Leading Case: Muthia v. Karuppan).
5.
The gift is valid. A completed gift needs no consideration and need not be a result of
natural love and affection or near relation.
6.
Amir cannot recover his loan from Garib. The agreement is void because an object (i.e.
minors marriage in contravention of the child Marriage Restraint Act) is unlawful. (Leading
Case: Srinivas V.K. Raja Ram Mohan).
7.
Such agreement is void and hence not enforceable by law as marriage of Bhushan to Chandra
is impossible at present.
8.
Kathore cannot claim Rs. 1000/- from Shaitan becuase the object of the agreement was
unlawful.
9.
There was no contract of bailment because Joharilal (bailee) had re-delivered the jewellery
bailed to, Swaranlata (bailor) (Leading Case: Kalia Derumal Pillai v. Visalakshmi).
10.
Sevak is not liable for the loss of goods put in Bhandaris warehouse because he acted
according to the directions of Mukhiya. Sevak is liable for the loss of goods put in another
warehouse because he has not acted according to the directions of Mukhiya.
Notes
References
1
35
Section 184
36
Section 12
37
Section 68
38
Section 13
39
Section 14
Sections 24 to 30
40
Section 15
Section 13
Section 14
Section 23
10
11
32
12
41
Section 16(1)
13
42
Secion 16(2)
16
43
Section 17
44
Section 18
45
Section 20
46
Section 22
47
Section 65
48
Section 72
49
Section 23
50
Section2(g)
51
Section 26
52
Section 27
53
Section 28
54
Section 30
55
Section 31
56
Section 32
57
Section 33
58
Section 34
59
Section 33
60
Section 35
17
18
19
20
21
22
23
24
25
26
Section 6(2)
Section 7
Section 6(1)
Section 6(3)
Section 2(b)
Section 2(c)
Section 8
Hindustan Co-operative Society v. Shyam
Section2(d)
28
29
Section 185
30
Section 63
31
Section 11
Self-Learning Material 53
Notes
54 Self-Learning Material
61
Section 36
62
Section 68
63
Section 69
64
Section 70
65
66
Section 72
67
Section 37
68
69
Section 62
70
Section 39
71
Section 75
72
Section 124
73
Section 126
74
Section 130
75
Section 131
76
Section 133
77
Section 134
78
Section 135
79
Section 139
80
Section 141
81
82
Section 144
83
Section 148
84
Section 172
85
Section 182
86
Section 183
87
Section 184
88
Section 185
89
Section 187
90
Section 237
91
Section 191
92
Section 194
Notes
Section
3
The Law is experience developed by reason and applied continually to further
experience.
Roscoe Pound
STRUCTURE
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Self-Learning Material 55
3.1 Introduction
Notes
The sale of goods is the most common of all commercial transactions. A knowledge of the main
principles of the sale of goods is important to all and particularly to the managers. The law relating to sale of goods is contained in the Sale of Goods Act, 1930 (hereinafter referred to as the
Act), which came into force on 1st July, 1930. This Act extends to the whole of India except the
state of Jammu and Kashmir. The general provisions of the Indian Contract Act, 1872, continue to
be applicable to the contract of sale of goods in so far as they are not inconsistent with the express
provisions of the Act.1
3.2
According to the Act, A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale
between one part-owner and another.2 A contract of sale of goods may be absolute or conditional
according to the desire of buyer and seller.
3.3
This definition reveals the following essential elements of a contract of sale of goods.
3.3.3 Goods
The subject matter of the contract of sale must be goods. According to the Act, goods means
every kind of moveable property other than actionable claims and money; and includes stock and
shares, growing crops, grass, and things attached to or forming part of the land which are agreed to
be severed before sale or under the contract of sale.4 Thus every kind of movable property except
actionable claims and money, is regarded as goods. Goodwill, trademarks, copyrights, patent right,
water, gas, electricity,5 decree of a court of law are all regarded as goods. Sale of immovable
property is governed by the Transfer of Property Act, 1882.
a)
The actionable claims mean claims which can be enforced through the courts of law, e.g.
a debt due from one person to another is an actionable claim.
b)
The money here means the legal tender (i.e. currency of the country) and not old coins.
3.3.4 Price
There must be a price. Price means the money consideration for the sale of goods.6 When the
consideration is only goods, it amounts to barter and not sale. However, the consideration may
be partly in money and partly in goods.
56 Self-Learning Material
Notes
3.4
3.4.1 Sale
Where under a contract of sale the property in the goods is transferred from the seller to the buyer,
the contract is called a sale.7 It refers to an absolute sale, i.e. outright sale. There is immediate
transfer of ownership and mostly of the subject matter. Delivery may be given in future. It is an
executed contract.
Points of
Distinction
Sale
Sale is an executed
contract, where one of the
parties has already
performed his part of the
contract.
Agreement to Sell
1.
Nature of Contract
Agreement to sell is an
executory contract, where both
the parties are yet to perform
their mutual promises within
agreed time.
2.
Creation of right
It creates a Jus-in-personam,
i.e. personal right only against
the person in default for
fulfilling his part of agreement.
3.
Passing of
property
Self-Learning Material 57
S. No.
Notes
Points of
Distinction
Sale
4.
Remedies on
breach of contract
5.
Risk of loss
6.
Insolvency of
buyer before he
pays for the goods
7.
Insolvency of
seller if the buyer
has already paid
the price
8.
Right to resale
3.5
Agreement to Sell
The seller has the right only to
sue for damages for
nonperformance of the
contract.
Contracts of sale resemble contracts of hire purchase as the real object of contract of hire purchase is the sale of goods ultimately. In hire purchase, property does not pass when agreement is
made out but only passes when the option is finally exercised after complying with all the terms of
agreement.
58 Self-Learning Material
Points of
Distinction
Transfer of
property in goods
Sale
In a sale, property in the
goods is transferred to the
buyer immediately at the
time of contract.
Hire Purchase
In hire purchase, property in
the goods passes to the hirer
upon payment of the
instalment.
S. No.
Points of
Distinction
Sale
Hire Purchase
Notes
2.
Position of the
buyer
3.
Power to terminate
the contract
The
buyer
cannot
terminate the contract and
is bound to pay the price
of the goods.
4.
5.
Tax payable
6.
Nature of contract
3.6
S. No.
Points of
Distinction
Agreement to Sell
Hire Purchase
Agreement
1.
Nature of
agreement
2.
Transfer of goods
Conveyance is immediately
transferred while ownership
remains with the seller.
3.
Rights of ownership
4.
Implied conditions
and warranties
5.
Law applicable
It is regulated by sale of
Goods Act, 1930.
It is regulated by Hire
Purchase Act, 1972.
Self-Learning Material 59
3.7
Notes
a)
A contract of sale may be made in writing or by word of mouth or partly in writing and partly
by word of mouth or may be implied from the conduct or dealings of the parties.
b)
There must be an offer to buy or sell goods for a price and acceptance of such offer by
another.
c)
The contract may provide for immediate delivery of the goods or delivery by instalments or
delivery at a future date.
d)
The contract may provide for immediate payment of the price (money) or payment
by instalment or payment may be postponed.
e)
f)
Contract of sale of goods must possess all the essentials of an ordinary contract.
3.8
S. No.
Points of
Distinction
Stipulation
1.
2.
3.
Breach
Treatment
Condition
Warranty
A condition is an essential
stipulation to the main
purpose of the contract.
Warranty is a stipulation
collateral to the main purpose.
4. What is known as
stipulation?
5. What is Caveat
Emptor?
6. Is warranty different
from condition?
Explain.
Examples:
1.
A buyer desires to buy a Sony TV model no. 2062. Here model no. is an express condition.
2.
b)
Self-Learning Material 61
Notes
Example: Long staple cotton, Kalyan wheat, Sugar C -30, Basmati rice or may simply mention
the trademark, brand name or the type of packing, etc.
c)
ii. That the buyer shall have a reasonable opportunity of comparing the bulk
with the sample.
iii. That the goods shall be free from any defect (latent).18
d)
e)
The particular purpose for which goods are required must have been disclosed
(expressly or impliedly) by the buyer to the seller.
g)
62 Self-Learning Material
Notes
Warranty of Quiet Possession: There is an implied warranty that the buyer shall have and
enjoy quiet possession of the goods. This is an extension of the implied condition as to
title.26
Example: M a lady purchased a second hand type-writer from B. She thereafter spent some
money on its repair and used it for some months. Unknown to the parties the type-writer was
a stolen one and M was compelled to return the same to its true owner. She was held entitled
to recover from the sellers for the breach of this warranty damages reflecting not merely the
price paid but also the cost of repair.27
b)
Warranty of Freedom From Encumbrances: There is an implied warranty that the goods are
free from any charge or encumbrance in favour of any third person if the buyer is not aware
of such charge or encumbrance.28 Example: X borrowed Rs. 500 from Y and hypothecated
his radio with Y as security. Later on X sold this radio to Z who bought in good faith. Here
Z can claim damages from X because his possession is disturbed by Y having a charge.
c)
Warranty of Disclosing the Dangerous Nature of Goods to the Ignorant Buyer: There is an
implied warranty on the part of the seller that in case the goods are of dangerous nature he
will warn the ignorant buyer of the probable danger. Example: C purchases a tin of disinfected
powder from A. A knows that the lid of the tin is defective and if it is opened without special
care it may be dangerous, but tells nothing to C. C opens the tin in the normal way where
upon the disinfectant powder flies into her eyes and causes injury. A is liable in damages to
C as he should have warned C of the probable danger.29
3.9
3.9.2 Exceptions
In the following cases, doctrine of Caveat Emptor does not apply.
a)
b)
Fraud: Where the seller obtains the consent of the buyer by fraud or conceals a defect, the
seller is liable.
c)
For Specific Purpose: (i) Where the goods are ordered for specific purpose, and (ii) the
seller is made aware of it, and (iii) the buyer relies on the skill or judgment of the seller, there
is an implied condition that the goods shall be reasonably fit for such purpose.
d)
Merchantable Quality: Where (i) the sale is by description and (ii) purchased from the seller
who deals in goods of that description, there is an implied condition that the goods shall be
of merchantable quality.
Self-Learning Material 63
e)
Notes
Goods are Sold by Sample or Description: In such cases, doctrine of Caveat Emptor does
not apply.
Who shall bear the risk? - It is the owner who has to bear the risk and not the person who has
the possession of goods.
b)
Who can take action against the third party? - It is the owner who can take action and not the
person who has the possession.
c)
Can a seller sue for price? - The seller can sue for the price only if the ownership of goods
has been transferred to the buyer.
d)
In case of insolvency of a buyer can the official receiver or assignee take the possession of
goods from seller? - Yes only if the ownership of goods has been transferred to the buyer.
e)
In case of insolvency of a seller can the official receiver or assignee take the possession of
goods from buyer? - Yes, only if the ownership of goods has not been transferred to the
buyer.
In Specific or Ascertained Goods: Specific goods mean goods identified and agreed
upon at the time when a contract of sale is made. 32 The ownership of specific or
ascertained goods is transferred to the buyer at such time as the parties intend it
to be transferred. 33 For the purpose of ascertaining the intention of the parties,
regard shall be had to the terms of the contract, the conduct of the parties, and
the circumstances of the case. However, when the intention of the parties cannot
be judged, the following rules shall apply:
i.
ii. The goods must have been unconditionally appropriated by the seller or the
buyer with the consent of the other.
c)
64 Self-Learning Material
or on sale or return basis mean those goods in respect of which the buyer has
option either to return or retain. The property in such type of goods passes to the
buyer:
i.
Notes
When he signifies his approval or acceptance to the seller or does any other act adopting
the transactions, e.g., uses the goods, pledges the goods, or resells them.
ii. If he does not signify his approval or acceptance to the seller but retains the goods,
without giving notice of rejection, beyond the time fixed for the return of goods, or if no
time is fixed, beyond a reasonable time.
Why is Transfer of
Property important?
8.
9.
3.11.2 Delivery
Delivery means voluntary transfer of possession of goods from one person to another.38 Delivery
should have the effect of putting the buyer in possession of the goods so that he may acquire the
position of exercising some degree of control over the goods, directly or through any of his
representatives.
Actual Delivery: Where the goods are physically handed over by the seller or his authorized
agent to the buyer.
b)
Symbolic Delivery: Where the goods are bulky and incapable of actual delivery. Delivering
of key of the warehouse, bill of lading, railway receipt etc. are the examples of symbolic
delivery.
c)
Delivery May be Either Actual or Symbolic or Constructive: Delivery of goods sold may be
made by doing anything which the parties agree shall be treated as delivery. The seller need
not be the owner of the goods. To constitute delivery to the buyer, he himself may not be in
actual possession of the goods.39
b)
Delivery and Payment are Concurrent: Unless otherwise agreed, delivery of goods and
payment of the price are concurrent conditions. The seller shall be ready and willing to give
possession of the goods to the buyer in exchange for the price and buyer shall be ready and
willing to pay the price in exchange for possession of the goods.40
c)
Delivery to be Made to Buyer: Delivery of goods sold has the effect of putting the goods in
possession of the buyer or of any person authorized to hold them on his behalf.41
d)
Part Delivery: Delivery of part of the goods, in progress of delivery of the whole amounts to
delivery of the whole, if there is no intention of severing of such part from the whole.42
Self-Learning Material 65
Notes
e)
Buyer to Apply for Delivery: Seller of goods is not bound to deliver the goods until the
buyer applies for delivery thereof.43
f)
Mode of Delivery: Mode of delivery depends on the contract between the parties whether it
is for the buyer to take possession of the goods or for the seller to send them to the buyer is
a question depending in each case on the contract, express or implied, between the parties.44
g)
Goods sold are to be delivered at the place at which they are at the time of
sale.
ii. Goods agreed to be sold are to be delivered at the place at which they are at the
time of the agreement to sell.
iii. Goods not then in existence are to be delivered at the place at which they are
manufactured or produced.45
h)
Time of Delivery: Where no time for sending the goods is fixed the seller is bound to send
them within a reasonable time.46 It implies that where time is fixed, the seller must send the
goods in time. If the delivery is to be done as and when required, demand for delivery must
be made at a reasonable time.
i)
Demand at Reasonable Hour: Demand for or tender of delivery must be made at a reasonable
hour. What is a reasonable hour is a question of fact.47
j)
Goods in Possession of Third Person: Where the goods at the time of sale are in possession
of a third person, delivery to the buyer is only effected when such third person acknowledges
to the buyer that he holds the goods on his behalf.48
k)
Expenses: Expenses of and incidental to delivery are as a general rule to be borne by the
seller. The parties may however, agree otherwise.49
l)
Instalment Delivery: Buyer of goods is not bound to accept delivery thereof by instalments
unless otherwise agreed.50 An agreement for delivery by instalments is made either expressly;
or inferred from circumstances or from the conduct of the parties.
m)
Goods Delivered at Distant Place: Where the seller of goods agrees to deliver the goods at
his own risk at a place other than that where they are when sold, the buyer shall unless
otherwise agreed, take any risk of deterioration in the goods necessarily incidental to the
course of transit.51 The necessary deterioration of merchantable quality of goods is on the
buyer, even if the seller agrees to deliver the goods at his own risk.
In Case of Short Delivery: The buyer may reject the goods delivered. If he accepts, he must
pay for them.
b)
In Case of Excess Delivery: The buyer may accept the goods included in the contract and
reject the rest or he may reject the whole. If he accepts the whole, he must pay for them.
c)
Where the Seller Mixes his Goods with the Buyers Goods: The buyer may accept the goods
which are in accordance with the contract and reject the rest or he may reject the whole.
66 Self-Learning Material
Acceptance of Delivery by the Buyer: In order that the delivery of goods may constitute a
valid acceptance, the buyer must have a reasonable opportunity of examining them. The
buyer is deemed to have accepted the goods when he intimates so to the seller or he acts in
a manner which is inconsistent with the ownership of the seller or retains the goods without
intimating to the seller that he has rejected them. The buyer is not bound to return the rejected
Notes
ii. Where goods have been delivered to him and he does any act in relation to
the goods which is inconsistent with the ownership of the seller, for example,
he pledges the goods, or sends the goods to his sub-purchaser or when he resells them.
iii. When after the lapse of a reasonable time, he retains the goods without
intimating to the seller that he has rejected them. The buyer after direct or
indirect acceptance cannot reject the goods. He may be however, entitled to
damages.55
Rule 3: Buyer not Bound to Return the Rejected Goods: Unless otherwise agreed where
goods are delivered to the buyer and he refuses to accept them he is not bound to return the
rejected goods to the seller. Mere intimation to the seller that he refuses to accept is sufficient.
The goods are then at the sellers risk.56
b)
Provided that where the neglect or refusal of the buyer to take delivery amounts to a repudiation of
the contract, the seller may sue for the price or for damages.57
Rights
i.
To recover the amount paid if the seller fails to deliver the goods.
Duties
i.
ii. To apply for the delivery of goods as the seller is not bound to deliver the goods
until the buyer applies for delivery.
Notes
iii. To compensate the seller for any loss occasioned by his neglect or refusal to
take delivery of the goods and also for reasonable charge for care and custody of
the goods.
Rights
i.
ii.
To receive compensation or sue for damages for any loss occasioned by him by
neglect or refusal of the buyer to take delivery of the goods.
iii.
iv.
If he is unpaid seller then to exercise his right of lien, to exercise his right of
stoppage in transit; and to exercise his right of resale.
v.
To sue the buyer for damages for wrongfully neglecting or refusing to accept the
goods.
vi.
To recover interest from the buyer if there is specific agreement to that effect or
charge interest on the price when it becomes due.
Duties
i.
ii.
iii.
iv.
To refund the amount paid by the buyer in case he fails to deliver the goods.
v.
Delivery of the goods by the seller to a carrier for purpose of transmission whether named
by the buyer or not or wharfinger for safe custody, prima facie constitutes delivery of the
goods to the buyer.
b)
The seller shall make such a contract on behalf of the buyer that the delivery must make
carrier or wharfinger responsible for the goods. If the seller omits to do so, and if the goods
are lost or damaged the buyer may decline to treat the delivery or may hold the seller
responsible for damages.
c)
Where goods are sent by seller to the buyer by a route involving sea transit, the seller shall
give such notice to the buyer as may enable him to insure the goods during sea transit. If the
seller fails to do so, the goods shall be deemed to be at the sellers risk during such sea
transit.
68 Self-Learning Material
In case of sea transit, the duty of insuring the goods is thrown on the buyer. There are three common
types of contracts as regards carriage by sea, i.e. when the seller sends goods to the buyer involving
sea transit.
a)
b)
F.O.B. Contract: F.O.B means Free on Board. The seller puts the goods on board at his
own expense. No sooner the goods are placed on the board, the sellers liability ceases, and
the buyers liability begins. The buyer is responsible to pay freight and also insurance charges
and other expenses. The seller pays cost of loading and other expenses for placing the goods
on ship. The seller gives the notice of the shipment to the buyer to enable him to insure the
goods. Failure to give notice makes the seller liable for risk, unless the buyer waives the
notice. The buyer must name the ship on which the goods are to be delivered, or he must
authorize the seller to select the ship, failing which the seller can sue for damages for nonacceptance.
c)
Ex-Ship Contracts: By ex-ship contract, the seller does not merely ship the goods, but he
has to deliver the goods to the buyer after the arrival of the ship on the port of delivery to
buyers place where the goods are to be delivered at his own expense. The seller has to pay
the freight. The property in the goods passes to the buyer only when the goods are delivered
to him. The goods are at the sellers risk during the voyage.
Notes
When the whole of the price has not been paid or tendered.
b)
Where a bill of exchange or other negotiable instrument has been received as a conditional
precedent, i.e. subject to the realization thereof, and the same has been dishonoured.59
He must sell goods on cash terms and not on credit, and he must be unpaid.
b)
c)
When the Property in the Goods Has Passed to the Buyer: The Act lays down that
notwithstanding that the property in the goods may have passed to the buyer,
the unpaid seller of goods, as such has by implication of law:
i.
Self-Learning Material 69
ii. In case of the insolvency of the buyer a right of stopping the goods in transit after
he has parted with the possession of them.
Notes
When the Property in the Goods has not Passed to the Buyer: Where the property
in the goods has not passed to the buyer, the unpaid seller has in addition to his
other remedies, a right of withholding delivery similar to and co-extensive with
his rights of lien and stoppage in transit where the property has passed to the
buyer. In short, the rights of an unpaid seller are:
Lien
Stoppage in
transit
Resale
Withholding
delivery
70 Self-Learning Material
a)
The sale is complete when the auctioneer announces its completion by the fall of the hammer
or in other customary manner.
b)
A bidder is at liberty to withdraw his bid at any time before it is accepted by the auctioneer.
c)
The auctioneer is not bound to sell articles advertised to the highest bidder except when the
sale is with reserve.
d)
The auctioneer is not bound to hold auction on the date of advertisement. His advertisement
is not an offer but a mere invitation.
e)
The auctioneer has the right to make the auction subject to any conditions he likes.
f)
A condition in an auction sale the biddings once made cannot be withdrawn is not
enforceable. The bidding can be withdrawn before acceptance.
g)
In case of goods put up for sale in lots, each lot is prima-facie deemed to be the
subject of a separate contract of sale.
h)
i)
No seller or any person who has advertised can bid at an auction sale, unless the
right is expressly reserved and notified, otherwise, any such sale may be treated
as fraudulent by the buyer.
j)
Agreements not to bid against each other are called Knockout Agreements and they are
not unlawful. The seller may protect himself by a reserve bid.
k)
If the seller makes use of pretended bidding to raise the price, the sale is voidable at the
option of the buyer.
l)
The sale may be notified subject to a reserve or upset price, i.e. there may be a price below
which the goods will not be sold. The reserve price may be kept a secret.
m)
Where the auctioneer discloses the fact that he is acting as an agent, but does not disclose the
name of his principal and sells specific goods, the principals title to the goods is not lost.
n)
If the sale is through the court, it would be subject to the confirmation of the court.
Notes
Summary
Contract of Sale
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. Goods here means only movable goods. Price must be
expressed in money.
What is a Stipulation?
A Stipulation in a contract of sale with reference to goods which are the subject thereof may be a
Condition or a Warranty.
What is a Condition?
A Condition is a stipulation essential to the main purpose of the contract. Its breach gives a right to
the buyer to repudiate the contract.
What is a Warranty?
A Warranty is a stipulation collateral to the main purpose of the contract. Its breach gives rise to a
claim for damages but not a right to treat the contract as repudiated.
Self-Learning Material 71
Implied Conditions
Notes
Implied Warranties
In a contract of sale, unless there is a contrary intention, there is an impled warranty that 1. the
buyer shall have and enjoy quiet possession of the goods 2. the goods are free from any charge or
encumberances 3. that the seller will disclose the dangerous nature of goods to the ignorant buyer.
Where there is a contract for the sale of unascertained goods, no property in the goods is
transferred to the buyer unless and until the goods are ascertained
2.
Where there is a Contract for the sale of specific or ascertained goods, the property in them
is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
To ascertain the intention of the parties, relevant issues are; terms of the contract, the conduct
of the parties and the circumstances of the following rules will be relevant.
a)
Specific Goods: 1. When goods are in a deliverable state 2. If the seller has to do something
to make goods deliverable, then when the seller has done such thing, and notice thereof is
given to the buyer.
b)
Unascertained or Future Goods: If such goods are sold by description, property passes,
when goods according to the description are unconditionally appropriated, and the buyer is
given a notice thereof.
c)
Goods Sent on Approval: In such goods, property passes when the buyer signifies his approval
or acceptance or when he does some act adopting the transaction if he retains the goods
without giving notice of rejection, property passes when the time agreed for returning the
goods expires or a reasonable time has expired.
Delivery of Goods
Delivery means voluntary transfer of possession of goods from the seller to the buyer. It may be
actual, symbolic or constructive.
Rules as to Delivery
1. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions.
72 Self-Learning Material
2. A delivery of part of the goods, in progress, of the delivery of whole, amounts to, for the purpose
of passing the property in such goods, as a delivery of the whole. 3 Apart from any express contract,
the seller of goods is not bound to deliver them until the buyer applies for delivery. 4. The place of
delivery is the place at which they are at the time of the sale. 5. If the goods are in possession of a
third party, there is no delivery until such third party acknowledges to the buyer that he holds the
goods on his behalf. 6. Where the seller is bound to send the goods to the buyer but no time for
sending them is fixed, they must be sent within a reasonable time. 7. Expenses of making delivery
are borne by the seller and expenses of obtaining delivery by the buyer. 8. If the seller sends to the
buyer a larger or a smaller quantity of goods than he ordered, the buyer may a) reject the whole, or
b) accept the whole, or c) accept the quantity he ordered and reject the rest. 9. If the seller delivers,
with the goods ordered, goods of a wrong description, the buyer may accept the goods ordered and
reject the rest or reject the whole. 10. Unless otherwise agreed, the goods are not to be delivered by
instalments.
Notes
1.
Right of Lien: It is available to the unpaid seller when a) the goods have been
sold without any stipulation as to credit; b) the goods have been sold on credit,
but the term of the credit has expired; c) the buyer becomes insolvent.
ii. Right of Stoppage in Transit: When the buyer of goods becomes insolvent the
unpaid seller who has parted with the possession of the goods has the right of
stopping them in transit. The seller may resume possession of the goods, as
long as they are in the course of transit and may retain them until payment or
tender of the price. The unpaid seller may exercise this right of stoppage in
transit either by taking actual possession of the goods, or by giving notice of his
claim to the carrier or other bailee in whose possession the goods are.
iii. Right of Re-sale: The unpaid seller can re-sell the goods Where the goods are
of a perishable nature- Where he has exercised his right of lien or stoppage in
transit and given notice to the buyer of his intention to re-sell the goods and
where the buyer has not within a reasonable time paid the price; andWhere
the seller expressly reserves a right of re-sale in case the buyer should make
default.
2.
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his
other remedies, a right of withholding delivery similar to and coextensive with his rights of lien and
stoppage in transit where the property has passed to the buyer.
3.
Suit for Price: Where under a contract of sale the property in the goods has
passed to the buyer and the buyer wrongfully neglects or refuses to pay for the
goods according to the terms of the contract, the seller may sue him for the
price of the goods.
ii. Damages for Non-acceptance: Where the buyer wrongfully neglects or refuses
Self-Learning Material 73
to pay for the goods, the seller may sue him for damages for non-acceptance.
iii. Repudiation of Contract Before Due Date: Where the buyer in a contract of sale
repudiates the contract before the date of delivery, the seller may either treat
the contract as subsisting and wait till the date of delivery, or he may treat the
contract as rescinded and sue for damages for the breach.
Notes
iv. Suit for Interest: The seller can recover interest on price from the date on
which the payment became due, if there is a special agreement to that effect.
4.
Auction Sale
A sale by auction is a public sale where different intending buyers try to outbid each other. The
goods are ultimately sold to the highest bidder.
Review Questions
True or False
1.
The consideration for the contract of sale can be partly in money and partly in goods.
2.
A stipulation the breach of which gives the aggrieved party a right to terminate the contract
is called a warranty.
3.
The term property in goods and possession of goods means the same thing.
4.
The property in goods passes only when the goods are delivered.
5.
When the goods are sent on sale or return basis, the property in goods passes when the buyer
retains the goods beyond a reasonable time.
6.
Generally, risk follows ownership whether the goods have been delivered or not and whether
price has been paid or not.
7.
8.
In a contract of sale of goods, if goods are destroyed while still in the possession of the
seller, the loss falls on the seller.
9.
In a contract of sale by sample, the bulk of goods supplied may not correspond with sample.
10.
Stipulations relating to time of payment are not of the essence of a contract of sale.
Practical Problems
Attempt the following problems giving reasons:
74 Self-Learning Material
1.
A sold 100 tons of groundnut oil to B. Before it could be delivered to B, the government
requisitioned the whole quantity of A in public interest. Can B sue A for breach of Contract?
2.
Soda Water was supplied by S to B in bottles. B was injured by the bursting of one of the
bottles. Can B claim damages from S?
3.
A contracts to sell B a piece of silk. B thinks that it is Indian silk. A knows that B thinks so
but knows that it is not Indian silk. A does not correct Bs impression. B later discovers that
it is not Indian silk and wants to repudiate the contract. Can he do so?
4.
5.
A sells goods to B. B pays to A through a cheque. Before B could obtain the delivery of
goods, his cheque is dishonoured by the bank. A, therefore, refuses to deliver the goods until
paid. Is As action justified?
Practical Problems
1.
B cannot sue A for breach of contract as the contract becomes void because of supervening
impossibility.
2.
B can claim damages from S for the injury as the bottle is not of merchantable quality and
there is a sale of goods by description.
3.
No, B cannot repudiate the contract, the rule of Caveat Emptor will apply here.
4.
5.
Yes, here A is an Unpaid Seller and under the Sale of Goods Act (section 47) can exercise
his right of lien over the goods.
Notes
Test Questions
1.
2.
Differentiate between a) Sale and Hire Purchase Agreement. b) Sale and Agreement to
sell.
3.
4.
5.
What is meant by Caveat Emptor? In what circumstances the doctrine does not apply?
6.
7.
Delivery does not amount to acceptance of goods. Discuss when a buyer can be said to
have accepted the goods.
8.
9.
Define Unpaid Seller. What are the rights of an unpaid seller over the goods sold by him?
10.
11.
Define the term goods. What are the different types of goods?
12.
In a contract for the sale of goods there is no implied condition or warranty as to the quality
of the goods or their fitness for any oparticular purpose. Comment.
13.
In a contract for the sale of goods, state when a) the property, b) the risk, in the goods sold
passes from the seller to the buyer.
14.
Summarise the provisions of the Sale of Goods Act in regard to the passing of property in a)
ascertained goods, b) unascertained goods, c) goods sold on approval or on sale or return.
15.
The right or stoppage in transit is an extension of an unpaid sellers right of lien. Comment.
16.
3. False
4. False
5. True
6. True
7. False 8. False
References
Notes
76 Self-Learning Material
Section 3
Section 4 (1)
3
Section 2 (11)
4
Section 2 (7)
5
Rash Behari v. Emperor. A.I.R. (1936). Cal.
753
6
Section 2 (10)
7
Section 4 (3)
8
note 7 ibid
9
Section 5
10
note 9 ibid
11
Section 12 (1)
12
Section 12 (2)
13
Section 12 (3)
14
Section 12 (4)
15
Section 14 (a)
16
Rowland v. Divall. (1923), 2 K.B. 500.
17
Section 15
18
Section 17
19
note 17 ibid
20
Nichol v. Godts. (1854), 10 Ex. 191.
21
Section 16 (1)
22
Priest v. Last. (1903), 2 K.B. 148.
23
Section 16 (2)
24
Grant v. Australian Knitting Mills Ltd.
(1936), A.C. 85.
25
Wren v. Halt. (1903), 1, K.B. 610.
26
Section 14 (b)
27
Mason v. Burmingham (1949), 2 K.B.
545.
28
Section 14 (c)
29
Clarke v. Army and Navy Cooperative
Society Ltd. (1903), 1 K.B. 155.
30
Section 16
31
Ward v. Hobbs. (1878), 4 A.C. 13.
32
Section 2 (14)
33
Secton 19 (1)
34
Section 20
35
Section 21
36
Section 22
37
Section 31
38
Section 2 (2)
39
Section 33
40
Section 32
41
note 33 ibid
42
Section 34
43
Section 35
44
Section 36 (1)
45
note 44 ibid
46
Section 35 (2)
47
Section 36 (4)
48
Section 36 (3)
49
Section 36 (5)
50
Section 38 (1)
51
Section 40
52
Section 37
53
Sections 41 to 43
54
Section 41
1
55
56
Section 42
Section 43
57
Section 44
58
Section 39
59
Section 45 (1)
60
Section 46 (1)
61
Section 46 (2)
62
Loon Karan Sethia and ors. v. Ivan E. John
and ors. - AIR 1973 SC 376.
63
Section 64
Law Relating to
Negotiable Instruments
Notes
Section
4
Money speaks sense in a language all nations understand.
Aphra Behn
STRUCTURE
4.1
Introduction
4.2
4.3
4.4
4.5
4.6
Promissory Note.
4.7
Bill of Exchange.
4.8
Cheque.
4.9
Negotiation.
Self-Learning Material 77
4.1 Introduction
Notes
Money is the most common medium of exchange in any advanced society. The reason for this is
that money has the exchange value and is also freely transferable. In trade and commerce the use of
ready cash is desirable, because of its acceptability, but it may cause inconvenience and risk. The
need for some safe and effective substitute for money lead to the development of the use of negotiable
instrument.The law relating to negotiable Instruments is contained in the Negotiable Instruments
Act, 1881 (in short the Act). It came into force on 01-03-1882. It extends to the whole of India.
Negotiable by Statute: The Act mentions only three kinds of instruments, i.e. Promissory
note, Bill of Exchange and Cheque (These are discussed in paragraphs 4.6, 4.7 and 4.8 ).
b)
Negotiable by Custom or Usage: Though the Act speaks of only three kinds of negotiable
instruments, it does not mean that there cannot be any other negotiable instruments.
For Example: hundis, treasury bills, bankers draft, share warrants, bearer warrants, bearer
debentures, etc. are negotiable instruments recognized by the custom, or usage or the
Companies Act. Money orders, Postal orders, Deposit receipts, Bills of lading, Railway
receipts, Dock warrants, etc. are not negotiable instruments. These documents are transferable
by delivery and endorsement, they cannot give a better title to the transferee.
78 Self-Learning Material
a)
b)
Date: Every negotiable instrument was made or drawn on the date it bears.
c)
Time of Acceptance: Every accepted bill was accepted within a reasonable time after its date
and before its maturity.
d)
Transfer: Every transfer of a negotiable instrument was made before its maturity.
e)
f)
g)
Holder in Due Course: The holder of a negotiable instrument is a holder in due course.
h)
Notes
The above presumptions are rebuttable by evidence to the contrary. Moreover, these presumptions
would not arise if an instrument has been obtained by means of fraud (or) for unlawful consideration.
4.6
Promissory Note
4.6.1 Definition
According to the Act, A promissory note is an instrument in writing (not being a bank note or a
currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum
of money only to, or to the order of, a certain person, or to the bearer of the instrument.3 Bank
notes and currency notes are not treated as promissory notes. The words or to the bearer of the
instrument in the definition of the promissory note are inoperative in view of the provisions of the
Reserve Bank of India Act, which prohibits the issue of a promissory note payable to bearer by
anybody other than the Reserve Bank of India4 and the Central Government of India.
It must be in writing.
b)
c)
d)
e)
f)
g)
h)
i)
4.6.3 Illustrations
S. No.
Instrument
1.
2.
3.
1. What is a Negotiable
Instrument?
2. How many types of
negotiable instruments
are there?
3. What is a
Promissory Note?
Self-Learning Material 79
S. No.
Notes
Remarks
4.
5.
6.
7.
8.
9.
I promise to pay B or
his orders Rs. 500.
10.
4.6.4
4.7
Instrument
Bill of Exchange
4.7.1 Definition
According to the Act, A bill of exchange is an instrument in writing containing an unconditional
order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to
the order of, a certain person or to the bearer of the instrument.
80 Self-Learning Material
b)
Drawee - The person on whom the bill of exchange is drawn. He is also called as an acceptor
of the bill.
c)
Payee - The person named in the instrument to whom or to whose order the money is directed
to be paid by the instrument.
4. What is a Bill of
S. No. Point of
Distinction
Bill of Exchange
Exchange?
5. Who are the parties to
a Bill of Exchange?
Promisory Note
(Pro-note)
1.
Numbers of
parties
2.
Order and
promise
A bill contains an
unconditional order.
A pro-note contains an
unconditional undertaking or
promise.
3.
Nature of
relationship
A pro-note is based on a
debtor creditor relationship,
i.e. the maker of a pro-note is
debtor and the payee is
creditor.
4.
Acceptacne
No such acceptance is
required, a pro-note is signed
by the maker only.
5.
Nature of
liability
6.
Immediate
relation
7.
Notice to
prior
parties
Self-Learning Material 81
Notes
S. No. Point of
Distinction
Bill of Exchange
Promisory Note
(Pro-note)
8.
Sets
9.
Protest
10.
Conditional
acceptance
11.
Acceptor for
honour
12.
Payable to the
maker himself
4.8 Cheque
4.8.1 Definition
According to the Act A cheque is a bill of exchange drawn on a specified banker and not expressed
to be payable otherwise than on demand and it includes the electronic image of a truncated cheque
and a cheque in the electronic form.5
a)
a cheque in the electronic form means a cheque which contains the exact mirror image of
a paper cheque, and is generated, written and signed in a secure system ensuring the minimum
safety standards with the use of digital signature (with or without biometrics signature) and
asymmetric crypto system;
b)
Notes
a truncated cheque means a cheque which is truncated during the course of a clearing
cycle, either by the clearing house or by the bank whether paying or receiving payment,
immediately on generation of an electronic image for transmission, substituting the further
physical movement of the cheque in writing.
Explanation II For the purposes of this section, the expression clearing house means the
clearing house managed by the Reserve Bank of India or a clearing house recognized as such by the
Reserve Bank of India.
S. No. Point of
Distinction
Cheque
Bill of Exchange
1.
Drawee
demand
2.
Payable on
demand
3.
Payable to the
bearer on
demand
4.
Acceptance
A cheque requires no
acceptance.
5.
Days of grace
6.
Supposition
7.
Crossing
8.
Stamping
Self-Learning Material 83
Notes
S. No. Point of
Distinction
Cheque
Bill of Exchange
Countermanding
10.
Circulation
11.
Discounting
12.
Failure to
present
13.
Primary
liability
14.
Statutory
protection
15.
Noting and
protesting
16.
Sets
9.
84 Self-Learning Material
General: Where a cheque bears across its face, two parallel transverse lines either with or
without any words, that shall be deemed to be crossed generally. The words used are &
Co. Not negotialbe or a combination of both. Where a cheque is crossed generally, the
banker on whom it is drawn shall not pay it otherwise than to a banker.
b)
Special: Where a cheque bears across its face an addition of the name of a banker, either
with or without the words not negotiable, and company, the cheque is deemed to be
crossed specially. The payment of a specially crossed cheque can be obtained only through
the particular banker whose name appears across the face of the cheque or between the
transverse lines, if any.
c)
Restrictive: In addition to the two statutory types of crossing (general or special) discussed
above, there is another type which has been adopted by commercial and banking usage. In
this type of crossing the words A/c Payee only are added to general or special crossing.
The words A/c Payee only on a cheque are a direction to the collecting banker that the
amount collected on the cheque is to be credited to the account of the payee. A/c payee
cheques are negotiable.
Notes
Not negotiable crossing (Section 130) - The effect of the words not negotiable on a crossed
cheque is that the title of the transferee of such a cheque cannot be better than that of its transferor.
The addition of the words not negotiable does not restrict the further transferability of the cheque.
The object of crossing a cheque not negotiable is to afford protection to the drawer or holder of
the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get
the cheque so crossed cashed, until it reaches its destination. For example: W drew a cheque not
negotiable in bank and handed it to his clerk to fill in the amount and the name of the payee. The
clerk inserted a sum in excess of her authority, and delivered the cheque to P in payment of a debt
of her own. Held, that the clerk had no title to the cheque and as such P had no better title, and
therefore W was not liable.
Cheque should have been dishonoured due to insufficiency of funds. The courts
have held the following amounting to dishounour for insufficiency of funds:
i.
ii. Request to the payee not to present the cheque till further intimation.
iii. Cheque received back from the payee bank with the remarks Account Closed.
However, remarks Refer to Drawer will not constitute dishonour for insufficiency of funds
because a cheque may be referred to a drawer for reasons other than insufficiency of funds.
6 What is a Truncated
b)
c)
The cheque was issued for the discharge of legally enforceable debt or other liability (not
for charity or marriage or birthday presents).
d)
The payee is to give notice demanding payment, within thirty days, from the drawer, on
receipt of information of dishonour of cheque from the bank.
Cheque?
7. What is the effect and
type of crossing?
8. What are the rules
for bouncing of
cheque?
Self-Learning Material 85
Notes
e)
The drawer is liable only if he fails to make payment within fifteen days of such notice
period.
f)
The word Company includes a partnership firm, or any other body corporate, or body of
individuals, and director, in relation to a firm means partner in a firm.6
b)
If the offence under section 138 of the Act is committed by a company, then every person,
who at the time when the offence was committed, was in charge of, and was responsible to,
the company for conducting its business, shall be deemed to be guilty as also the company
itself of the offence.7
c)
The persons who are guilty under Section 138 being in charge of the affairs of the company
can escape the liability if they can prove that:
i.
ii. They had exercised due diligence to prevent the commission of such offence.8
d)
The words in charge of the company must mean In overall conduct of the day-to-day
business of the company or the firm.9
e)
In order to proceed against any director, manager, secretary or other officer of the company,
it has got to be proved that the offence has been committed by the company, and such
offence has been committed with the consent, or connivance of or is attributable to the
neglect on the part of any such director, manager, secretary or other officer of the company.10
f)
The company, and the person in charge of or officer of the company may be prosecuted
independently, or jointly.11
Note: The remedy available to the payee (or any other holder) of a cheque dishonoured for the
reasons mentioned in Section 138 of the Act is an additional remedy. Since the amount of the
cheque dishonoured basically constitutes a debt, the holder of the cheque can sue the drawer
under the civil law to claim his debt.
4.9
Negotiation
4.9.1 Definition
According to the Act, When a promissory note, bill of exchange or cheque is transferred to any
person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.12
Thus negotiation implies a transfer of negotiable instrument so as to constitute the transferee a
holder thereof, who should be entitled in his own name to sue on the instrument and recover the
amount due thereon.
Example: Handing over a bearer instrument to a servant for safe keeping is not negotiation.
b)
c)
Acceptor: He is a the person who accepts the instrument of bill of exchange. Generally the
drawee becomes the acceptor after accepting the instrument (but sometimes a stranger may
accept on behalf of the drawee).
d)
Payee: Payee is a person to whom the sum stated in the instrument is payable. The drawer
or any other person may also be the payee. In the latter case, he is called Payee for Honour.
e)
Endorser: When the holder endorses the instrument to any one else, he becomes the endorser.
f)
g)
Endorsee in Case of Need: The person to whom resort may be had in case of need (In
English law, he is called referee in case of need), i.e. when the bill is dishonoured either by
non-acceptance or by non-payment.
h)
Acceptor for Honour: Further, any person may voluntarily become a party to a
bill as an acceptor. A person who, on refusal by the original drawee to accept the
bill or to furnish better security when demanded by the notary, accepts the bill in
order to safeguard the honour of the drawer or any endorser is called acceptor for
honour.
i)
Holder: According to the Act, The holder of a negotiable instrument means any
person entitled to the possession of the instrument in his own name and to receive
or recover the amount due thereon from the parties thereto. 13 Where the
promissory note, bill of exchange or cheque is lost or destroyed, its holder is the
person so entitled at the time of such loss or destruction.
j)
Holder in Due Course: According to the Act, Holder in due course means any person
who for consideration became the possessor of a promissory note, bill of exchange or
cheque, if payable to the bearer, or the payee or endorsee thereof, if payable to the order,
before the amount mentioned in it became payable, and without having sufficient cause to
believe that any defect existed in the title of the person from whom he derived his title.14
For example: A bank note sent by post was taken and carried away by a robber. The next
day the same note was received by X. He received it for full and valuable consideration and
in the usual course of his business and without any notice of the bank note being taken out
of the mail. The court held him to be a holder in due course.
Notes
He must be a holder.
b)
c)
He must have become the holder of the negotiable instrument before its maturity.
d)
He must take the negotiable instrument complete and regular on the face of it.
e)
The holder must have obtained the instrument without a sufficient cause to believe that any
defect existed in the title of the person from whom he has derived his title (Good faith).
A person, who signed and delivered to another a stamped but otherwise inchoate (incomplete)
instrument, is stopped from asserting, as against a holder in due course, that the instrument
has not been filled in accordance with the authority given by him provided the amount
filled is covered by the stamp affixed.15
Self-Learning Material 87
b)
Every prior party to a negotiable instrument, i.e. the maker or drawer, the acceptor, and all
the intermediate endorsers continue to remain liable to the holder in due course until the
instrument is duly satisfied.16
c)
Where a bill of exchange is drawn by a fictitious person and is payable to his order, the
acceptor cannot be relieved from his liability to the holder in due course. The holder in due
course shall, however, have to prove that the instrument was endorsed by the same hand as
the drawers signature.17
d)
Where as instrument is negotiated to a holder in due course, the parties to the instrument
cannot escape liability on the ground that the delivery of the instrument was conditional or
for a special purpose only.18
e)
Not only that the title of the holder in due course is not subject to the defect in previous
holders title but once the instrument passes through the hands of a holder in due course, it
is purged of all defects. Any person acquiring it takes it as free of all defects, unless he was
himself a party to the fraud.19
f)
No maker of a promissory note and no drawer of a bill of exchange or cheque shall in a suit
thereon by a holder in due course, be permitted to deny the validity of the instrument as
originally made or drawn.20
Notes
a.
b.
4.11 Endorsement
4.11.1 Definition
When the maker or holder of a negotiable instrument signs the same, otherwise than such a
maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to endorse the same; and is called the endorser.23
The person who signs the instrument with the intention of transferring its ownership to another is
called the endorser and the person in whose favour the instrument is transferred is called the
endorsee and the procedure is called endorsement.
b)
c)
d)
Every sole maker, drawer, payee or endorsee or all of several joint makers, drawers, payees
or endorsees of the instrument.
e)
88 Self-Learning Material
b)
Full or special Endorsement: When an endorser signs his name and also specifies a person
to whom or to whose order the amount of the instrument is to be said the endorsement is
said to be full or special, and the person so specified is called the endorsee of the
instrument.24
c)
d)
Partial Endorsement: Where only part of the amount of the instrument is transferred, it is
called partial endorsement. A partial endorsement does not operate as a negotiation of the
instrument, e.g. the holder of a promissory note for Rs. 2,000 writes on it, pay B Rs.
1,000 and endorses the note. The endorsement is invalid for the purpose of negotiation.
But where a instrument has been partly paid, it can be negotiated for the balance, provided
the fact of partpayment is noted on the instrument (Section 56).
e)
f)
g)
Sans Frais: These words, when added at the end of the endorsement, indicate that no
expenses should be incurred on account of the bill.
h)
Notes
Summary
The law relating to negotiable instruments is contained in the Negotiable Instruments Act, 1881.
A negotiable instrument means a promissory note, bill of exchange or cheque payable to order or
to bearer.
Presumptions
The presumptions laid down by the Act in favour of negotiable instruments are as to a) consideration,
b) date, c) time of acceptance, d) time of transfer, e) order of endorsement, f) stamping, g) holder
in due course, and h) proof of interest.
Promissory Note
A promissory note is an instrument in writing (not being a bank note or a currency note) containing
an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.
Self-Learning Material 89
Bill of Exchange
Notes
Cheque
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque
in the electronic form.
Crossing of Cheque
When a cheque bears across its face two parallel transverse lines, the cheque is said to be crossed.
The payment of a crossed cheque can be obtained only through another banker. The crossing may
be general, special or restrictive.
Bouncing of Cheque
A drawer of a dishonoured cheque is punishable to imprisonment upto two years or with a fine
upto twice the amount of the cheque, if cerain conditions are fulfilled. These conditions are, 1.
Cheque should have been dishonoured due to insufficiency of funds, 2. cheque should be presented
within its validity, 3. Cheque was issued for the discharge of legally enforceable debt or other
liability, 4. Payee is to give notice demanding payment within thirty days of dishonour, 5. Drawer
is allowed to make payment within fifteen days after receiving the notice, and 6. A written complaint
to a Metropolitan Magistrate or a Judicial Magistrate of the first class is made within one month
of cause of action arising. If the cheque issued by a company is dishonoured, then the company
and the person in charge of or officer of the company may be prosecuted independently or jointly.
Negotiation
When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute
that person the holder thereof, the instrument is said to be negotiated.
Holder
The holder of a negotiable instrument means any person entitled to the possession of the instrument
in his own name and to receive or recover the amount due thereon from the parties thereto.
liable to him, 4. Acceptor of a fictitious bill is liable to a holder in due course provided the latter
can show that the first endorsement on the bill and the signature of the supposed drawer are in the
same handwriting, 5. Privilege when an instrument delivered conditionally is negotiated, 6. Estopped
against denying original validity of instrument, 7. Estopped against denying capacity of payee to
endorse.
Notes
Endorsement
When the maker or holder of a negotiable instrument signs the same, ortherwise than such a
maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable
instrument, he is said to endorse the same, and is called the endorser.
Types of Endorsement
1. Blank or general, 2. Full or special, 3. Restrictive, 4. Partial , 5. Conditional or qualified, 6. San
Recourse, 7. Sans Frais, and 8. Faculative.
Review Questions
True or False
1.
2.
3.
The payment of a specially crossed cheque can be obtained only by the particular banker
whose name appears between the crossing.
4.
Every prior party to a negotiable instrument is duly liable thereon to a holder in due course
until the instrument is satisfied.
5.
6.
7.
8.
9.
10.
Practical Problems
1.
Mr. X promises by way of promissory note to pay Y, his partner, a sum of Rs. 10,000 in the
event of Ys retirement from the partnership firm. Is this a valid promissory note.
2.
A signed as maker, a blank stamped paper and gave it to B and authorized him to fill it as a
note for Rs. 500. B fraudulently filled it up as a note for Rs. 1,000 payable to C, who in
good faith advanced Rs. 1,000. Can C recover Rs. 1,000 from A?
3.
A owes Rs. 1,000 to B. A makes a promissory note for the amount payable to B. A dies and
the promissory note was found by his legal heirs, afterwards among his papers, and delivered
to B. Can B sue upon it?
4.
A cheque payable to bearer is crossed generally and is marked not negotiable. The cheque
Self-Learning Material 91
is lost and comes into possession of Ram, who takes it in good faith and for value. Ram
deposits the cheque in his bank account and the banker collects the same. Can Ram be
compelled to return the money to the true owner of the cheque?
Notes
5.
Amit draws a bill of exchange on Shashi. Arun writes an acceptance on it. Is it a valid
acceptance?
Practical Problems
1.
2.
C, being a holder in due course can recover Rs. 1,000 from A provided the stamp covers the
value of Rs. 1,000.
3.
No, B cannot sue upon it because the instrument was not properly negotiated. Delivery is
essential to complete negotiation. The delivery effected by legal heirs of a deceased is not
considered as a good delivery under the Negotiable Instruments Act.
4.
Yes, the true owner can compel Ram to refund money because the cheque bears not
negotiable crossing as a request of which the transferee cannot get a better title than that of
the transferor.
5.
No, a stranger to the bill cannot accept it unless it is done for the honour of the party liable
on the bill after the bill has been noted or protested for non-acceptance.
Test Questions
1.
2.
3.
4.
5.
6.
What is meant by the term crossing a cheque? Explain the different types of crossings.
7.
Discuss the law relating to bouncing of cheques for insufficiency of funds in the account.
8.
9.
10.
A holder in due course gets a title free from equities. Explain the statement and discuss
the various privileges of a holder in due course.
11.
What do you mean by the term Endorsement? What are the types of endorsement?
12.
13.
14.
Why are bills of exchange, promissory notes and cheques called negotiable instruments?
15.
Dishonour of a cheque for want of funds is an offence under the Negotiable Instrument Act.
Do you agree with this statement?
92 Self-Learning Material
Notes
1) 4.2 2) 4.4 3) 4.6.1 4) 4.7.1 5) 4.7.2 6) 4.8.1b 7) 4.8.4 8) 4.8.5 9) 4.10.1 10) 4.11.1
References
1
Section 13 (1). It may be noted that the Act does not give the meaning of the term negotiable
instrument. Rather it enumerates the class of instruments considered as negotiable by the statute.
2
Section 4.
Section 141(1).
10
11
Section 141(2).
12
Section 14.
13
Section 8.
14
Section 9.
15
Section 20.
16
Section 36.
17
Section 42.
18
19
Section 53.
20
Section 120.
21
Section 121.
22
Section 58.
23
Section 15.
24
Section 16.
25
Section 52.
Self-Learning Material 93
Notes
94 Self-Learning Material
Section
5
Dont
organise.
Moneyagonise;
speaks sense
in a language all nations understand.
FlorynceAphra
R. Kennedy
Behn
STRUCTURE
5.1
Introduction
5.2
5.3
5.4
5.5
5.6
5.7
Findings
5.8
Miscellaneous
5.9
Self-Learning Material 95
5.1 Introduction
Notes
In India, with industrialisation and economic development, the population of consumers and the
volume of consumption of goods and services increased. The Contract Act, 1872 and the Sale of
Goods Act, 1930 provided remedies but they were time consuming and expensive. Consumer
issues started gaining importance. The interests of consumers were highlighted by media, nongovernment organisations, social activists and even business concerns. The United Nations
organised a session on the need for the protection of consumers. The government of India also
realised that consumers need to be protected by law.The law relating to consumer protection is
contained in the Consumer Protection Act, 1986 (in short the Act). The Act extends to the whole
of India except the state of Jammu and Kashmir.
Better Protection of Interests of Consumers: The Act seeks to provide consumer councils
and authorities for settlement of consumer disputes.
b)
Protection of Rights of Consumers: The Act seeks to promote and protect the rights of
consumers such as:
i.
The right to be protected: Against marketing of goods and services which are hazardous
to life and property.
ii. The right to be informed: About the quality, quantity, potency, purity, standard and
price of goods and services so as to protect the consumers against unfair trade practices.
iii. The right to be assured: Wherever possible, access to goods and services at competitive
prices.
iv. The right to be heard: And to be assured that consumers interest will receive due
consideration at appropriate forums.
v.
The right to seek redressal: Against unfair trade practices or restrictive trade practices
or unscrupulous exploitation of consumers.
vi. Right to consumer education: By publishing material and magazines for the benefit of
consumers, such as magazine like Upbhokta Jagran.
c)
Consumer Protection Councils: The above said objects are sought to be promoted and
protected by the consumer protection councils established at the central, state and district
levels.
d)
Quasi-judicial Machinery for Speedy Redressal of Consumer Disputes: The Act seeks to
provide speedy and simple redressal to consumer disputes. For this purpose, the following
consumer disputes redressal agencies are envisaged:
i.
Buys any goods for consideration which has been paid or promised or partly paid and
partly promised, or under any system of deferred payment and includes any user of such
goods other than the person who buys such goods for consideration paid or promised or
partly paid or partly promised or under any system of deferred payment when such use is
made with the approval of such person, but does not include a person who obtains such
goods for resale or for any commercial purpose; or
b)
Notes
Hires or avails of any services for a consideration which has been paid or promised or
partly paid or partly promised, or under system of deferred payment and includes any
beneficiary of such services other than the person who hires or avails of the services for
consideration paid or promised or partly paid and partly promised, or under any system of
deferred payment, when such services are availed of with the approval of the first mentioned
person but does not include a person who avails of such services for any commercial
purpose.
Commercial purpose does not include use by a person of goods bought and used by him and
services availed by him exclusively for the purposes of earning his livelihood by means of selfemployment.1 To put briefly, consumer is a person who buys any goods or hires or avails of any
services for a consideration.
Esamples
1.
Amar bought a pressure cooker for use by his family. In the first use it self, while his wife
Bindu was using it, the pressure cooker burst, hurting her. Is Amar a consumer? Is Bindu a
consumer?
2.
Chander bought a laptop and gifted it to his son Dev, Dev is an advocate and uses the laptop
for his business. Are Chander and Dev Consumers?
Answers to Examples
1.
Amar is a consumer due to the first part of (i) buys any goods for consideration. Bindu is
also a consumer as the provision provides and includes any user of such goods other than the
person who buys such goods for consideration.... ... when such use is made with the approval
of such person.
2.
Chander was a consumer when he bought the laptop, as the purchase was neither for resale
nor for commercial purpose. However, Dev is not a consumer as he is using it for commercial
purpose.
Case A charitable trust was running a diagnostic centre, where patients taking advantage of X-ray, CT
scan etc. were ordinarily required to pay for the same and only 10% of them being provided free
service. It was held that the machines purchased by the Trust for use in the diagnostic centre were
meant for commercial purpose, and therefore the Trust was not a consumer. - Kalpavraksha Charitable
Trust vs Toshniwal Brothers (Bombay) (P) Ltd. - ((2000) I.S.C.C. 512).
1.
Who is a consumer?
2.
What is a service?
3.
What is known as
Unfair Trade
Practice?
Self-Learning Material 97
5.3.3 Services
Notes
According to the Act, Service means service of any description which is available to potential
users and includes, but not limited to, the provision of facilities in connection with banking,
financing, insurance, transport, processing, supply of electrical or other energy, board or lodging
or both, housing construction, entertainment, amusement or the purveying of news or other
information, but does not include the rendering of any service free of charge or under a contract of
personal service.4
Case A customer of a bank is aconsumer entitled to seek compensation under the act, and the bank is
liable for deficiency of service. - Vimal Chandra Grover vs Bank of India ((2002), 110 comp. cas: 499 (SC))
5.3.4 Complainant
According to the Act, Complainant meansa)
a consumer.
b)
any voluntary consumer association registered under the companies act, 1956 or under any
other law for the time being in force.
c)
d)
one or more consumers, where there are numerous consumers having the same interest, in
case of a death of a consumer, his legal heir or representative; who or which makes a
complaint.5
Case Where Insurance company pays and settles the claim of the insured, it can file a complaint for the
loss caused to the insured goods by negligence of goods/service providers. For example, when loss
is caused to such goods because of negligence of transport company, the insurance company can
file a claim against the transport company. - New India Assurance Company Ltd. vs Green Transport Co.
((1991), CPJ(I) Delhi).
5.3.5 Complaint
Complaint means any allegation in writing made by a complainant with a view to obtaining any
relief under the Act.
98 Self-Learning Material
a)
Delay beyond the period agreed to by a trader in supply of such goods or in providing the
services which has led or is likely to lead to rise in the prices.
b)
Any trade practice which requires a consumer to buy, hire or avail of any goods or, as the
case may be, services as condition precedent to buying, hiring or availing of other goods or
services.6
Case A furniture dealer offers to sell a Sofa at Rs. 20,000 and Double Bed at Rs. 15,000. He has an offer
that whoever will buy Sofa and Bed both he will charge Rs. 30,000 only. Here the choice is open to
the customer to buy the products single or composte. This is not a restrictive trade practice.
Notes
Example Akash sold a second hand computer to Bharat representing it to be a new one. Here Bharat can
make a complaint against Akash for adopting an unfair trade practice.
5.3.8 Defect
A defect is defined to mean any fault, imperfection or shortcoming in the quality, quantity, potency,
purity or standard which is required to be maintained under any law or contract.8
Example Ajit bought a computer from Bimal. It was not working properly since day one. Ajit can make a
complaint against Bimal for supplying a defective computer.
5.3.9 Deficiency
It is defined to mean any fault, imperfection, shortcoming or inadequacy in the quality, nature and
manner of performance which is required to be maintained under any law or contract.9
Case A boarded a train. The compartmet in which he travelled was in ban shape-fans and shutters of
windows were not working, rexin of the berth was badly torn and there were rusty nails which
caused some injury to his wife who was also travelling along with him. A made a complaint against
Railways for deficiency in service. It was held that the faults or short-coming pointed out in the
plaint constituted deficieny in service and teh compensation of Rs. 1500 was awarded to A. General Manager, South Eastern Railway vs Anand Prasad Sinha ((1991), CPJ 10 (12) NC).
5.3.10 Person
The expression person for the purposes of the Act shall include:
a)
b)
Notes
c)
A co-operative society
d)
Every other association of persons whether registered under the Societies Registration Act
or not.
State
Commission
National
Commission
1.
Territorial
All India.
2.
Composition
President &
minimum two
members - one
woman.
President &
minimum seven
members - one
woman.
3.
Qualifications
for President
Serving or retired or
qualified to be a District
Judge.
Serving or retired
judge of High
Court.
(Consultation with
Chief Justice of
the High Court
necessary).
Serving or
retired judge of
Supreme Court.
(Consultation
with Chief
Justice of India
necessary).
4.
Qualifications
of members
Same as for
District Forum.
Same as for
District Forum.
5.
Disqualifications
of members
Same as for
District Forum.
Same as for
District Forum.
6.
Selection
Committee
Chairman - President of
State Commission.
Members - Secretary
Law, Secretary
Consumers Affairs of
State.
Same as for
District Forum.
Chairman, S.C.
Judge Members
- Secy. Deptt of
legal affairs Secy. Deptt of
Consumer
Affairs.
S. No. Point of
Distinction
District
Forum
State
Commission
National
Commission
7.
Term
8.
Yes
9.
Monetary
Jurisdiction
Upto 20 lakhs.
Between 20 lakhs
and one crore.
10.
Administratove
control
State
commission.
National
Commission.
--------
11.
Limitation
Upto 2 years
from the date on
which the cause
of action arose.
12.
Appeal
State
Commission
within 30 days of
order. 50% of the
amount payable
or Rs. 25000,
whichever is less
to be deposited
by the appellant.
13.
Enforcement
of the order
As if it is a court
order, forwarded to
the appropriate
court.
As if it is a court
order, forwarded to
the appropriate
court.
As if it is a court
order, forwarded to
the appropriate
court.
14.
Penalties
Imprisonment - Not
less than one month
but may extend to 3
years. Fine - not less
than Rs. 2000, but
may extend to Rs.
10,000.
Imprisonment - Not
less than one month
but may extend to 3
years. Fine - not less
than Rs. 2000, but
may extend to Rs.
10,000.
Dismiss the
complaint and
costs upto Rs.
10,000.
Dismiss the
complaint and costs
upto Rs. 10,000.
Dismiss the
complaint and costs
upto Rs. 10,000.
15.
Frivolous or
Vexatious
Complaints
Notes
5 years or age of
70 whichever is
earlier.
Yes
5.
Is a co-operative
society treated on the
basis of separate
individual under law?
6.
7.
Notes
ordinarily be decided within twenty one days of the receipt of complaint. A complaint may be
proceeded with or rejected. However before rejection, an opportunity to be given to the complainant
for hearing.
5.6
If a complaint relates to any goods, a copy of the admitted complaint should be given to the opposite
party within 21 days for him to give his version within thirty days. If the opposite party denies or
disputes the complaint or fails or omits to take any action within the time given, (Initial 30 days and
can be extended by 15 days) then the complaint shall be proceeded further. If the defect in goods
needs analysis or testing by a laboratory, a sample of the goods shall be sent to the laboratory for a
report within forty five days. The fees for the laboratory test shall be payable by the complainant.
The report of the laboratory test is given to the opposite party. If any of the parties disputes the
correctness of the laboratory test report, the objections to such report shall be made in writing. A
reasonable opportunity of being heard shall be given regarding the objections made in relation to
laboratory test.If the complaint relates to any services or in respect of goods where laboratory
report is not required, then a copy of the complaint is referred to the opposite party directing him to
give his version within a period of thirty days. This can be extended by fifteen days. If the opposite
party does not file any reply the complaint shall be decided exparte. If the opposite party, denies or
disputes the allegations made in complaint, the matter will be decided on the basis of evidence
adduced by the complainant and the opposite party. Every complaint shall be heard expeditiously
and endeavour shall be made to decide the complaint within three months when it does not require
analysis or testing by any laboratory and within five months if it requires analysis or testing of
commodities.11
5.7
Findings
The following orders can be made by the consumer dispute redressal agency:
a)
To remove the defect - pointed out by the appropriate laboratory from the goods in question.
b)
To replace the goods - with new goods of similar description which shall be free from any
defect.
c)
To return to the complainant the price - or, as the case may be, the charges paid by the
complainant.
d)
To pay compensation - to the consumer for any loss or injury suffered due to the negligence
of the opposite party. However the consumer disputes redressal agency shall have the power
to grant punitive damages in such circumstances as it deems fit.
e)
f)
To discontinue the unfair trade practice or the restrictive trade practice - or not to repeat
them.
g)
h)
i)
To cease manufacture of hazardous goods - and to desist from offering services which are
hazardous in nature.
j)
To pay such sum - as may be determined by it, if it is of the opinion that loss or injury has
been suffered by a large number of consumers who are not identifiable conveniently. However,
the minimum amount of sum so payable shall not be less than five percent of the value of
such defective gods sold or services provided as the case may be to such consumers. It may
also provide that the amount so obtained shall be credited in favour of such person and
utilised in such manner as may be prescribed.
k)
the cost of the opposite party responsible for issuing such misleading advertisement.
l)
Notes
5.8 Miscellaneous
The act also lays down provisions regarding the following:
a)
b)
Power to make rules by the central government or by the state governments,14 and laying of
such rules before parliament/state legislature.15
5.9
a)
b)
c)
Under the Act, damages are payable only if there is negligence of the opposite party.18
Employees of Bank of Baroda, Calcutta, resorted to a strike, in opposition to a scheme of
transfer of its employees. The striking employees created barricades by forming a human
wall before the bank. The customers were prevented from entering the bank for 54 days.
The customers had suffered losses, which included loss of interest. The Supreme Court
ruled that the shortcoming in the service by bank did not arise due to failure on the part of
bank in performing its duty or discharging its obligations as required by law.19
d)
Where the opposite party failed to file written objections within the time allowed, it could
not be denied the privilege of oral submissions before the Forums. The National Commission
gave the reason that the opposite party should not be deprived of its natural and legal right
to put forward its defence.20
e)
f)
Wearing of jewellery on body of person included in luggage, being in his charge during
travel in Railway. Gold chain snatched by miscreants while travelling in reserved
compartment. It was held that there was deficiency in service on the part of Railways.22
g)
h)
i)
Complainant having confirmed ticket, not provided seat in aircraft and consequently lost
job. It was held that there was deficiency of service on the part of the airlines.25
j)
Nursing home had no proper arrangements to meet emergency and not properly equipped,
it is deficient in service. When forceps delivery was done in haste which caused haemorrhage
and no attempt was made to stop profuse bleeding, it was held that there was negligence
and deficiency in medical care.26
k)
Deceased was insured under the Salary Savings Scheme from L.I.C. Employer failed to
deduct the premium from the salary of the employee. As a result policy lapsed. It was held
that the complainant (wife of the deceased) is entitled to claim the insurance amount from
the employer.27
Self-Learning Material 103
Notes
l)
When there is a delay in delivery of motor vehicle and there is unauthorised escalation in
price, consumer is not liable to pay.28
m)
Complainant applied for allotment of a flat under a scheme of Housing Board and made
full payment. Possession of the flat was not given as per the scheme. The contention of the
Housing Board that the scheme was given up due to unavoidable reasons and the option
given to the complainant to opt for another scheme is not valid. It was held that there was
a deficiency in service on the part of the Housing Board.29
Summary
The law relating to consumer protection is contained in the Consumer Protection Act, 1986. Its
objects are a) better protection of interests of consumers, b) protection of rights of consumers, c)
to provide for consumer protection councils and d) to provide quasi-judicial machinery for speedy
redressal of consumer disputes. The Act also defines terms like a) consumer who buys goods and
services for a price b) goods means every kind of moveable property c) services, d) complainant,
e) complaint f) restrictive trade practices, g) unfair trade practices h) defect, i) deficiency, i)
persons and k) consumer dispute.
Findings
The consumer dispute redressal agencies can arrive at any of these findings a) to remove defects,
b) to replace goods, c) to return the price, d) to pay compensation, e) to remove deficiencies in
services, f) to discontinue the unfair trade practice or the restrictive trade practice, g) not to offer
hazardous goods for sale, h) to withdraw hazardous goods, i) to cease manufacture of hazardous
goods, j) to pay such sum as may be determined by such agency k) to issue corrective advertisement,
and l) to provide for adequate costs to parties.
Review Questions
Notes
True or False
1.
When a cause of action has arisen, a complaint before a consumer dispute redressal agency
is to be filed within three years.
2.
3.
A member of the District Forum under the Consumer Protection Act, can hold office upto
the age of 65 years.
4.
A claim of Rs. 50 lakhs under Consumer Protection Act is to be filed before the National
Commission.
5.
A tutor teaches a student for one year and the student fails. The student is a consumer under
the Consumer Protection Act.
6.
7.
8.
Consumer Protection Act does not provide any remedy for frivolous and vexatious
complaints.
9.
10.
Practical Problems
1.
Mr. Chaluram is a transport contractor and has a proprietory firm in Meerut by the name of
M/s Ram and Sons. He has two trailors of Ashok Leyland make. He purchased a third
trailor for a sum of Rs. 4.75 lakhs. This trailor did not give satisfactory service and started
giving trouble on account of manufacturing defects. He filed a complaint before District
Forum, Meerut against M/s Ashok Leyland for defects in the trailor. Will Mr. Chaluram
succeed?
2.
3.
Kamjor, a subscriber to the Provident Fund Under Employees Provident Fund and Misc.
Provisions Act, 1952 could not get final provident fund dues amounting to Rs. 5.75 lakhs
within the stipulated period of 20 days. After waiting for twenty months he filed a complaint
in the concerned District Forum against the relevant Regional Provident Fund Commissioner.
Will Kamjor succeed?
4.
5.
A boy aged 10 years was admitted in a private nursing home with high fever. On account of
negligence and deficiency on the part of nursing home, doctors and nurses the child suffered
irreparable damage. Can childs parents file complaint under the Consumers Protection
Act?
Test Questions
Notes
1.
What are the objects which the Consumer Protection Act, 1986, seeks to achieve?
2.
3.
Define the following terms as used in the Consumer Protection Act, 1986.
a. Consumer
b.
Goods
c.
Services
d.
Complainant
e.
f.
4.
Which are the Consumer Dispute Redressal Agencies and what are their powers?
5.
6.
Explain the rights of a consumer enshrined under the Consumer Protection Act, 1986.
7.
Practical Problems
1.
No, as he is not a consumer because trailor was purchased for commercial purpose.
2.
Uttar Pradesh Consumer Disputes Redressal Commission as the claim amount of Rs. 25
lakhs is within the jurisdiction of State Commission. He will succeed as the Cooperative
Group Housing Society comes under Consumer Protection Act.
3.
Yes as the Regional Commissioner to the employees provident fund comes under the purview
of Consumer Protection Act. Non payment of dues within the stipulated period is a deficiency
of service.
4.
No, it does not amount to Unfair Trade Practice under the Consumer Protection Act.
5.
Yes, they come under the definition of consumer under the Act.
2. False 3. True
9. False 10. True
4. False
5. False
6. True
7. False
References
10
11
Notes
Section 13.
12
Section 14.
13
Section 28.
14
Section 30.
15
Section 31.
16
Indian Medical Association V.P. Shantha & Ors. (1995) 3 CTJ 969 (Supreme Court CP); [1995
(III) CPJ 1 (SC)].
17
18
19
Consumer Unity and Trust Society, Jaipur v. Chairman and Managing Director, Bank of
South Delhi University Teacher Cooperative Group Housing Society Ltd. v. Dr. Madhu
Regional Provident Fund Commissioner, Faridabad v. Shiv Kumar Joshi (1997) 24 CLA NCDRC.
22
Mrs. M. Kanthimathi & Anr v. Government of India, Ministry of Railways; I 2003 CPJ 16
(NC).
23
24
Dr. Sham Lal & ors. v. Mrs Saroj Rani & Ors; I (2003) CPJ 47 (NC).
25
Manager Air India Ltd. & Anr. v. A Moideen Kutty & Ors., I (2003) CPJ 65 (NC).
26
Dr. Smt. T. Vani Devi & ors. v. T.L.N. Narasa Reddy. I (2003) CPJ 180 (NC).
27
28
M/s Vikas Motors Ltd v. Dr. P.K. Jain. II (1999) CPJ 44 (SC).
29
George Thomas & ors. v. G.D.A. & ors. I (1999) CPJ 18 (NC).
Notes
Introduction to Law of
Partnership
Notes
Section
6
The most enlightened judicial policy is to let people manage their own
Money speaks
in a language all nations understand.
business
in theirsense
own way.
Aphra
Behn
Oliver Wendell
Holmes
STRUCTURE
6.1
Introduction
6.2
Definition of Partnership
6.3
6.4
6.5
6.6
6.7
Registration of Firms
6.8
6.9
Reconstitution of Firm
6.1 Introduction
Notes
To carry on a business, a person may choose any form of organization depending upon his needs.
When a person works in his individual capacity, he runs a proprietary organization, also known as
a sole trader. When he works with some person, they are running a partnership. Partnership is the
most common form of organisation . Law relating to partnership is governed by the Indian
Partnership Act, 1932 (the Act). it extends to the whole of India except to the state of Jammu and
Kashmir.
An agreement: partnership is the result of an agreement. It does not arise from status (as in
the case of Hindu Undivided Family) operation of law (as of co-owners) or inheritance.
Agreement may be express or implied. Again it may be oral or in writing. partnership deed
is example, of an agreement in writing.
b)
Two or More Persons: There must be at least two persons to form a partnership. The Act
does not mention any thing about the maximum number of persons who can be partners in
a partnership firm but the Companies Act, 1956 (Section 11) lays down that a partnership
consisting of more than 10 persons for banking business and 20 persons for any other
business would be illegal. Hence these should be regarded as the maximum limits on the
number of partners in a partnership firm.
Note: The term person means any person competent to enter into a contract and includes a
company also. A minor can be admitted as a partner only for the benefits of partnership.
c)
d)
Sharing of Profits: There must be sharing of profits. However, partners may agree to share
profits in any proportion. But whenever the partnership firm runs into losses, the partners
will share it too since a loss represents a negative profit.
e)
Mutual Agency: There must exist a mutual agency relationship among the partners. Mutual
agency implies that each partner acts for the other partners. He, thus, is an agent of other
partners. Also, each partner is a principal for he is bound by the acts of other partners.
Mode of creation. Partnership is essentially the result of an agreement. A Joint Hindu Family
arises from status and is not the result of an agreement. It arises by operation of law.
2.
Interest in business. In partnership a person does not acquire interest in partnership business
by birth. It is the result of an agreement In a joint family business, the male members acquire
Interest by birth.
3.
Admission of new members. In partnership, a new partner can be admitted only with the
consent of all the partners. In a joint family business, a male becomes a member by his birth.
a)
What is partnership?
2.
3.
Is it compulsory to
register a partnership
firm?
Membership fluctuating. In partnership, the number of partners should not exceed ten
in case of a firm carrying on banking business and twenty in case of any other business.
In a joint family business, there is no limit to the maximum number of members.
4.
Authority of members. In partnership each partner has implied authority to bind the firm by
acts done in the ordinary course of the business of the firm. In a joint family business, only
the Karta (usually the eldest male member of the family) has implied authority to contract
debts and pledge the credit and the property of the family for the ordinary purposes of the
family business.
5.
Liability of members. In partnership, the liability of the partners is unlimited. The share of
each partner in the partnership property along with his private property is liable for the
discharge of partnership liabilities. In a joint family business, the Karta is personally liable
for the debts of the family whereas the other members are liable only to the extent of their
Interest in the Joint family business. The other members are personally liable If they are also
contracting parties.
6.
Right of members to demand accounts. In partnership, every partner has a right to have
access to and inspect and copy any of the books of the firm and ask for the account of profits
and losses. The members of a joint family business cannot ask the Karta of the family for
accounts of his past dealings concerning the family business. Similarly, they cannot ask the
Karta for the account of profits and losses.
7.
1.
2.
Business. Business Is necessary for the existence of partnership ; co-ownership can exisf
without it
3.
4.
Transfer of interest. A partner cannot transfer his share to a stranger without the consent of
the other partners. A co-owner can. When a co-owner transfers his share, the transferee
becomes vis-a-vis the other co- wners a substitute of the co owner who transfers his share.
5.
Number of members. In partnership, the number of members cannot exceed the statutory
limit. In co-ownership there is no limit on maximum number.
6.
Authority of members. A partner is the agent of his co-partners. A co-owner is not the agent
of the other co-owners.
7.
Partition of property. A partner cannot sue for the partition of partnership property in specie
but he can sue his co-partners for the dissolution of the firm and accounts. A co-owner can
sue for the partition of the property.
8.
Lien for expenses. A partner has a lien on the partnership property for expenses incurred by
him on such property on behalf of the firm ; a co-owner has no such lien.
6.6.3 Clubs
A club or a society, such as a cricket club or a debating society or a residents welfare society, is not
a partnership. It is not formed to earn profit and its members are not agents of one another and as
such are not liable for one anothers acts. A member of a club Is not liable to a creditor except so far
as he has assented to the contract in respect of which such liability has arisen. A club Is formed
upon the implied condition that its members are not bound to contribute to its losses beyond the
amount or subscription as laid down in the rules to be paid so long as he remains a member.
5.
Under what
circumstances does
reconstitution of a
partnership firm take
place?
6.8.2 Rights
1.
2.
Right to take part in business. The partnership agreement usually provides the mode of the
conduct of the business. Subject to any such agreement between the partners, every partner
has a right to take part in the conduct of the business. This is based on the general principle
that partnership business is the common business of all the partners.
Right to be consulted. Every partner has an inherent right to be consulted in all matters
affecting the business of the partnership and express his views before any decision is taken
by the partners.
3.
Right of access to accounts. Subject to contract between the partners, every partner has a
right to have access to and inspect and copy any of the books of the firm. A minor partner
may have access to and inspect any of the accounts of the firm but not books.
4.
Right to share in profits. In the absence of any agreement, the partners are entitled to share
equally in the profits earned and are liable to contribute equally to the losses sustained by
the firm.
5.
Right to interest on capital The partnership agreement may contain a clause as to the right
of the partners to claim interest on capital at a certain rate. Such interest, subject to contract
between the partners is payable only out of profits, if any, earned by the firm.
6.
Right to interest on advances. Where a partner makes, for the purposes of the business of
the firm, any advance beyond the amount of capital, he is entitled to interest on such advance
at the rate of six per cent per annum. Such interest is not only payable out of the profits of
the business but also out of the assets of the firm.
7.
Right to be indemnified. A partner has authority, in an emergency, to do all such acts for the
purpose of protecting the firm from loss as would be done by a person of ordinary prudence,
in his own case, acting under similar circumstances. Such acts of the partner bind the firm.
If as a consequence of any such act, the partner incurs any liability or makes any payment,
he has a right to be indemnified.
8.
Right to the use of partnership property. Subject to contract between the partners, the
property of the firm must be held and used by the partners exclusively for the purposes of
the business of the firm. No partner has a right to treat it as his individual property. If a
partner uses the property of the firm directly or indirectly for his private purpose, he must
account to the firm for the profits which he may have earned by the use of that property.
9.
Right of partner as agent of the firm. Every partner for the purposes of the business of the
firm is the agent of the firm. And subject to the provisions of the Indian Partnership Act 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.
10.
No new partner to be introduced. Every partner has a right to prevent the introduction of a
new partner unless he consents to that or unless there is an express term in the contract
permitting such introduction.
11.
No liability before joining. A person who is introduced as a partner into a firm is not liable
for any act of the firm done before he became a partner.
12.
Right to retire. A partner has a right to retire (a) with the consent of all the other partners, or
(b) in accordance with an express agreement between the partners, or (c) where the
partnership is at will, by giving notice to all the other partners of his intention to retire.
13.
Right not to be expelled. A partner has a right not to be expelled from the firm by any
majority of the partners, save in the exercise in good faith of powers conferred by the
contract between the partners.
14.
Right of outgoing partner to share in the subsequent profits. Where a partner has died, or
has ceased to be a partner by retirement, expulsion, insolvency, or any ether cause, the
surviving or continuing partners may carry on the business with the property of the firm
Notes
7.
What is a limited
liability partnership?
without any final settlement of accounts as between them and the outgoing partner or his
estate. In such a case, legal representative of the deceased partner or the outgoing partner,
in the absence of a contract to the contrary. Is entitled, at his option, to
Notes
a)
such share, of the profits as is proportionate to his share in the property of the firm, or
b) Interest at the rate of 6 per cent per annum on the amount of his share in the property
of the firm.
6.8.3 Duties
Partnership is a contract of uberrimae fidea. The partners must act with utmost good faith as the
very basis of partnership is mutual trust and confidence. According to Sec. 9, which deals with the
general duties of partners, partners are bound
a)
b)
c)
to render true accounts and full Information of all things affecting the firm to any partner or
his legal representative.
The other duties are spread over the Partnership Act These duties are summed up as under:
1.
To carry on business to the greatest common advantage. Every partner is bound to carry on
the business of the firm to the greatest common advantage. He is bound, in all transactions
affecting the partnership, to do his best in the common interest of the firm. He must share
with other partners any benefit which he may have been able to obtain from other people and
in which the firm is in honour and conscience entitled to participate.
2.
To observe faith. Partnership is a fiduciary relation. Every partner must be Just and faithful,
and observe utmost good faith towards every other partner of the firm. Good faith requires
that he shall not obtain a private advantage at the expense of the firm. He is bound, in all
transactions affecting the partnership, to do his best In the common interest of the firm.
3.
To indemnijy for fraud. Every partner is bound to indemnify the firm for any loss caused to
it by his fraud In the conduct of the business of the firm. This is an absolute duty of a partner
and no partner can contract himself out of it. The innocent partners of the firm are, however,
liable to third parties for the fraud of any of the partners. But they can proceed to claim
damages against the partner who has committed the fraud.
4.
To attend diligently. Subject to contract, between the partners, it is the duty of every partner
to attend diligently to his duties in the conduct of the business of the firm, and to use his
knowledge and skill to the common advantage of all the partners.
5.
Not to claim remuneration. A partner Is not entitled to receive any remuneration in any form
for taking part in the conduct of the business of the firm. It is, however, usual to allow some
remuneration to the working partners provided there is a specific agreement to that effect.
6.
To share losses. It is the duty of every partner to contribute to the losses of the firm. In the
absence of an agreement to the contrary, the partners are bound to contribute equally to the
losses sustained by the firm. An agreement to share profits implies an agreement to share
losses also.
7.
To indemnify for wilful neglect. Every partner Is, subject to contract between the partners,
bound to indemnify the firm for any loss caused to it by his wilful neglect in the conduct of
the business of the firm. The firm is, however, liable to the third persons for the wilful
neglect or fraud of any of the partners.
8.
To hold and use property of the firm exclusively for the firm. It is the duty of every partner of
the firm to hold and use the property of the firm exclusively for the purposes of the business
of the firm. The partners may agree differently but, in such a case, there should be a specific
agreement to that effect.
9.
To account for personal profits. If a partner derives any benefit, without the consent of the
other partners, from partnership transactions (or from any use by him of the partnership
property, name or business connection), he must account for it and pay it to the firm. This is
because the relationship between partners is a fiduciary relationships and no partner is entitled
to make any personal profit.
10.
To account for profits in competing business. A partner must not carry on any business of
the same nature as competing with that of the firm. If he does that he is bound to account for
and pay to the firm all profits made by him in that business. This is, however, subject to
contract between the partners.
11.
To act within authority. Every partner is bound to act within the scope of his actual or
Implied authority. Where he exceeds the authority conferred on him and the firm suffers a
loss, he shall have to compensate the firm for any such loss.
12.
To be liable jointly and severally. Every partner is liable, jointly with all the other partners
and also severally, for all the acts of the firm done while he is a partner.
13.
Not to assign his rights. A partner cannot assign his rights and interest in the firm to an
outsider so as to make him the partner of the firm. He can, however, assign his share of the
profit and his share in the assets of the firm.
Notes
b)
Retirement of a partner
c)
Expulsion of a partner
d)
Insolvency of a partner
e)
Death of a partner, or
f)
Dissolution of Firm: The term refers to the dissolution of partnership between all the partners
of a firm. Thus, where all the partners in a firm agree to sever their relationship, it is known
as dissolution of firm.
b)
Without court order: Such a dissolution may take place in the following ways:
i.
Dissolution by agreement
Self-Learning Material 115
Notes
Dissolution by the Court: At the suit of a partner, the court may dissolve a firm on any of the
following grounds, namely:
i.
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;
ii. That a partner, other than the partner suing, has become in any way permanently incapable
of performing his duties as partner;
iii. That a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of the business;
iv. That a partner, other than the partner suing willfully or persistently commits breach of
agreements relating to the management of 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;
v.
vi. 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 it to be sold if the recovery of arrears
of land revenue or of any dues recoverable as arrears of land revenue due by the partner;
or
vii. On any other ground which renders it just and equitable that the firm should be dissolved.
Summay
Notes
Review Questions
True or False
1.
A money lender getting a share in the profits of the firm for the sum lent is a partner in the
firm.
2.
3.
Test Questions
1.
What is parternship?
2.
3.
4.
5.
6.
7.
8.
Practical Problems
Notes
X, the lessee and manager of a theatre enters into an agreement for the performance of a play
at his theatre, with Y, the manager of a theatrical company. The terms of the agreement
provide that X would provide the theatre, pay for the lighting and pay bills and would
receive 60 per cent of the receipts, and Y would receive the remaining 40 per cent. State
whether the aforesaid relationship amounts to partnership between X and Y or not.
2.
A and B are partners of a trading firm. A borrows Rs. 40000 from C in the name of the firm
without the knowledge of B. A spends the amount for his own purpose. Can C hold B liable
for Rs. 40000?
3.
2. True
3. False
2.
3.
No, as all the parties interested in the matter of dispute are not ad-idem on the question of
reference, the reference is invalid and the award will not bind even the consenting parties.
2) 6.3
3) 6.7
4) 6.8
5) 6.9
References
Section 4 of the Indian Partnership Act, 1932.
2
Details of LLP can be obtained on Ministry of Company Affairs site http://www.nic.in/dca and
Institute of Company Affairs site www.icsi.edu.
Notes
Section
7
Free
competition
is worth
more to society
thanunderstand.
it costs.
Money
speaks sense
in a language
all nations
Oliver Wendell
Holmes
Aphra
Behn
STRUCTURE
7.1
Introduction
7.2
7.3
7.4
7.5
7.6
Penalties
7.7
Competition Advocacy
7.8
7.9
7.10 Miscelianeous
7.1 Introduction:
Notes
India has in the pursuit of globalization, responded to liberalization. . The natural corollary of this
is that the Indian market should be geared to face competition from within the country and outside.
The Monopolistic Restrictive Trade Practices Act, 1969 had become obsolete in certain respects in
the light of international economic development relating more particularly to competition laws.
There is a need to shift our focus from curbing monopolies to promoting competition. Competition
in business is like the blood in the body. As without blood, body will perish, similarly without
competition, business will languish and perish. Even giants like Microsoft was slapped a fine of
US$ 613 million by European Union competition authority for its antitrust (anti-competitive)
practices. Microsoft had also lost the Case in US, under anti-trust law. In India the Central
Government constituted a High Level Committee on competition Policy and Law (Under the
chairmanship of Mr. V.S. Raghavan). This committee submitted its report on 22.5.2000. Thereafter
the Central Government consulted all concerned including the trade and industry associations and
the general public. The Central Government after considering the suggestions of all concerned
parties enacted the Competition Act, 2002, hereinafter referred to as the Act. The Act received the
assent of the President on 13.1.2003. The Act was further extensivly amended in 2007.
Anti-competitive Agreements: The Act provides for prohibition of agreement, which causes
or is likely to cause an appreciable adverse effect on competition within India. In this
category come agreements relating to bid-rigging or collusive bidding, market - sharing,
control of source of production or services, tie-in agreements or exclusive supply or
distribution agreements. However the right of any person to restrain any infringements of
for protecting any of his rights under Intellectual Property Rights (like Copyright Act 1957,
Patents Act 1970 or such other IPR protection law) is protected.
b)
Abuse of Dominant position: No enterprise or group shall abuse its Dominant position. The
expression dominant position means a position of strength, enjoyed by an Enteiprise, in
the relevant market in India
c)
The parties jointly have a. In India assets > Rs.1000 crores or turnover>Rs.3000 crores
b. In India or outside India assets >500 million US$ including at least Rs. 500 crores in
India or turnover > 1500 million US$ including at least Rs.1500 crores in India.
ii. The group jointly havea. In India assets > Rs 4000 crores or turnover > Rs 12000 crores .
b. in India or outside India the assets >2billion US$ including at least Ks. 500 crores in
120 Self-Learning Material
India or turnover > 6 billion US$ including at least Rs. 1500 crores in India.
iii. Direct or indirect contract of acquisition if the acquirer has directly or indirectly control
over.
Notes
assets
>
Rs.
4000
crores
or
turnover
Any enterprise after merger/amalgamation a. In India assets > Rs. 1000 crores or turnover > Rs. 3000 crores.
b. In India or outside India assets > 500 million US$ including at least Rs. 500 crores in
India or turnover > 6 billion US$ including at least Rs. 1500 crores in India.
Note:1.
Any person/enterprise entering into a combination shall give notice to the Competition
Commission of India (CCI) within 30 days of approval of the proposal by its board of
directors or execution of any agreement or other document for execution.
2.
No combination shall come into effect until 210 days have passed from the day on
which the notice has been given to CCI, which may deal with the notice in accordance
with the Act.
Establishment of Competition Commission (CCI): The Act provides for the establishment
of the CCI which shall consist of the chairperson and not less than 2 and not more than 6
members, to be appointed by the Central Government. Their term shall be of 5 years and are
eligible for re-appointment. Central Government may appoint a Director General for assisting
CCI.
b)
Duties of C.C.I.:
It shall be the duty of CCI:i.
d)
To make inquiries into certain agreements and dominant position of enterprise and
about combinations.
Procedure for Inquiry: C.C.I, can direct the Director General (D.G.) to investigate, if primafacie case exists. If there is no prima-facie case, the matter shall be closed D.G. after inquiry
shall submit the report to C.C.I., who shall send the report to the parties, Central Government
or State Government. If DGs report says no contravention, then the complainant or the
relevant authorities shall be given an opportunity to rebut DGs findings. C.C.I, can dismiss
or order further enquiry. No enquiry shall take place after the expiiy of 1 year from the date
on which combination has taken effect.
Powers of CCI: After inquiring into agreements or abuse of dominant position CCI can pass
appropriate orders. It can order division of enterprise enjoying dominant position. CCI has
powers to regulate its own procedure and to rectify its own orders and to make a reference to
the statutory authority. CCI has power to inquire into acts taking place outside India but
2.
What is abuse of
dominant position?
3.
What do you
understand by
combination?
4.
7.6 Penalties5
Some of the penalties under the Act are as under:
Note:i.
S. No.
6.
7.
Is opinion given by
CCI binding on
Central/State
Government.
Offences
Penalties
1.
2.
3.
4.
5.
Notes
Establishment of CAT: The Central Government shall establish CAT to hear and dispose of
appeals against any direction issued or decision made or order passed by CCI. CAT shall
also adjudicate on claims for compensation.
b.
Appeal to CAT: The Central or State Government, a local authority, enterprise or any person
aggrieved by any direction, decision or order of CCI may file an appeal to CAT, Appeal shall
be filed within 60 days of the receipt of the order/decision by the appellant, CAT should
dispose of the appeal within 6 months of its receipts.
c.
Composition of CAT: CAT shall consist of a chairperson and not more than two members.
The term of chairperson or a member of CAT is five years and they are eligible for reappointment.
d.
Procedure and Powers of CAT: CAT shall not be bound by the procedure laid down in the
Code of Civil Procedure. It shall be guided by the principles of natural justice, provisions of
the Act and rules made by the Central Government. CAT shall have power to regulate its
own procedure. CAT shall have the same powers as are vested in a civil court.
e.
Contravention of orders of CAT.: Any person contravening any order of CAT shall be liable
for a penalty upto Rs. 1 crore or imprisonment upto 3 years or both.
f.
7.10 Miscellaneous9
This part of the Act provides for:
a.
ii. Any agreement arising out of treaty, agreement or convention with any country.
iii. Any enterprise performing sovereign function.
b.
c.
The chairpersons and members of C.C.I., CAT, D.G., Secretary officers and employees are
public servants.
d.
e.
The Act to have over-riding effect. The application of other laws is not barred.
f.
g.
h.
i.
j.
Notes
All pending cases relating to Monopolistic Restrictive Trade Practices shall revert to C.C.i
and of Unfair Trade Practices (except some) to the National Commission under the Consumer
Protection Act, 1986.
Summary
The Competition Act, 2002
Competition is necessary for any business in India. The law regarding competition is contained in
the Competition Act, 2002 as amended in 2007. It extends to the whole of India except Jammu and
Kashmir. The Act prohibits anti-Competitive agreements, abuse of dominant position and regulates
combination by laying down monetary limits for acquisition by one or by a group in or outside
India. The Act also provides for the establishment of Competition Commission of India (CCI) and
its power and duties and the procedure for Inquiry to be conducted by the Director General. From
the orders of CCI, appeal can be filed to the competition Appellate Tribunal (CAT) and from its
orders in the Supreme Court of India. The Act provides for various offences like contravention of
orders of CCI, non furnishing of information on combination making false statements and the
punishment for them. There are provisions for finance, audit and accounts and some miscellaneous
aspects.
Review Questions
True or False
1.
2.
From the orders of the CAT appeal is made to the Supreme Court of India.
The Competition Commission of India (CCI) shall consist of members not more than:
a)
Two
b) Three
c) Five
d) Six
Test Questions
1.
2.
Discuss briefly the offences and penalties provided in the Competition Act, 2002.
3.
4.
5.
2. True
3. Two.
2) 7.3 (b)
3) 7.3 (c)
4) 7.4 (b)
5) 7.5
6) 7.6
7) 7.7
References
1
Notes
Notes
Highlights of
Information Technology
Act
Notes
Section
Money
speaks
sense inwhen
a language
understand.
Men keep
agreements
it is to all
thenations
advantage
of neither to break them.
Aphra
Behn
Salon
STRUCTURE
8.1
Introdution
8.2
8.3
Applicability.
8.4
8.5
Electronic Governance.
8.6
8.7
8.8
8.9
8.1 Introduction
Notes
Electronic commerce eliminates the need for paper based transactions, therefore to facilitate ecommerce there is a need for legal changes. The United Nations Commission on International
Trade Law (UNCITRAL) adopted the model law on e-commerce in 1996. The General Assembly
of the United Nations by its resolution No. A/RES/51/162 dated 30 January 1997, recommended
that all states should give favourable considerations to the said model law when they enact or revise
their law. Consequently, India enacted Information Technology Act, 2000 (hereinafter referred to
as the Act) which came into force on 17-10-2000.
8.3 Applicability
The Act extends to the whole of India. It shall also apply to any violation or contravention of the
provisions of the Act done by any person any where in the world. The Act is not applicable to:
a)
b)
c)
d)
A will as defined in clause (h) of section 2 of the Indian Succession Act, 1925, including any
other testamentary disposition by whatever name called.
e)
Any contract for the sale or conveyance of immovable property or any interest in such
property.
f)
Any such class of documents or transactions as may be notified by the Central Government
in the Official Gazette.1
or printed form, then such requirement shall be deemed to have been satisfied if such
information or matter is:i.
Notes
c)
Use of electronic records and digital signatures in Government and its agencies.5
This is permitted for filing of any records, issue, grant of licenses/permit or receipt/ payment
of money, as may be prescribed by appropriate Government.
d)
e)
f)
Sections 6,7,8 not to confer right to insist document should be accepted in electronic form.8
g)
Acknowledgement of receipt.11
This can be given of electronic record in a particular form or by a particular method, if so
desired by the originator.
c)
12
The dispatch of an electronic record (E.R.) occurs when it enters a computer resource (C.R.)
outside the control of the originator.The time of receipt of an E.R. shall be determined:
i.
If the addressee has designated a C.R. for the purpose of receiving E.R., when
E.R. enters designated C.R. or when E.R. is retrieved by the addressee.
ii. If the addressee has not designated a C.R. along with specified timings, if any,
receipt occurs when the E.R. enters the C.R. of the addressee.
1.
records authenticated?
2.
Are digital
signatures legally
recognised?
3.
What is a secure
digital signature?
13
Secure E.R.
Where any security procedure has been applied to an E.R. at a specified point of time, then
such record shall be deemed to be a secure E.R. from such point of time to the time of
verification.
Notes
b)
c)
Security Procedure.15
The central government shall prescribe the security procedure having regard to commercial
circumstances prevailing at the time when the procedure was used.
Generating key pair (private and public) by applying the security procedure.
b)
c)
Penalties for damage to computer, computer system etc. upto Rs. 1 crore and for failure to
furnish information, return etc. upto Rs. 1.5 lakhs.
b)
8.13 Offences21
a)
130 Self-Learning Material
Offences and the punishment provided can be summarised in the following table:
S. No.
Offences
Punishment
Imprisonment
Term upto
Fine upto
Notes
1.
3 years
2 lakhs
2.
3 years
2 lakhs
3.
Publishing of Information
which is obscene in
electronic form.
Failure to comply with the
orders of the Controller.
5 years
1 lakh
3 years
2 lakhs
5.
7 years
NIL
6.
Securing access to a
protected system.
10 years
No Limit
7.
Misrepresentation or
suppression of fact.
2 years
1 lakh
8.
Breach of confidentiality
and piracy, publishing
false or fraudulent DSC.
2 years
1 lakh
4.
b)
Extra-territorial jurisdiction - The provisions of the Act shall apply also to any offence
committee outside India by any person irrespective of his nationality.
c)
Confiscation - Any computer, floppies, compact discs, tape drive or any other accessories
related thereto, in respect of which any contravention has been committed shall be liable to
confiscation.
d)
Penalties or confiscation not to interfere with other punishments provided in any other law.
e)
Power to investigate offences - This power is vested with police officer not below the rank
of Deputy Superintendent of Police.
Network service provider shall not be liable if the offence or contravention was committed without
his knowledge or that he had exercised all due diligence to prevent the commission of such offence
or contravention.
5.
8.15 Miscellaneous23
This portion of the Act deals with miscellaneous subjects like power to make rules and regulations
and amendments to Indian Penal Code I860, Indian Evidence Act 1872, Bankers Books Evidence
Act 1891, and the Reserve Bank of India Act, 1934. By an amendment made in 2002 the Act shall
apply to electronic cheques and truncated cheques.24
6.
Summary
Notes
Review Questions
True or False
1.
A contravention of Information Technology Act by any person any where in the world is
punishable under the Act.
2.
The digital signatures are generated by one key and not by a set of keys.
3.
Central Government
b)
State Government
c)
Certifying Authority
d)
Income Tax
d)
Trust
Test Questions
1.
Digital signature
b) Electronic governance
2.
Explain the provisions on penalties, adjudication and offences of the Information Technology
Act.
3.
Explain the areas where Information Technology Act 2000 is not applicable.
4.
5.
Notes
2. False 3. False
2. d
6) 8.13.e
References
1
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
Notes
Important Features of
Copyright Law
Notes
Section
9
Thoughts,
emotions
demand
legal
recognition.
Money speaks
sense and
in a sensations
language all
nations
understand.
Louis
D. Brandeis
Aphra
Behn
STRUCTURE
9.1
Introduction
9.2
9.3
9.4
Licences
9.5
Copyright Societies
9.6
9.7
International Copyright
9.8
Registration of Copyright
9.9
Infringement of Copyright
What is a Copyright
Board?
2.
3.
4.
9.12 Miscellaneous
9.13 Some Cases on Copyright
9.1 Introduction
Notes
Copyright is about the right to copy. It is based on the principle that people who produce creative
work like poems, novels have a right to decide how their works can be reproduced. It is relevant
to mention that copyright is not related to ideas, but to their expression. Law relating to copyright
is contained in the Copyright Act, 1957 (referred to as the Act). It extends to the whole of India
and came into force on 21-11958. The Act has been amended in 1983, 1984, 1992, 1994 and 1999
primarily to bring the Indian law in conformity with the international conventions like Bern
Convention, Universal Copyright Convention and agreements ofWorld Trade Organization relating
to Trade Related Intellectual Property Rights (TRIPS).
What is a Copyright
Board?
2.
3.
4.
Basically for a copyright, there should be a work and not a mere idea. Idea does not have
a copyright protection. To claim copyright, the work should be in a material form which
involves the ideas translated. - Jeffreys vs Bosey (1854, 4 HLC 815).
Case 2 The term literary means anything written or printed such as books on various subjects,
serious and non-serious, novels, drama, poetry, anthology, critique, excerpts with comments,
etc. What is material is that there should be some originality and skill in the work turned
out. Thus the term literary is not confined to works of literature in the commonly understood
sense but would include of what is expressed in writing whether they have inherent or
latent literary merit or not. - Agarwal Publishing House vs Board of Higher Secondary and Intermediate
Education, (UP AIR 1967 (All) 91).
Case 3 It is the original inventive literary work that is entitled to protection under the Act. The
word original does not mean that the work must be the expression or inventive thought.
Orginality relates to the expression of thought but the Act does not require that the expression
must be in original or other form. The work must not be copied from another work, that is,
it should not originate from another. - MacMillan & Co. vs Cooper, (AIR 1924 PC 75).
Notes
Case 4 Copyright exists in computer programes (software) and the written requests, punched cards,
magnetic tapes or disks as the case may be. In a television programme also, there exists a
copyright. The Tambola ticket books carry copyright protection as it consists of tables and
numbers of skill and labour as has been bestowed. In the case of question papers, they
enjoy copyright. - Jagdish Prasad vs Parameswar Prasad, (AIR 1966 Pat 33).
Case 5 An exhibition of a film in a television through video tape in which the cinematograph film
is recorded will be the subject matter of copyright protection. A VCR which is used for
playing pre-recorded cassettes of movies similarly will also be subject - matter of copyrights
protection. In respect of cinematographic films the word original is missing in the section.
In a film, a particular actor cannot claim any copyright and hence the actors performance
is not copyrighted. In other words, a cine artiste in a film does not have a copyright protection.
- International Films vs Dev Anand, (AIR 1979, Bom 17).
b)
Meaning of Copyright: The word Copyright means the exclusive right in all the works in
which the copyright subsists (See paragraph 9.3.3 (a))
c)
Ownership of Copyright: The author of the work is the first owner of the copyright therein.
This is, however, subject to some exceptions like an employer can have the ownership on a
work produced by an author, under a Contract of Service or apprenticeship or the ownership
of a computer related work vests in one who pays for it.
d)
Assignment of Copyright: The owner of the copyright may assign to any person the copyright,
either wholly or partially, and either generally or subject to limitation and either for the
whole term of the copyright or any part thereof. The assignment is valid only when it is in
writing.
e)
Term of Copyright:
i.
The term of the copyright in any literary, dramatic, musical or artistic work
(other than a photograph) is:
a. If published with in the lifetime of the author until 60 years from the beginning
of the calendar year next following the year in which the author dies.
b. If published anonymously or pseudonymously, until 60 years from the
beginning of the calendar year next following the year in which the work is
first published. If, however, the identity of the author is disclosed before the
expiry of the said period, then copyright shall subsist as per a above.
c. In posthumous works, until 60 years from the beginning of the calendar year
next following the year in which the work is first published.
9.4 Licences3
Notes
The owner of the copyright in any existing work or the prospective owner of the copyright in any
future work may grant any interest in the right by license in writing signed by him or by his duly
authorised agent. License to produce and publish a translation of a literary or dramatic work in
any language may be applied to the Copyright Board, after a period of 7 years from the first
publication of the work. A License to translate foreign literary or dramatic work, may be applied
after three years from its publication.
Case Many a time there arises a contentious issue whether a deed is one of assignment of copyright or
licensing of copyright may arise. Much of the confusion is because of the manner of drafting the
deed. Particularly whether there is an exclusive licence or a partial licence or non-exclusive licence
or a partial assignment or otherwise of the copyright the problem of interpretation becomes
necessary in the context of the intention expressed in the deed but where the agreement contain
express words indicating a licence or a partial assignment not much difference would areise.
Many times where the agreement provides for royalties for sharing of profits in respect of literary
works, the inference that could be drawn is that there is no assignment of the copyright. Similarly,
where the publishers have been conferred exclusive licence to publish and sell and the authors are
under obligation to revise the work and keep it up-to-date, there would be in law an inference that
there is no assignment of the copyright whatsoever. Where payment of royalty is specified in the
agreement the preponderance of the conclusion that there is no assignment would be right in law.
- Sundaram vs Rattan Prakashan Mandir, (AIR 1983 Del 461).
Case -
Notes
The copyright exists whether the registration is done or not, and the registration is merely a piece
of evidence as to when a certain author started claiming copyrights in some artistic or some other
work. - Glaxo Operations UK Ltd. vs Samrat Pharmaceuticals (AIR 1984 Del 265).
b)
Criticism or review.
c)
Computer programme - making copies for the purpose for which it was supplied or make
backup copies.
d)
e)
f)
In any work prepared by the Secretariat of a Legislature exclusively for the use of its
members.
g)
h)
i)
Along with non-copyright matter, for the bonafide use of educational institutions.
j)
k)
l)
Any bonafide religious ceremony held by the Central or State Government or any Local
Authority.
Case Mr. Anand wrote a play entitled Hum Hindustani in 1953. The play was enacted in the next few
years, in Delhi and Calcutta. It got good reviews in newspapers like the Indian Express, Hindustan
Times, The Times of India and other papers. The play was based on the theme of provincialism and
its baneful and divisive effects on the society. A film maker, Mr. Mohan Sehgal, become interested
in making a film based on the play. He heard the play from Mr. Anand, in his office. Mr. Mohan did
not receive any further communication from Mr. Sehgal. Thereafter, Mr. Sehgal announced the
production of a film New Delhi. The picture was released in Delhi in September, 1956. From
comments in the press, Mr. Anand felt that the film was very much like his play, Hum Hindustani.
Thereafter, Mr. Anand himself saw the picture and felt that the film was entirely based on his play.
He felt that Mr. Sehgal had dishonestly imitated the play in the film and violated his copyright. He,
therefore, moved the court and the case finally came before the Supreme Court.
The opposite party (Delux Films) claimed that they had communicated to Mr. Anand that the play
might have been all right for the amateur stage, but it was too inadequate for the purposes of
making a full length commercial motion picture. The key argument of the opposite party was that
there could be no copyright on the subject or idea of provincialism. Any one can adopt it in his own
way. They claimed that the motion picture was quite different from the play. Hum Hindustani in
its content, spirit and climax. Some similarities could be explained by the fact that both were based
Self-Learning Material 139
Thus the position appears to be that an idea, principle, theme, or subject matter or historical or
legendary facts being common property, cannot be the subject matter of copyright of a particular
person. It is always open to any person to choose an idea as a subject matter and develop it in his
own manner and give expression to the idea by treating it differently from others. Where two
writers write on the same subject, similarities are bound to occur because the central idea of both
are the same but the similarities or coincidences by themselves cannot lead to an irressistible inference
of plagiarism or piracy. The court found that there had been no copyright violation in that case. - R.
G. Anand vs M/s Delux Films and others (AIR 1978 SC 1613).
9.11 Offences10
Any infringement of copyright is punishable with imprisonment of not less than 6 months but may
extend to 3 years or fine not less than Rs. 50 thousand but may extend to Rs. 2 lakhs. For infringement
of copyright in computer programme punishment provided is imprisonment of not less than seven
days but may extend to 3 years and fine of not less than Rs. 50 thousand but may extend to Rs. 2
lakh. If the infringement is not for gain or commercial purpose punishment can be less. If any
person is aggrieved by any order made by the court, then he can file appeal within 30 days of the
date of the order to the higher appellate court.
9.12 Miscellaneous11
This provides for the Central Government to make rules and also that all the actions taken by
officials under the Act, if done in goods faith are protected.
a)
Ratnasagar Pvt. Ltd. v. Trisea Publications and others (citation: (1997) 24 CLA (SNR) 1
Delhi) Ratnasagar Pvt. Ltd. had published a book titled Living Science and claimed rights
of literary work in that book. Trisea Publications brought out another book titled Unique
Science. Ratnasagar Pvt. Ltd. urged that their copyright has been infringed by Trisea
Publications and prayed for an injunction which was granted.
b)
Nagoti Venkataramana Case (Citation: 1996, (6) Scale 417 and 1996, (6) Sec 409)Nagoti
Venkataramana was owning a Video parlour named Video City in Andhra Pradesh. He
was sentenced to 3 months R.I. and fine of Rs. 3000 for keeping 90 pirated Telugu, Hindi
and English movies video cassettes. He used to give these pirated cassettes to customers on
hire. On the point that the police should have produced the evidence of the copyright owners,
the Supreme Court ruled that It is unnecessary for the prosecution to track on and trace out
the owner of the copyright to come and adduce evidence of infringement of the copyright.
c)
Phonographic Performance Ltd. (PPL) (As reported in the Times of India, Delhi edition
1st Jan. 2004). PPL is a copyright society registered under the Copyright Act. It is the sole
authority to administer the broadcasting, telecasting and public performance rights and to
collect licence fees on behalf of the music industry. Music Companies are members of PPL
and have assigned it the right to issue licenses to event organisers for playing music at
public performance. In a petition filed by PPL in Bombay High Court against the hotels of
Mumbai for not paying license fee to PPL for playing music in respect of the companies
with PPL on New years eve parties, the High Court of Bombay directed hotels of Mumbai
Notes
Summary
Copyright
The law relating to Copyright is contained in the Copyright Act, 1957. The Indian law is in
conformity with our obligations in International Conventions. The Registrar of Copyright controls
Copyright office and above him is the Copyright Board. The copyright subsits in 1 - original
literary, dramatic, musical and artistic works, 2 - cinematograph films, and 3 - sound recordings.
Copyright means the exclusive right in all the works in which the copyright subsists. The author of
the work is the first owner of the Copyright therein. The owner of the copyright may assign to any
person the copyright, either partially or wholly. The term of the copyright in any literary, dramatic,
musical or artistic work is 60 years. The term of broadcasting reproduction right is 25 years and of
performers right in 50 years. The Act provides for international copyright and for optional
registration of copyright. Some of the acts which are considered as no infringement of copyright
are, a - private use including research, b - criticism or review, c - making back-up copies of
computer programme, d - reporting current events, e -for judicial proceedings, f- work prepared
by secretariat of a legislature for its members, g - copy made in accordance with law, h - reading
in public of any extract from a published literary or dramatic work, i - for the bonafide use of
educational institutions, j - in the course of instructions or as a part in examination, k - recording
to be heard in an enclosed room, or l - any bonafide religious ceremony held by the Central, State
or Local Government. The infringement of copyright gives rise to civil remedies such as injunction
or damages and penalties of imprisonment upto 3 years and fine upto Rs. 2 lakhs.
Review Questions
True or False
1.
2.
Granting license of copyright can only be done to a copyright society registered by the
Central Government.
3.
4.
2.
b. 40 years
c. 30 years
d. 20 years
d. 80 years
Test Questions
Notes
1.
2.
How infringements of Copyright are dealt under the copyright Act, 1957? What acts are
considered as no infringement of copyright?
3.
2. True 3. True
4. True
2. c
2) 9.3 c
3) 9.3 e
4) 9.9 c
References
Sections 9 to 12 of the Copyright Act, 1957.
Sections 13 to 29 of the Copyright Act, 1957.
3
Sections 30 to 32 B of the Copyright Act, 1957.
4
Sections 33 to 36 A of the Copyright Act, 1957.
5
Sections 37 to 39 A of the Copyright Act, 1957.
6
Sections 40 to 43 of the Copyright Act, 1957.
7
Sections 44 to 50 A of the Copyright Act, 1957.
8
Sections 51 to 53 A of the Copyright Act, 1957.
9
Sections 54 to 62 of the Copyright Act, 1957.
10
Sections 63 to 73 of the Copyright Act, 1957.
11
Sections 74 to 79 of the Copyright Act, 1957.
1
2
Important Aspects of
Patent Law
Notes
Section
10
Art and law are as different as chalk from cheese. But the dreamer also
needs support.
Money speaks sense in a language all nations understand.
Anonymous
Aphra Behn
STRUCTURE
10.1 Introduction
10.2 What is a Patent?
10.3 Inventions not Patentable
10.4. Application for Patents
10.5 Publication and Examination of Application
10.6 Oppositoin Proceedings to Grant of Patents
10.7 Provisions for Secrecy of Certain Inventions
10.8 Grant of Patents and Rights Conferred Thereby
10.9 Patents of Addition
10.10 Amendment of Applications and Specifications
10.11 Restoration of Lapsed Patents
10.12 Surrender and Revocation of Patents
2. Inventions
Who makes
the
10.16 Use of Inventions for Purposes of Government and Acquisition of
by Central
applications
for
Government
patents?
10.17 Suits Concerning Infringement of Patents
10.18 Miscellaneous
Self-Learning Material 143
10.1 Introduction
Notes
The fundamental principle of patent law is that a patent is granted only for an invention which must
be new and useful. That is to say, it must have novelty and utility. It is essential for the validity of a
patent that it must be the inventors own creation as opposed to mere verification of what was
already known before the date of the patent. Mere collection of more than one integers or things,
not involving the exercise of any inventive faculty does not qualify for the grant of a patent. The
law relating to patents is contained in the Patents Act, 1970, hereinafter referred to as the Act. It
extends to the whole of India. The Act describes the procedure for the grant of patent and protects
the rights of the patentee against infringement. The Act came into force from 21-91970. It has been
amended in 1999, 2002 and again in 2005.
Frivolous inventions or which claim anything obvious or contrary to well established natural
laws.
b)
Inventions which are contrary to public order or morality, or which caused serious prejudice
to human, animal or plant life or health or to the environment.
c)
Mere discovery of a new form of a known substance which does not result in the enhancement
of the known efficacy of that substance.
d)
Mere discovery of any new property or mere use of a known process, machine or apparatus
unless such known process results in a new product or employs at least one new reactant.
e)
f)
g)
h)
A presentation of information.
i)
j)
k)
Case Mere arrangement or rearrangement or duplication of a known device cannot be patented. - Standipack
Pvt. Ltd. vs Oswal Trading Co. Ltd. ((19) PTC 479 (Del)).
b)
Assignee of (a)
c)
Notes
Every application for a patent shall be for one invention only and on a prescribed form. It shall be
filed in the patent office with provisional or complete specifications. The Act also provides for
international application under the Patent Cooperation Treaty, for a patent.
Case Prior registration of patent in another country prima facie constitutes prior publication and is liable
to be rejected. - Lintech Electronics (P) Ltd. vs Marvel Engineering Co. (1995 (35) DRJ 11).
Grant of Patent: Where the application for the patent is accepted, then the Controller shall
grant the patent. The date of the grant of patent is entered in the register when the patent is
granted, the application, specification and other documents related to the patent shall be
open for public inspection.
3.
b)
Date of Patent: Every patent shall be dated as of the date on which the application for patent
was filed.
4.
c)
Rights of Patentee: The patentee has exclusive right to prevent third parties from the act of
making, using, selling or importing for these purposes the patented product in India.
5.
d)
Term of Patent: The term of every patent shall be 20 years from the date of filing of the
application for the patent.
Working of Patents: The patents are granted to encourage inventions, and to make the benefit
of the patented inventions available at reasonably affordable prices to the public. They are
not granted merely to enable patentees to enjoy a monopoly. The patents granted do not
impede protection of public health and nutrition. The Central Government is working on a
fast track solution to ease the burden of ever growing patent applications in India. Once the
system is in place, the procedure of completing a patent application will take six months to
five years. At present the government needs at least 11 years to handle one patent application.
Till a couple of years ago, only 4000 patent applications were filed annually. In 2004-05,
there were about 17000 applications which further went upto 25000 during 2005-06.16
b)
Compulsory Licenses and Revocation: At any time after the expiration of 3 years from the
date of the grant of a patent, any person interested may make an application to the Controller
for the grant of compulsory license on patent. The Controller, may grant a license on such
terms as he may deem fit. The Controller may grant compulsory license for export of patented
pharmaceutical products in certain exceptional circumstances like public health. Any license
of the patent can also be terminated by the Controller.
Notes
Case Where the defendant neither claims to be the owner of the patent nor has it filed any petition or
counter claim, it cannot plead that the plaintiff has no locus standi to institute proceeding for
infringement of patent, merely raising the plea that the plaintiffs registration is improper. - Schnieder
Electric Industries SA vs Telemecaniqne and Controls (I) Ltd. ((IA no 8522) 2000 (20) PTC 20 (Del)).
10.18 Miscellaneous
The Act also provides for:
a)
b)
Penalties.20
c)
Patent agents.21
d)
International arrangements.22
e)
f)
7.
Summary
Notes
Patent
The law relating to patents is contained in the Patents Act, 1970. Patent is granted only for inventions
which are new and useful. Patent is a grant from the government, which confers on the grantee, for
a limited term, the exclusive privilege of making, selling and using an invention and also authorising
others to do so. Some of the inventions which are not patentable are 1 - frivolous, 2 - contrary to
public order or morality, 3 - mere discovery of any new property or a known substance, 4 - methods
of agriculture or horticulture, 5 - mathematical or business methods, 6 - method of playing games,
7 - presentation of information, 8 - topography of integrated circuits, 9 - which in effect is traditional
knowledge, and 10 - relating to atomic energy. A patent application can be made by true and first
inventor, his assignee or their legal representative. Every application shall be for one invention and
accompanied by provisional or complete specifications. Every application shall be published and
sent to an examiner for a report. If any opposition to the grant of patent is made, it shall be decided
by the controller. If the invention is relevant for defense purposes, then the Central Government
may give directions as to prohibiting the publication of information. The term of the patent shall be
20 years from the date of filing of the application for the patent. The patentee has exclusive right to
prevent third parties from making, using or importing the patented product in India. The Controller
may grant the patent for the improvements or modification as a patent of addition.
The Controller has powers 1 - to allow the application for the patent or complete specifications, 2
- for the restoration of a lapsed patent and 3 - to allow surrender or to revoke the patent. A register
of patent is kept in the patent office. All the particulars regarding the patent are entered in the
register. The register is prima-facie evidence of entries made in the register. The head office of the
patent office is at Kolkata and branch offices are at Mumbai, New Delhi and Chennai. The Central
Government may use the invention for government purposes and also can acquire an invention for
a public purpose for adequate compensation. For any infringement of patent, the court may grant
injunction, seizure of goods or damages.
Review Questions
True or False
1.
2.
The Central Government can acquire a patent for public purpose without paying any
compensation.
3.
4.
The Controller is empowered to allow the application for the patent to be amended.
2.
c. Mumbai
d. Kolkata
Test Questions
Notes
1.
What is a patent?
2.
3.
What inventions can not be patented under the Patents Act, 1970?
2. False 3. True
4. True
2. D
2) 10.4
3) 10.7
4) 10.8 c
5) 10.8 d
6) 10.9
7) 10.11
References
1
10
11
12
13
14
Ajay Dua, Secretary, Department of Industrial Policy and Promotion as told to Economic Times
and published in Economic Times (Delhi edition) dated 9th April 2006.
15
Section 82 to 94.
16
17
18
19
20
21
22
Notes
23
24
Introduction to FEMA
Notes
Section
11
Obey the law, whoever you be that made the law
Money speaks sense in a language all nations understand.
STRUCTURE
Pittacus
Aphra Behn
11.1 Introduction
11.2 Extent and Application
11.3 Regulation and Management of Foreign Exchange
11.4. Authorised Person
11.5 Contravention and Penalties
11.6 Adjucdication and Appeal
11.7 Directorate of Enforcement
11.8 Miscellaneous
11.1 Introduction
Notes
The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign Exchange Regulation
Act, 1972 (FERA). FERA aimed at having stringent controls to conserve Indias foreign exchange.
FERA was amended in 1993 to bring about certain changes, as a result of introduction of economic
reforms and liberalisation of the Indian economy. It was soon realized that FERA has outlived its
utility and was replaced by FEMA. FEMA has been brought into force with effect from1-6-2000.1
The objective of FEMA is to facilitate external trade and payments and to promote the orderly
development and maintenance of foreign exchange market in India.
b)
c)
d)
is quantifiable otherwise upto Rs. 2 lakhs. If the contravention continues, the penalty of Rs.
500 per day shall be imposed. Any adjudicating authority, may in addition to the penalty,
direct confiscation of money, security, currency or property involved.
b)
Notes
Adjudicating Authority:
The central government is empowered to appoint Adjudicating Authorities (A.A) for holding
inquiries in their respective jurisdiction on a complaint made in writing. The A.A. has
powers of a civil court. All complaints are to be disposed off finally within one year, otherwise
reasons are to be given in writing.
b)
c)
Appellate Tribunal:
The central government can establish Appellate Tribunal to hear appeals against the orders
of A.A. and Special Director (Appeals). The person appealing has to deposit the levied
penalty. The appeal is to be filed within 45 days of the receipt of the order. It is to be
disposed off within 180 days, otherwise reasons in writing are to be given. The Appellate
Tribunal shall have the powers of the civil court. The Appellate Tribunal and the Special
Director (Appeals) shall not be bound by the procedure laid down by the Code of Civil
Procedure. They shall be guided by the principles of natural justice and shall have powers
to lay down their own procedure. No civil court shall have jurisdiction in respect of matters
to be dealt with by A.A., Special Director (Appeals) or Appellate Tribunal. From the orders
of the Appellate Tribunal, appeal can be filed in the High Court within 60 days.
2.
3.
4.
5.
11.8 Miscellaneous9
Under this chapter FEMA provides for:
a)
b)
Power of central government to give directions and suspend the operations of this Act.
c)
Death or insolvency shall not abate the action. Liability is only to the extent of inheritance
Self-Learning Material 153
d)
e)
Contravention by companies.
f)
Summary
The Foreign Exchange Management Act, 1999
The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign Exchange Regulation
Act, 1949. FEMA extends to the whole of India and to all branches, offices outside India owned
and controlled by person resident in India. Dealing in foreign exchange can be done only by
authorised persons who are appointed by the Reserve Bank of India. Current account transactions
are fully convertible whereas there are some restrictions in respect of capital account transactions.
For any contravention of the Act, the penalty is thrice the sum involved when the amount is
quantifiable otherwise upto Rs. 2 lakhs. In addition to the penalty, Adjudicating Authority (AA)
may order confiscation of money, security or property involved. If penalty is not paid within 90
days, a person is liable for civil imprisonment. If the default in payment of penalty exceeds Rs. 1
crore detention in civil prison shall be upto 3 years and in other case upto 6 months. Person is
released from detention if amount is subsequently paid. A.A. is appointed by the Central Government.
A.A is required to dispose of complaint within one year. Appeal against the orders of AA is made to
the Special Director (Appeals) within 45 days of the receipt of the order. Thereafter appeal can be
made to Appellate Tribunal established by the central government. The Appellate Tribunal is required
to dispose of appeals within 180 days. No civil court shall have jurisdiction. From the orders of
Appellate Tribunal, appeal can be filed in the High Court within 60 days. The central government
shall establish a Directorate of Enforcement with a Director and other officers. These officers
investigate the matter under the Act and have powers like income tax authorities under the Income
Tax Act, 1961.
Review Questions
True or False
1.
2.
A person resident in India can purchase a house in Singapore only after getting
permission from the Reserve Bank of India.
3.
2.
Central Government
b)
State Government
c)
Authorised person
d)
b)
Adjudicating Authority
c)
d)
Central Government
Test Questions
1.
How is regulation and management of foreign exchange done under the Foreign Exchange
Management Act?
2.
3.
Discuss briefly the provisions ofcontravention, penalties, adjudication and appeal in the
Foreign Exchange Management Act?
Notes
2. True 3. False
2. C
2) 11.2
3) 11.3.b
4) 11.3 d
5) 11.7
References
1
Sections 3 to 9 of FEMA.
Sections 10 to 12 of FEMA.
Sections 13 to 15 of FEMA.
Sections 16 to 35 of FEMA.
Sections 36 to 38 of FEMA.
Sections 39 to 49 of FEMA.
Notes
Company Law
Notes
Section
12
Corporations cannot commit treason, nor be outlawed, nor excommunicated,
for they have no souls
Money speaks sense in a language all nations understand.
Sir Edward Coke
Aphra Behn
STRUCTURE
12.1 Meaning and Nature of a Company
12.2 Formation and Incorporation of a Company
12.3 Memorandum of Association
12.4. Articles of Association
12.5 Prospectus
12.6 Membership
12.7 Share and Share Capital
12.8 Borrowings, Loans, Debentures and Investments
12.9 Company Management and Administration
12.10 Company Meetings and Resolutions
12.11 Accounts and Audit
Check Your
Your Progress
Progress
Check
1.
12.13 Compromises, Arrangements, Reconstruction and Amalgamation1.
2.
2.
12.14 Winding Up of a Company
12.15 Corporate Governance
3.
3.
Define a company.
Define a company.
What do you
What do you
understand by an
understand by an
Artificial Legal
Artificial Legal
Person?
Person?
What is a Common
What is a Common
Seal?
Seal?
b)
c)
As per Prof. Haney, A company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal.
Incorporated Association: The company must be incorporated or registered under the Act.
b)
Artificial Legal Person: The company, being a juristic person, does not possess the body of
a natural being. It exists only in contemplation of law.
c)
Separate Legal Entity: Unlike partnership, the company is distinct from the persons who
constitute it. In the famous case of Salomon V. Saloman Co. Ltd1., Salomon was leather
merchant. He converted his business into a limited company -Salomon and Co. Ltd. The
company so formed consisted of Salomon, his wife and five of his children as members.
The company purchased the business of Salomon for 39,000, the purchase consideration
was paid in terms of 10,000 debenture conferring a charge over the companys assets,
20,000 in fully paid 1 share each and the balance in cash. The company within a year ran
into difficulties and liquidation proceedings commenced. The assets of the company were
not even sufficient to discharge the debentures (held entirely by Salomon himself). And
nothing was left for the unsecured creditors. It was held by the House of Lords that the
company was validly constituted. The business belonged to the company and not to Salomon.1
d)
Perpetual Succession: A company being an artificial person does not die. Its life is not
Define a company.
2.
What do you
understand by an,
Artificial Legal
Person.
3.
What is a Common
Seal?
dependant on its members. Prof. Gower aptly puts that no hydrogen bomb could have
destroyed a company.
e)
Limited Liability: The members of a company are only liable to contribute towards payment
of its debts to a limited extent, e.g. in a company limited by shares, a members liability is
limited to the nominal value of the share. However, the Act provides for unlimited liability
company as well.
f)
Transferable Shares: The companys shares are capable of being easily transferred. They
are traded in a stock exchange market.
g)
Common Seal: A company can be held bound by only those documents which bear its
signature. Common seal is the official signature of a company.
h)
Separate Property: Share holders are not, as per law, part owners of the company or its
property. A company being a legal person can hold and own property in its own name.
i)
Capacity to Sue and Being Sued: A company, has a distinct legal personality and hence can
sue and being sued.
Notes
Chartered Companies: Like East India Company. This type of company is generally
not found in India presently.
ii. Statutory Companies: Which are created by a special Act like Life Insurance
Corporation, State Bank of India, Unit Trust of India, Reserve Bank of India.
iii. Registered Companies: Are companies registered under the Act.
b)
On the basis of Liability of Membersiv. Limited by Shares: Where the liability of the members of a company is limited to the
amount unpaid on the shares.2
v.
vi. Unlimited: Every member is liable for the debts of the company, as in an ordinary
partnership, in proportion to his interest in the company.4
c)
On the basis of Number of Membersvii. Private: Where the minimum number of member is two and maximum fifty.
viii. Public: Where the minimum number of member is seven and maximum number is
limited by number of shares.
d)
Government Companies: Means any company in which not less than 51% of the paid
up share capital is held by the central government and partly by one or more state
governments.5
ii. Foreign Company: Means a company incorporated outside India but having a place of
business in India.6
iii. Holding and Subsidiary Company7: These are relative terms. A company is a holding
company of another, if the other is its subsidiary. A company shall be deemed to be a
subsidiary of another if:
a.
b.
The other company holds more than half in nominal value of its equity share capital.
Self-Learning Material 159
c.
Notes
e)
Producer Companies8The companies (Amendment) Act, 2002, has introduced a new type of company known as
Producer Companies. Any ten or more individual producers or any two or more producer
institutions may form and incorporate a company as a producer company. This type of
company shall have special provisions regarding membership and voting rights and its
administration.
Private Company
Public Company
1.
2.
No restriction.
3.
Freely transferable.
4.
5.
6.
7.
Necessary.
8.
9.
10.
11.
Managerial remuneration no
restriction.
12.
Five members.
13.
Rs. 5 lakh.
14.
Not so exempted.
15.
16.
Must do so.
Notes
5.
What do you
understand by a
Under Statutory Provisions: The advantage of distinct entity and limited liability may
not be allowed in certain circumstances. Such cases are:
i.
ii. Misrepresentation in Prospectus: In such a case, every director, promoter and every
other person, who authorises such issue of prospectus incurs liability towards those
who subscribed for shares on the faith of untrue statement.10
iii. Fraudulent Conduct of Business: During winding up of a company, when any business
of a company has been carried on with intent to defraud creditors of the company or
any other person, those who are knowingly parties to such conduct of business may, be
made personally liable.11
Foreign Company?
6.
iv. Failure to Return Application Money: When a company issues shares to the public,
and minimum subscription as stated in the prospectus has not been received within
sixty days of the closure of the issue, directors shall be personally liable to return the
money with interest @ 15% per annum, in case application money is not repaid within
10 days of the closing of issue.12
v.
Mis-description of Name: When the companys name is not mentioned, or not properly
mentioned in any document, then any person signing such document shall be personally
liable.13
vi. Non-payment of Tax: Under the Income Tax Act, where any private company is wound
up and any tax arrears could not be recovered, then every director of such a company
shall be jointly and severally liable for payment of tax.
vii. Liability of 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.
viii. Liability of Promoters For Pre-incorporation Contracts: Prior to passing of Specific
Relief Act, 1963, would not be borne by the company and promoters are liable for
such contracts.
ix. Directors With Unlimited Liability: Shall be personally responsible for the debts of
the company.
x.
b)
Holding-subsidiary Company: Every holding company shall attach to its balance sheet
copies of balance sheet, profit and loss account, directors reports and auditors report
in respect of each subsidiary company.
Under Judicial Interpretations: It is difficult to deal with all the cases in which courts have
lifted or might lift the corporate veil. Some such cases are:
i.
For Determining the Enemy Character of a Company: Famous case establishing this
point is Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain)
Ltd.14 The brief facts of this case are that a company was incorporated in London for
Self-Learning Material 161
Notes
ii. For the Benefit of Revenue: In Sir Dinshaw Maneckjee Petil, Re,15 An assessee was
receiving huge income by way of dividend and interest income, transferred his
investments to four private companies formed for the purpose of reducing his tax
liability. These companies transferred the income to D as a pretended loan. Held, the
companies were formed by D purely and simply as a means of avoiding tax obligation
and the companies were nothing more than the assessee himself.
iii. For Prevention of Fraud and Improper Conduct: In Jones v. Lipman16 L agreed to sell
a certain land to J. He subsequently changed his mind and to avoid the specific
performance of the contract, he sold it to a company which was formed specifically for
this purpose. The company had L and a clerk of his solicitors as the only members. J
brought the action for specific performance against L and the company. The court
looked to the reality of the situation, ignored the transfer, and ordered that the company
should convey the land to J.
iv. Others: Like where company is used to avoid welfare legislation, or where company is
a mere sham or cloak. In Delhi Development Authority V. Skipper Construction
company (P) Ltd.17 the Supreme Court held that the fact that the director and members
of the family of Tejwant Singh had created several companies and these companies
were mere cloaks and that the device of incorporation was really a ploy adopted for
committing illegalities and / or to defraud people.
Promotion.
b)
Registration/Incorporation.
c)
Floatation/Raising of Capital.
d)
Commencement of Business.
12.2.2 Promotion
Promotion means the preliminary steps taken for the purpose of registration and floatation of the
company. Gerstenberg has defined the term promotion as the discovery of business opportunities
and the subsequent organization of fund, property and managerial ability into a business concern
for the purpose of making profits therefrom. Persons who perform the task of promotion are
called promoters. The word promoter has not been defined in the Act, although this term has been
used in various sections of the Act. Justice Cockburn described a promoter as one who under takes
to form a company with reference to a given project and to set it going, and who takes the necessary
steps to accomplish that purpose.18 L.J. Bowen observed that the term promoter is a term not of
law but of business, usefully summing up in a single word-promotion, a number of business operations
familiar to the commercial world by which a company is brought into existence.19
162 Self-Learning Material
The promoter of the company will submit the following documents with the Registrar of Companies
for the registration of the company:
a)
b)
c)
A list of persons who have consented to act as directors of the proposed company.
d)
e)
The Registrar of Companies is to allot a Corporate Identity Number (CIN) to each company
registered on or after November 1, 2000. After scrutiny of all these documents and if they are in
order, the Registrar of Companies shall issue a certificate of incorporation. This certificate of
incorporation given by the Registrar shall be conclusive evidence that all the requirements of the
Act have been complied with. In the case of Jubilee Cotton Mills Ltd v. Lewis20, the Registrar
issued a certificate of incorporation on January 8, but dated it January 6th, which was the date he
received the documents. On January 6th the company made an allotment of shares to Lewis. It
was held that the certificate was conclusive evidence of incorporation on Jan 6th and that the
allotment was not void on the ground that it was made before the company was incorporated.
b)
Deliver a 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.
Where the company has issued a prospectus it has to satisfy the following conditions:
i.
ii. Every director of the company has paid on his shares in cash, a proportion equal to the
proportion payable on application and allotment on the shares payable in cash.
iii. A statutory declaration duly verified by one of the directors or the secretary in the
prescribed form, that the above conditions have been complied with, is filed with the
Registrar. When the company has complied with the aforesaid conditions, the Registrar
will issue a certificate to commence business.
b)
Where the company has not issued a prospectue - it has to satisfy the following conditions:
i.
ii. Every director of the company has paid on his shares in cash, a proportion equal to the
proportion payable on application and allotment on the shares payable in cash.
7.
8.
Who is a promoter?
9.
Who allots a
Corporate Identity
Number?
iii. A statutory declaration duly verified by one of the directors or the secretary in the
Self-Learning Material 163
Notes
prescribed form, that the above conditions have been complied with, is filed with the Registrar.
When the company has complied with the aforsaid conditions, the Registrar will issue a certificate
to commence business.
12.3.2 Contents
The memorandum of a limited company is to contain the following clauses:
a)
Name of the Company With limited or private limited as the last word(s) of the name.
b)
Registered Office The name of the state in which the registered office is to be situated.
c)
e)
Capital The amount of authorised share capital divided into shares of fixed amounts.
f)
Association or Subscription The initial members are called subscribers, who sign the
memorandum in the presence of one witness.
The above clauses of the memorandum are called compulsory clauses. In addition to these, the
memorandum may contain other information, for example, rights attached to various classes of
shares. The memorandum cannot contain anything contrary to the provisions of the Act.
The rule of ultra-vires was for the first time laid down in the case of Ashbury Railway Carriage
and Iron Company Ltd. v. Riche.22 In this case the company was formed with the object to make
and sell, or lend or hire railway carriage and wagons and all kinds of railway plants, to carry on
the business of mechanical engineers and general contractors. The company contracted with
Riche to finance the construction of railway line in Belgium. The company repudiated the agreement
and was sued for breach of contract. Riche contended firstly, that the contract in question came
well within the meaning of the words general contractors, and, was therefore, within the powers
of the company, Secondly, that the contract was ratified by the majority of the shareholders. The
court (House of Lords) held that the term general contractors must be taken to indicate the
making generally of such contracts as were connected with the business of mechanical engineers,
otherwise it would authorise the making of contracts of any kind and every description and would,
therefore, be altogether un-meaningful. Hence the contract was entirely beyond the objects in the
memorandum of association. The effects of ultra-vires transactions are:
a)
Void abinitio - The ultra-vires acts are null and void abinitio (The company is not bound by
these acts).
b)
Injunction - A member can get an order of restraint (injunction) from the court against such
an act (ultra-vires) of the company.
c)
Personal liability of directors - For ultra-vires acts of the company, directors will be
personally liable.
d)
Acquisition of property that is ultra-vires - In such a case companys right over such property
is held secured.
e)
Notes
For the change of name special resolution by a company and written approval of the
central government is required. However no approval of the central government is
necessary if the change of name involves only the addition or deletion of the word
Private.
ii. When name is identical or too closely resembles the name of an existing company then
change of name can be done by passing an ordinary resolution and the written approval
of the central government.
b)
From one premises to another premises in the same city, town or village, by passing a
resolution of the Board of Directors.
ii. From one town or city or village to another town or city or village in the same state, by
passing a special resolution. Confirmation of Regional Director is required if the
jurisdiction of the Registrar of company is changed. A copy of the special resolution
and the confirmation of the Regional Director, if required, is to be filed with the Registrar
who is also given notice of new location within thirty days.
iii. From one state to another state special resolution and confirmation of the central
government is required. This change is permissible only for certain purposes as given
in Section 17 of the Act (see paragraph 12.3.4 (c) ii).
c)
Special resolution is passed by the company and a copy of the same is filed with the
Registrar within 30 days.
The liability of a member of a company cannot be increased unless the member agrees
in writing.
ii. From unlimited liability, it can be made limited by re-registration of the company.
e)
If the articles authorise a company limited by share capital may by an ordinary resolution alter the
capital so as:
i.
12.4
Articles of Association
12.4.1 Meaning
According to the Act, articles means the articles of association of a company as originally framed
or as altered from time to time in pursuance of any previous company laws or of this Act....29 The
articles of association of a company are its bye laws or rules and regulations that govern the
management of its internal affairs and the conduct of its business. They define the powers of its
officers. They also establish a contract between the company and the members and between the
members inter se.
a)
b)
c)
d)
e)
f)
The time lag in between calls on shares, conversion of shares into stock.
g)
h)
i)
Lien of shares.
j)
k)
l)
m)
n)
o)
p)
q)
r)
Winding up.
Notes
Alteration should not be inconsistent with the provisions of the Act or any other statute,
and conditions contained in memorandum.
Alteration must not be contrary to the order of National Company Law Tribunal
(Tribunal).
b)
c)
Each member is bound to other members so far as rights and duties arising out of the
articles are concerned.
d)
Notes
Memrandum
Articles
1.
Charter of company.
2.
3.
Supreme document.
4.
5.
6.
a)
b)
In case of forgery.
c)
d)
The doctrine of indoor management was propounded in the case of Royal British Bank v.
Turquand.31 In this case the directors of a company were authorised by the articles to borrow on
bonds, as authorised by the shareholders. The directors gave a bond without the authority of any
resolution. It was held that the company was liable on the bond, as T was entitled to assume that
the resolution of the company in general meeting had been passed.
Notes
12.5 Prospectus
12.5.1 Definition
According to the Act, prospectus means 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 in, or debentures
of a body corporate.32
Document.
b)
Subscription.
c)
Invitation to public.
d)
Offer to public. 50 or more persons constitute public as per the amendment of the Act in
2000.
Prospectus must be Dated: There are two dates relevant-one is the date of issue and the
other is the date of publication.
b)
c)
Matters specified in Part I of Schedule II-It includes general information like name and
address of the company, its objects, number and classes of shares, particulars of directors,
and auditors, underwriters, details regarding the securities being issued, outstanding
litigation, management perception of risk factors and details of any issue within past 3
years.
b)
Matters listed in Part II of Schedule II - It contains reports by the auditors and the
accountants, consent of directors, auditors etc. and some other statutory information.
c)
For a company carrying on business for less than 5 financial years, then the reference
is to the number of financial years for which the business has been carried on.
ii. If the prospectus is issued more than 2 years after the date at which the company is
Self-Learning Material 169
Notes
iii. Statements by experts - Prospectus also contains statements made by experts like
engineer, valuer, or an accountant. Experts need to give their consent in writing. Experts
not connected with the formation of the company are included in the category of experts.
Civil: This consists of liability against the company and against the directors, promoters
and experts. This may include rescission of contract, damages or compensation.
b)
Criminal: Fine upto Rs. 50,000 or imprisonment upto 2 years or both. If there is a fraud,
penalty is increased to fine upto Rs. 1 lakh, or imprisonment upto 5 years or both. In case
of allotment on fictitious names imprisonment can extend upto 5 years.
When a company allots shares or debentures to the public through the medium of issue houses,
then the issue houses invite subscription from the public through their own offer documents. Such
an offer document by the issue houses is treated as a prospectus by the company and known as a
deemed prospectus or prospectus by implication.
Where a public company does not invite public to subscribe for its shares, but arranges to get
money from private sources, it need not issue a prospectus to the public. In such a case the promoters
are required to prepare a draft prospectus known as statement in lieu of prospectus. It should
contain the information required to be disclosed by Schedule-III of the Act. The statement In lieu
of prospectus must be filed with the Registrar at least three days before any allotment of shares or
debentures are made.
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 the prospectus. This is valid for a period
of one year from the date of opening of the first offering of the shelf prospectus. For subsequent
offering, information memorandum updating the information under the various heads will have to
be filed and entire set comprising of shelf prospectus and the information memorandum shall
constitute the prospectus and have to be circulated to the general public. This will help to reduce
the expenses of preparation and issue of prospectus on the part of the issuer and will inform the
investors up-to-date position of the issue.
Notes
12.6 Membership
12.6.1 Introduction
Persons who collectively constitute the company as a corporate entity are members or shareholders.
12.6.2 Definition
a)
b)
Who agrees in writing to become member and whose name appears in the register of
members.
c)
Who holds equity share capital and whose name is entered as beneficial owner in the records
of the depository.
b)
S. No.
Shareholder
Member
1.
Is a member.
2.
3.
4.
Subject to the provisions of the Act, the memorandum and articles the position of certain persons
who may become a member of a company is as follows:
a)
b)
Insolvent: An insolvent may be a member of a company so long as his name appear in the
register of members, he is a member and is entitled to vote even though his shares vest in the
Official Receiver or Assignee.
c)
Partnership Firm: A partnership firm is not a legal person and as such it cannot be a member
of a company. However, the partnership firm may hold shares in a company in the Indvidual
or joint names of partners.
d)
Foreigner: A foreigner may become a member of a company subject to the provisions of the
Foreign Exchange Management Act, 1999.
e)
Company: A company may, if so authorised by its articles, become a member of any company.
f)
Trade Union or Society: A registered trade union or a society can become member of a
company.
g)
b)
ii. By transfer
iii. By transmission
b)
a)
b)
Shares held by each member and the amount paid up on those shares.
c)
d)
b)
c)
d)
e)
Dies.
f)
Is adjudged insolvent.
g)
h)
Share
Stock
1.
2.
3.
Transferable in fractions.
S. No.
Notes
Share
Stock
4.
5.
No such number.
6.
Preference share.
b)
Equity or ordinary share. This type of share can be further divided into:
i.
They have preferential rights to be paid dividend during the life time of company.
b)
They have preferential right to the return of capital when the company goes into liquidation.
a)
b)
c)
d)
Convertible or non convertible: Convertible preference shares are those which would be
convertible into equity shares after a specified period.
A public company limited by shares, if so authorised by its articles, may issue, with the previous
approval of the central government, with respect to any fully paid up shares, a warrant stating that
the bearer of the warrant is entitled to share specified therein. The shares become transferable by
mere delivery of the share warrant.37
S. No.
Share Warrant
Share Certificate
1.
2.
3.
4.
He is a member.
5.
6.
7.
Not so considered.
8.
It does.
9.
10.
Time Within Which Transfer Must be Registered: Is within two months of the application of
transfer.
b)
Refusal of Transfer: Where the articles of a company give power to the board to refuse
registration of a transfer of shares; such power must be exercised by a resolution of the
Board. The Board must act in the interest of the company and bonafide.
c)
d)
e)
Transfer Instrument Must be Valid and Proper: A proper instrument of transfer is lodged
with the company by the buyer with valid signature of the seller. The company after satisfying
the validity of instrument of transfer, shall record the transaction. Appropriate stamps are
to be affixed on the transfer deed.
Appeal Against Refusal to Register: The transferor or transferee may appeal to the Tribunal
(NCLT) against any refusal of the company to register the transfer or against any failure on
its part within a period of 2 months, either to register the transfer or to send notice of its
refusal to register the same. This period of two months shall reckon from the receipt of the
notice of such refusal.
Forged Transfer: An instrument on which the signature of the transferor is forged is called
a forged transfer. A forged transfer can never confer ownership upon the transferee thereof,
f)
b)
c)
b)
c)
d)
Section 77(1) of the Act provides that a company limited by shares or a company limited by
guarantee having a share capital cannot buy its own shares except when reduction of capital is
effected. The Companies (Amendment) Act, 1999, vide sections 77A, 77AA and 77B (effective
from 31-10-1998) and as amended by the Companies (Amendment) Act 2002 (effective from 2310-2001) and the guidelines issued by SEBI and the Department of Company Affairs allow
companies to purchase their own shares. The relevant provisions are:
a)
i.
Free Reserves: In case shares are bought back out of free reserves then an equal sum
shall be transferred to capital redemption reserve account. This can be used for issue
of fully paid bonus shares.
Conditions for Buy Back: No company shall purchase its own shares unless:
i.
Notes
a. Not applicable if the buy back is less than 10% of the total paid up capital and
free reserves of the company.
b. Such buy back is authorised by a Boards resolution. No offer of buy-back is
made within one year of the preceding year.
iii. The buy-back is or less than 25% of the total paid up capital and free reserves
of the company. In any financial year not to exceed 25% of its total paid up
equity capital in that financial year.
iv. The ratio of debt owed by the company is not more than twice the capital and
its free reserves. The central government may prescribe a higher ratio for a
class or classes of companies.
v.
Notice of the Meeting: The notice of the meeting at which special resolution is
proposed to be passed shall be accompanied by an explanatory statement stating:
i.
f)
Destruction of the Securities: The company shall extinguish and physically destroy the
securities so bought back within seven days of completion of buy back.
g)
e)
i. Bonus shares.
ii. Conversion of warrants.
iii. Stock option schemes or sweat equity.
iv. Conversion of preference shares or debentures into equity shares.
h)
Securities so bought.
Self-Learning Material 177
Notes
j)
Penalties: In case of any default, a person is imposed a fine upto Rs. 50,000 or imprisonment
upto to 2 years or both.
k)
Prohibition for Buyback: No company shall directly or indirectly purchase its own shares/
securities.
i.
ii. For consideration other than cash for providing know how.
iii. Making available rights in the nature of intellectual property rights or value
additions.
b)
ii. The resolution specifies the number of shares, current market price, the
consideration, if any, and the class of directors or employees to whom such
equity shares are to be issued.
iii. Not less than one year has at the date of the issue elapsed since the date on
which the company was entitled to commence business.
iv. The sweat equity shares of a company whose equity shares are listed on a
recognised stock exchange, are issued in accordance with the regulations
made by SEBI.
Notes
Issued Capital
Subscribed Capital
Called-up Capital
Paid-up
b)
b)
c)
d)
e)
b)
By paying off or returning capital which is in excess of the wants of the company;
c)
Pay off paid-up capital on the understanding that it may be called up again.
d)
e)
Write off or cancel capital which has been lost or is not represented by available assets.
a)
The creditors are entitled to object where the reduction of share capital is involved.
Introduction: A company needs money to finance its activities. A part of this requirement is
met by issue of shares; for the rest the company has to resort to public borrowing. Borrowing
is incidental to trading. The exigencies of commerce render such a power necessary. A
trading company has implied power to borrow unless prohibited by its memorandum or
articles. A non-trading company requires express powers to borrow. This power is taken in
its memorandum or articles. Where the memorandum authorises the company to borrow,
the articles provide as to how and by whom these powers will be exercised. A public company,
having a share capital, cannot exercise borrowing power unless certificate to commence
business is obtained by it.
b)
Exercise of Borrowing Power and Limitations: The power to borrow is exercised by the
directors. Directors act as agents and this power is subject to two limitations:
i.
12.8.3 Debenture
a)
Definition: According to the Act, debenture includes debenture, stock, bonds, and any
other securities of a company, whether constituting a charge on the assets of the company
or not.39
b)
v.
It is a movable property.
c)
Bearer or unregistered
ii. Registered
iii. Secured
iv. Unsecured or naked
v.
Redeemable
Notes
12.8.4 Investments
a)
Meaning: The word investments in its natural connotation, would include any property or
right in which money or capital is invested. The word investments in a limited sense
would mean the investing of money in shares, stock, debentures or other securities.
b)
ii. Give any guarantee, or provide security, in connection with a loan made by
any other person to, or to any other person, by any body corporate.
iii. Acquire by way of subscription, purchase or otherwise the securities of any
body corporate, exceeding 60% of its paid up share capital and free reserves
or 100% of its free reserves, whichever is more.In case the limit is exceeded
special resolution is required.
b)
Guarantee by the Board: The Board may give guarantee, without being previously authorised
by a special resolution, if:
i.
ii. There exist exceptional circumstances which prevent the company from obtaining
previous authorisation by a special resolution passed in a general meeting for giving a
guarantee.
iii. The resolution of the board under (i) is confirmed within 12 months, in a general
meeting of the company or the annual general meeting held immediately after passing
of the board resolution, whichever is earlier.
c)
ii. The particulars of the body corporate where loan, guarantee or security to
be given.
iii. The purpose of the investment, loan, security or guarantee.
iv. Special sources of funding and such other details.
d)
e)
Loan at Bank Rate: No loan to any body corporate shall be made at a rate of interest lower
Self-Learning Material 181
f)
ii. Give any guarantee, or provide a loan made by any person to, or to any
other person by any body corporate.
iii. Acquire, by way of subscription, purchase or otherwise the securities of any
other body corporate till such default is subsisting.
g)
Keeping of a Register: Every company shall keep a register showing the following particulars
in respect of every investment or loan made, guarantee given or security provided by it in
relation to any body corporate namely:
i.
ii. The amount, terms and purpose of the investment or loan or security or
guarantee;
iii. The date on which the investment or loan has been made.
iv. The date on which the guarantee has been given or security has been
provided in connection with the loan.
h)
ii. Register shall be kept at registered office and open for inspection as the
register of members.
iii. Extracts or copies can be taken.
i)
Guidelines: Central government may prescribe guidelines for the purpose of this section.
j)
To any loan made, any guarantee given or any security provided for any investment
made by:
a. A banking company, or an insurance company, or a housing finance company
in the ordinary course of its business, or a company established with the
object of financing industrial enterprise, or of providing infrastructural
facilities.
b. A company whose principal business is the acquisition of shares, stock,
debentures or other securities.
c. A private company, unless it is a subsidiary of a public company.
ii. To any investments made in shares allotted in pursuance of Section 81 (1)(A) (Rights
issue).
iii. To any loan made by a holding company to its wholly owned subsidiary.
iv. To any guarantee given or any security provided by a holding company to its wholly
owned subsidiary.
v.
k)
Penalties:
i.
Notes
12.9
No body corporate, association or firm can be appointed director of a company. Only an individual
can be appointed.
Public Company
3
Maximum *
* Both minimum and maximum number of directors may be as provided in the articles. For
example, the articles may fix 6 as the minimum and 10 as maximum.
b)
c)
Notes
ii. Nominal value of qualification shares must not exceed Rs. 5000 or one share
where its value exceeds Rs. 5000.
iii. Share warrants will not count for this purpose.
b)
An undischarged insolvent;
c)
A person who has applied to be adjudged as an insolvent and his application is pending;
d)
A person who has been convicted by a court of an offence involving moral turpitude and
sentenced to imprisonment for six months, and a period of five years has not elapsed from
the date of the expiry of the sentence;
e)
A person whose calls in respect of shares of the company held for more than 6 months have
been in arrears;
f)
A person who is disqualified for appointment as directed by an order of the Tribunal (NCLT)
under section 203 of the Act (which deals with power of the Tribunal to restrain fraudulent
person from managing company);
g)
Has not filed the annual accounts and annual returns for 3 financial years commencing
on and after 1.4.1999.
ii. Has failed to repay its deposit or interest thereon on due date or redeem its debentures
on due date or pay dividend and such failure continues for one year or more.
Note:
1.
The disqualifications mentioned in (d) and (e) above may be removed by the central
government by a notification in the Official Gazette.
2.
A private company which is not a subsidiary of a public company may, by its articles,
provide for additional grounds.
3.
A director who has been removed by the central government shall not be a director for five
years.
4.
A director disqualified under (g) above shall be ineligible for appointment as a director of
any other public company only and this disqualification shall last for 5 years.
a)
First Director: The first directors are usually appointed by name in the articles, or in the
manner provided therein. When the articles do not provide for the appointment of first
directors, the subscribers to the memorandum, shall be deemed to be the first directors of
the company.
b)
c)
Appointment of Directors by the Board: The board of directors can exercise the power to
appoint directors in the following three cases:
i.
Additional directors.
e)
Notes
Single Transferable Vote: A quota of votes is fixed. A person gets elected if he gets the
required number of votes fixed as quota. Suppose votes cast are 600 and there are 5
seats. Thus the quota will be 101 calculated as follows:
600
+1 = 101 Votes
5+1
ii. Cumulative Voting: The total number of votes cast would be equal to the total number
of shares multiplied by the number of directors to be elected. Thus, if there are 1000
shares and five directors to be elected, the total number of votes cast would be equal to
5000. A candidate getting 1000 votes should be declared elected. Now assuming that
the minority holds 20% of shares, i.e. 200 shares, the total votes which the minority
can cast in favour of one or more candidate would be equal to 200 x 5 = 1000. Thus
this minority shareholder can elect one director.
f)
g)
b)
By Central Government: The central government has the power to make reference to
the Tribunal (NCLT) against any managerial personnel, with a request to inquire into
as to whether or not such a person is fit and proper person to hold the office of director.
On the findings of the Tribunal, the central government may remove the director.
c)
By Tribunal (NCLT): Where an application has been made to the Tribunal (NCLT) against
oppression and mismanagement of companys affairs, the Tribunal (NCLT) may order the
b)
c)
d)
e)
f)
g)
b)
c)
d)
e)
Borrowing monies exceeding the aggregate of the paid-up capital and free reserves of the
company.
b)
c)
d)
Duty to participate in committees of the board like Audit Committee or Investors Grievance
Committee.
e)
Notes
b)
c)
Meaning: A director who is entrusted with substantial powers of management which would
not otherwise be exercisable by him.
b)
Number of companies: Of which one person may be appointed Managing Director is two.
c)
Tenure of appointment: Is five years but eligible for re-appointment for another term of
five years.
12.10.2 General
a)
Requisites of a Valid Meeting: It must be duly convened, legally constituted and properly
conducted.
b)
Notice of Meeting Must be Proper and Adequate: For general meetings at least 21 clear
days notice must be given to every member and auditor of the company. It must specify the
date, time and place of meeting.
c)
Chairman of the Meeting: Every meeting is presided over by the chairman who is to conduct
the proceedings of the meeting properly. The chairman is either the chairman of the board
or elected for every meeting. His main role is to maintain order and decorum in the meeting.
d)
Quorum: The quorum is generally laid down in the articles. In the absence of any provision
in the articles, the quorum is 5 members for public and 2 members for private company.
The articles can not provide for a smaller quorum.
e)
Voting: To ascertain the sense of the house the chairman of the meeting can use any of the
following:
i.
vi. Poll (According to the number of shares held by a member. A proxy can only
vote on a poll, unless the articles may provide otherwise, say permitting a
proxy to vote on a show of hands also)
f)
Agenda: Every general meeting has an agenda to be sent to every member. An agenda is the
statement of business to be conducted in a meeting.
g)
Minutes: The decisions taken in a meeting are recorded as minutes of the meeting. These
minutes shall be evidence of the proceedings recorded therein.
Meetings of a Company
Shareholders
General Meetings
Statutory Meetings
Directors
Class Meetings
Extra-ordinary Meetings
Object: The main purpose is to enable the members to know at an early date the financial
position and prospects of the company and also to provide them an opportunity of discussion
on various matters arising out of promotion and formation of a company.
b)
When Held: Only Once in the life time of the company. It is to be held within a period of
not less than one month but not more than six months from the date the company is entitled
to commence business. This is the first meeting of the shareholders.
c)
Not Required to be Held: A private company is not required to hold a statutory meeting.
This meeting is also not required to be held by a public company not having share capital
or has unlimited liability or a government company.
d)
e)
Statutory Report: Is presented in this meeting. Its contents include, total shares allotted,
total amount of cash received, an abstract of receipts and payments, details of contract,
directors, brokerage and commission.
f)
In case of default: Penalty is Rs. 5000 and is also a ground for winding up.
Notes
b)
c)
First AGM: May be held within 18 months from the date of incorporation.
First AGM must be held not later than 9 months from the date of closing of
financial year.
ii. Subsequent AGM: There must be one meeting held in each calendar year.
The gap between two AGMs must not be more than 15 months. This period
can be extended to 18 months by the Registrar. Meeting must be held not
later than 6 months from the close of the financial year.
iii. Extension of time: Registrar can give extension time upto a maximum of 3
months.
iv. Business to be transacted: Ordinary business like consideration of annual
accounts, declaration of dividend, appointment of directors and auditors or
any special business may be transacted.
v.
Notice: 21 days.
vi. Default: Central government can give directions as it thinks expedient. Penalty
provided is Rs. 50,000 or in case of continuing default Rs. 2500 per day.
All general meetings other than the AGM shall be EGMs. Some of the points relating
to EGM are:
a)
When to be convened: For transacting some urgent or special business that may arise between
two AGMs, e.g. removal of a director/auditor.
b)
Business to be transacted: All business transacted in EGM is called special business and
accompanied by an Explanatory Statement.
c)
Notes
ii. The directors on requisition, if the requisitionists are the holders of 1/10 of
total voting power.
iii. The requisitionists themselves, if the board does not call the meeting within
45 days of the deposit of a valid requisition. Meeting must be held within 3
months of the date of deposit of requisition.
iv. The Tribunal (NCLT).
d)
e)
All reasonable expenses incurred by the requisitionists by reason of the failure of the board
to call a meeting shall be repaid to the requisitionist by the company.
When to hold: Atleast once in every three calendar months and 4 meetings every year.46
b)
Notice: To be given to every director in writing. No form or period of notice is laid down.
Usually a weeks notice is sufficient. The notice must state, the date, time and place of
meetings.
c)
d)
12.10.8 Motion
a)
b)
12.10.9 Resolution
a)
Meaning: Any motion voted upon and agreed to in a meeting and entered in minutes. In
other words, a motion when passed, with or without amendment, is called a resolution.
b)
Types of Resolution:
i.
Ordinary resolution
c)
d)
Special Resolution: The votes cast in favour, by whatever means, by members present
should not be less than three times the votes cast against the resolution. Intention as special
resolution should be specified in the notice or intimation of the meeting. Some of the matters
for which special resolution is required are to alter objects clause of memorandum or to
alter articles.
e)
Resolution Requiring Special Notice: Notice of the intention to move the resolution should
be given to the company not less than 14 clear days before the meeting at which it is to be
moved. Examples - appointing an auditor other than the retiring one, removing a director
before expiry of period of his office.
Notes
Conditions of Applicability:
i.
Listed public company shall get any resolutions passed by postal ballot on
subjects so declared by the central government. Some of the subjects so declared
are, alteration in the object clause of the memorandum, buy-back of own shares,
sale of the undertaking of the company.
ii. Send a notice to shareholders along with the draft resolution and shareholders
to send their vote within 30 days of posting of the letter.
iii. Notice to be sent by registered post. A.D. or by any other method as prescribed
with a pre-paid postage envelope.
b)
Penalties:
i.
b)
c)
d)
Every three months summarised accounts of all branch offices-in or outside India.
e)
Note:
1.
Books of accounts should necessarily give a true and fair view of the state of affairs of the
company.
2.
Books are to be kept on accrual basis and as per double entry system of accounting.
3.
Books are to be kept at the registered office. However, a company may keep books at any
other place in India as the board of directors may decide. In such an event, the company has
to file full particulars with the Registrar within 7 days of such decision.
Notes
Books of account and other books are open for inspection by:
a)
Any director
b)
The Registrar
c)
d)
A shareholder has no statutory right to inspect books of account. However, if the articles specifically
provide for such a right then he can inspect.48
a)
A body corporate.
b)
c)
d)
Indebted to the company for an amount exceeding Rs. 1000 or guarantor or who had given
security in connection with the indebtedness of any third person.
e)
Notes
A person holding any security carrying voting rights of that company after a period of one
year from the date of commencement of the Companies (Amendment) Act, 2000 (viz., 1412-2000).
First Auditor: Is appointed by the board, if not then by the company in general meeting.
b)
Subsequent Auditor: Is appointed every year by the members in AGM by passing an ordinary
resolution.
b)
c)
d)
e)
b)
c)
Others:
i.
Statutory report.
ii. Prospectus.
iii. Assistance in investigation.
iv. Following accounting standards.
b)
Notes
ii. Proper books of account have been kept by the company and report from
branches received.
iii. Auditors report of branch office, not audited by him.
iv. Accounts render true and fair view of the affairs of the company.
v.
vi.
Balance sheet and profit and loss account are in agreement with books of
account.
Applicable to every public company having paid up capital of not less than Rs. 5 crores.
b)
c)
d)
e)
f)
It shall have authority to investigate into any matter specified in section 292A of the Act or
referred to by the board. It shall have full access to information kept by the company.
g)
The recommendations on any matter relating to financial management including the audit
report, shall be binding on the board. If the board does not accept the recommendation, it
shall record the reasons there for and communicate such reasons to the shareholders.
h)
ground that the acts of the directors were capable of confirmation by the majority of shareholders
and held that the proper plaintiff for wrongs done to the company is the company itself, and not
the minority shareholders, and as such the company could act only through its majority shareholders.
The majority rule has many inherent advantages like:
a)
If a company has suffered any financial loss, it is the company and not the minority
shareholders who can sue.
b)
If every individual member were given unfettered right to decide there would be endless
litigation.
c)
Notes
There are many exceptions to the majority rule. One of them is - where prevention of oppression
and mismanagement is applicable.53
The term oppression has not been defined in the Act. Lord Cooper has given the meaning of the
term as The essence of the matter seems to be that the conduct complained of should, at the
lowest, involve a visible departure from the standards of their dealing and a violation of the
conditions of fair play on which every shareholder who entrusts his money to the company is
entitled to rely.54 The complaining member must show that he is suffering from oppression in his
capacity as member and not in any other capacity. The oppression must be of continuing nature.
b)
The Tribunal (National Company Law Tribunal (NCLT)) for winding up.
b)
c)
Note:
The powers of the court or Company Law Board are transferred to the National Company Law
Tribunal (in short NCLT) by the Companies (Amendment) Act 2002. The central government is in
the process of formation of NCLT. As on date, the powers are exercised by courts or Company
Law Board. Hence, in this section NCLT or Tribunal has been used.
b)
Notes
Not less than 100 members or 1/10 of the total number of its members,
whichever is less.
ii. By any member(s) holding not less than 1/10 of the issued share capital.
b)
Company not having share capital: 1/5 of the total number of member of the company.
c)
b)
c)
d)
e)
f)
g)
Countermanding decision of the board who controls majority voting power, and not allowing
board to perform its functions.
h)
i)
a)
b)
c)
d)
e)
f)
g)
Notes
a)
b)
c)
d)
e)
f)
g)
h)
Sale of assets at low price and without compliance with the Act.
i)
j)
Building up of reserves.
b)
c)
Removal of secretary by majority decision of the board unless it is shown that the removal
has prejudicially affected the interest of the company or public interest.
d)
e)
b)
Purchase of shares or interest of any member of the company by other member or by the
company.
c)
d)
Termination, setting aside or modification of any agreement between the company and the
managing director/director/manager.
e)
Termination, setting aside or modification of any agreement between the company and any
third party.
f)
Setting aside of any transfer, delivery of goods, payment, execution or other acts relating to
Self-Learning Material 197
property.
Notes
g)
h)
b)
b)
Creditors agreeing to receive in part payment of the claims and the balance in shares or
debentures of the company.
c)
Compromise/arrangement when the company is a going concern - This can be done between
a company and its creditors or any class of them or between a company and its members or
any class of them. When a proposal is made, the company or any creditor or member may
apply to the NCLT (Tribunal) for compromise. NCLT then calls a separate meeting of each
class of creditors/ members. Meeting is held and conducted as NCLT directs. Proper notice
of meeting and full particulars of the scheme is given to all interested parties, including
shareholders and the central government. NCLT sanctions the compromise if it is approved
by a majority representing 3/4th in value of creditors/members at the meeting. Any scheme
which is fair and reasonable and made in good faith will be sanctioned. A certified copy of
NCLTs order is filed with the Registrar, then only the order has any effect. An appeal lies
to the Appellate Tribunal. NCLT has the power to supervise the carrying out of the
compromise/arrangement. If the NCLT is satisfied that the compromise/arrangement cannot
be worked satisfactorily it may make an order for the winding up of the company. The
procedure to be followed is summarised below:
i.
Notes
Note:
The powers of court are transferred to the National Company Law Tribunal (NCLT), in short
Tribunal by the Companies (second amendment) Act, 2002. The central government is in the
process of formation of the Tribunal. As on date, the powers are exercised by courts. Hence in this
section Tribunal or NCLT is used.
Meaning of Amalgamation: This term is not defined in the Act. It implies combination of
two or more companies or the business of two or more companies into one company or into
the control of one company.
c)
d)
e)
i.
By sale of undertaking.
Notes
Winding-up of a company represents the steps for the last stage in its life. It means a proceeding
by which a company is dissolved. According to Prof. L.C.B Gower, Winding-up of a company is
a process whereby its life is ended and its property administered for the benefit of its creditors and
members. An administrator, called liquidator, is appointed and he takes control of the company,
collects its assets, pays its debts and finally distributes any surplus among the members in accordance
with their rights.57 Winding up of a company differs from insolvency of an individual in as much
as a company cannot be made insolvent under the insolvency law. Besides, even a solvent company
can be wound-up.
b)
Voluntary winding-Up.
*Note:
The powers of court are transferred to the National Company Law Tribunal by the Company
(Amendment) Act, 2002. The central government is in the process of formation of this Tribunal.
As on date, the powers are exercised by courts. Hence in this section Tribunal/NCLT has been
used.
By the company passing a special resolution: This ground may not be resorted to very
much as the members may prefer to go for voluntary winding up as the same may be more
economical and speedier.
b)
c)
Failure to commence business within a year from the date of incorporation or suspension
of business for a whole year: The suspension must be of entire business and not a part of it.
d)
Reduction in membership below the minimum required: The minimum number is 7 for a
public company and 2 for a private company. The company carries on business for more
than 6 months while the number is so reduced.
e)
Inability to pay its debts of Rs. 1 lakh : What is important to note that the company must be
commercially insolvent.
f)
Tribunal is of the opinion that it is just and equitable: The Tribunal may order winding up
under this clause in the following cases:
i.
Notes
g)
Default of companys filing its balance sheet and profit and loss account on annual
return for any five consecutive financial years.
h)
If the company has acted against the interests of 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 as it has
become sick and is unlikely to become viable in future.
The company.
b)
Any creditor.
c)
Any contributory.
d)
e)
The Registrar.
f)
g)
h)
The Supreme Court of India has ruled that the workers of a company cannot prefer a winding-up
petition against a company. They are entitled to appear and be heard in support of or in opposition
Self-Learning Material 201
b)
c)
d)
e)
f)
g)
Official liquidator is normally the liquidator, If not, then liquidator is selected from a panel.
h)
i)
b)
a)
To stay winding-up.
b)
c)
d)
To set-off claims.
e)
To make calls.
f)
g)
h)
i)
To order costs.
j)
k)
l)
m)
b)
To make a report.
c)
d)
e)
f)
g)
h)
i)
j)
Notes
To institute or defend any suit in the name and on behalf of the company;
To do all such other things as may be necessary for the winding-up of the
company;
ii. Inspect the records and returns of the company with the Registrar;
iii. Claim in the insolvency of any contributory;
iv. Draw, accept, make any bill of exchange in the name of the company;
v.
On status of company.
v.
Notes
c)
Appointment of liquidator.
v.
vii. Duty of liquidator to call a general meeting at the end of each year.
viii. Final meeting and dissolution.
ix. Alternative provisions as to annual and final meeting in case of insolvency.
e)
Meeting of creditors.
Members Voluntary
Winding-up
Creditors Voluntary
Winding-up
1.
2.
3.
No Committee of Inspection.
4.
5.
Sl. No.
6.
Members Voluntary
Winding-up
Liquidator exercises some of his powers
with the sanction of a special resolution
of members.
Creditors Voluntary
Winding-up
Notes
Notes
Dr Iranis Committee Report. Corporate world is awaiting the changes to be made in company
law. Parliament had passed the Companies (Amendment) Act, 2006 which envisages
implementation of a comprehensive e-governance system through the much-touted MCA-21 project.
b)
According to Ada Demb and Friedrich Neubauer, Corporate governance is the process by
which corporation is made responsive to the rights and wishes of stakeholders.
c)
d)
OECD has defined the corporate governance to mean a system by which business
corporations are directed and controlled.
e)
Cadbury Committee (U.K) has defined corporate governance as (it is) the system by which
companies are directed and controlled.
f)
g)
Salim Sheikh and William Ress in their treatise Corporate Governance and Corporate
Control stated that corporate governance is also concerned with the ethics, values and
morals of a company and its directors.A review of various definitions and views brings
out that in its simplistic form corporate governance is an umbrella term encompassing
various issues concerning senior management, board of directors, shareholders and other
corporate stakeholders.
a)
b)
c)
d)
e)
f)
Ethics: A company must observe ethical standards. Deviation from ethical principles corrupts
organisational culture and undermines stakeholder value.
b)
Transparency: It involves the explaining of companys policies and action to those to whom
it owes responsibilities. Transparency leads to appropriate disclosures without endangering
companys interest. In the case of Enron, the shareholders value was destroyed because it
did not share its setbacks with the shareholders.
c)
Accountability: It signifies that the Board of Directors are accountable to shareholders and
management is accountable to the Board of Directors, and shareholders. Accountability
provides impetus to performance.
d)
Trusteeship: There exists the principle of trusteeship on the Board of Directors who must
act to protect and enhance shareholders and other stakeholders value. Mahatma Gandhi
had advocated this principle.
e)
f)
Fairness to all Stakeholders: It involves a fair and equitable treatment of all stakeholders
who participate in the corporate governance structure.
g)
Oversight: It means the existence of a system of checks and balances. It should prevent
misuse of power and facilitate timely management response to change and risks.
h)
i)
j)
Whistle Blower Policy: Companies should adopt a policy for Whistle blowers. This was
specifically recommended by Narayan Murthy Committee.
Notes
12.15.6 Conclusions
a)
b)
No single definition: It is a dynamic concept and can be defined in many ways. It is not
defined in only one manner.
c)
Drawn from diverse fields: Corporate governance is drawn from diverse fields like laws,
economics, ethics, politics, management, finance, etc.
d)
Mere law is not sufficient: Corporate governance goes far beyond company law. In India
company law has been amended to include better corporate practices like audit committee,
directors responsibility statement, voting by postal ballot. Strict implementation of the
law is essential.
e)
Accounting standard: In all the developed countries accounting standards have been devised
and followed. India has also evolved its own accounting standards which are required to be
followed by all companies.
f)
Professional and competent directors: The key to good corporate governance is a well
functioning, informed Board of Directors. The board should have a core group of
professionally acclaimed and accredited non-executive directors.
g)
Evaluation: Corporate governance can now be evaluated and corporate governance rating
has come to stay. Many Indian companies like ITC, Infosys, Grasim have been evaluated
and awarded corporate governance rating by agencies like CRISIL or ICRA.
In conclusion, it can be said that minimal corporate governance can be achieved by following the
law, better governance by having a professional management but best corporate governance is
achieved by following ethical practices and principles.
Summary
Notes
Formation of a Company
The whole process of formation of a company may be divided into four stages namely
i) promotion, ii) registration, iii) floatation, and iv) commencement of business.Promotion denotes
preliminary steps taken for the purpose of registration of the company. The persons who undertake
these steps are called promoters. The promoters of the company prepare memorandum and articles
of association and other necessary documents. These documents are filed with Registrar of
Companies (ROC). ROC after scruitinising these documents and on being satisfied that they are
in order, issues the certificate of incorporation. This certificate is conclusive as to all the
requirements of the Act with respect to registration have been duly complied with. A private
company can commence its business on receipt of certificate of incorporation. A public company
has to raise capital and for this purpose issue a prospectus if subscription of capital is sought from
public or issue a statement in lieu of prospectus when share capital is sought to be arranged
through friends and relatives. To get the certificate to commence business, a public company must
have received the minimum subscription viz. 90% of the entire issue on complying with some
other formalities, ROC grants the certificate to commence business. Now, a public company can
commence its business.
Memorandum of Association
Memorandum of association of a company is an important document. It defines as well as confines
the powers of the company. The memorandum of a limited company is to contain its name, the
name of the state in which registered office is to be situated; the objects, the liability, and the
subscription clause. A company can only act as per the objects given in the memorandum of
association. Any action beyond this are Ultra-vires (beyond the powers of the company) and
hence void. All the clauses of the memorandum, except the subscription clause can be changed by
following the procedure provided in the Act.
Notes
Articles of Association
The articles of association of a company are its bye-laws or rules and regulations. It controls the
internal management of the company and defines the powers of its offices. It also establishes a
contract between the company and the members and between members inter se. Articles are
subordinate to memorandum. Articles contain provisions relating to share capital, rights of
shareholders, shares and stock, meetings, directors. Articles may be altered by passing a special
resolution. Alterations must not be inconsistent with the Act, or any other statute; or it must not be
illegal or opposed to public policy and must be in the interest of the company. The memorandum
and articles when registered are public documents and can be inspected by anyone on payment of
a nominal fee. Thus there is a presumption that any person dealing with company has read and
understood these documents. This is known as doctrine of constructive notice. This doctrine is
subject to another doctrine namely indoor management. This doctrine of indoor management
provides that the persons dealing with the company are not bound to inquire into the regularity of
internal proceedings. This relief under indoor management is not available where the outsider has
knowledge of irregularity or in case of forgery or even negligence.
Prospectus
A public company normally invites public to subscribe to its share capital. For this purpose a
prospectus is required to be issued. A prospectus means any document described or issued as
prospectus and includes any notice, circular, advertisement or other documents 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. The prospectus must be dated, signed and registered with the
registrar. Prospectus must contain the information as per Parts I, II and III of Schedule II to the
Act. The golden rule of prospectus is that there must be full, frank and honest disclosure of all
facts. There should not be any errors of commission or omission i.e. no mis-statements. Any misstatements in prospectus entails civil and criminal liability. Civil liability may include rescission
of contract, damages or compensation. Criminal liability entails imprisonment upto 2 years or
fine upto Rs 50,000 or both. An offer document by the issue houses offering shares to the public
is known as deemed prospectus. Where a public company does not invite public to subscribe for
its shares, but arranges to get money from private sources, it need not issue a prospectus. The
promoters, in such a case are required to prepare a draft prospectus known as statement in lieu of
prospectus. This is also required to be filed with the Registrar. Public financial institutions and
scheduled banks have been allowed to file shelf prospectus which will remain valid upto one
year. Thus, such institutions and banks need not issue a prospectus every time they offer securities
to public. They only need to file an Information memorandum with respect to changes in the
financial position, etc. A red herring prospectus is a prospectus which does not have complete
particulars on the price of securities offered and quantum of securities offered. SEBI acts as the
administrative authority in relation to any complaints relating to prospectus.
Membership
Notes
A member means a person who has either subscribed to the memorandum or who agrees in writing
to become member and whose name appears in the register of members. A member does not
include a bearer of a share warrant. A member is also called a shareholder except in some cases
like the legal heir of a member is a shareholder but not member till his name is entered in the
register of the members. A company, a foreigner, a registered society or trade union can become
members but a partnership firm (although partners in their individual capacity can become
members), official receiver or liquidator cannot become a member. A persons membership can be
terminated in many ways like on transfer forfeiture, or surrender of shares or when he is adjudged
insolvent or when the contract is rescinded.
Notes
The management of companies is based on the rule of majority. One of the exceptions to this rule
is where prevention of oppression and mismanagement is applicable. Oppression has not been
defined in the Act. It means visible departures from the standards and a violation of the conditions
of fair play. The term mismanagement would mean that the affairs of the company are being
conducted or such affairs are likely to be conducted in a manner which is prejudicial to public
interest or prejudicial to the interests of the company. In case of oppression of members and
mismanagement of company, a requisite number of shareholders can apply for appropriate relief
to the Tribunal for winding-up, or the Tribunal / central government for appropriate relief. Requisite
number of members who should sign such an application in respect of company having share
capital is not less than 100 members or 1/10 of the total number of its members, which ever is less,
or by any member(s) holding not less than 1/10 of the issued share capital. In case of a company
not having share capital, requisite number is 1/5 of the total number of members of the company.
The notice of every application made to the Tribunal for the prevention of oppression and
mismanagement must be given by the Tribunal to the central government. The central government
can make any representation which the Tribunal will consider before making a final order. Relief
can be granted if the application is made by majority shareholders who have been rendered
completely ineffective by the questionable acts of a minority group. The Tribunal has all the
necessary powers to end oppression as well as mismanagement. Some of the powers are a) the
regulation of conduct of the companys affairs in future, b) purchases of shares by another member,
c) reduction of share capital, d) termination or modification of any agreement with the director or
any third party, e) setting aside of any transfer of any property, f) prevent the change in the board,
or g) any other matter considered just and equitable. The central government has also the powers
to prevent oppression or mismanagement and to remove managerial personnel.
Winding up of a Company
Winding up of a company is a process whereby its life is ended and its property administered for
the benefit of its creditors and members. An administrator, called liquidator is appointed and he
takes control of the company, collects its assets, pays its debts and finally distributes any surplus
among the members in accordance with their rights. There are two modes of winding up:
a)
b)
A company may be wound up by the Tribunal on these grounds namely a) By the company passing
a special resolution, b) Default in holding statutory meeting or in delivering statutory report to the
registrar, c) Failure to commence business within a year from the date of incorporation, d) Reduction
in membership below the minimum required, e) Inability to pay debt of Rs. one lakh, f) When in
the opinion of the Tribunal it is just and equitable, g) Default of companys filing its balance sheet,
h) If the company has acted against the interests of sovereignty and integrity of India, and i) When
the company has become sick and is unlikely to become viable in future. A petition for winding up
may be made by the company, any creditor, any contributory, the registrar, any person authorised
by the Central Government, the official liquidator or the central or state government. Every company
is to file with the Tribunal a statement of affairs along with the petition for winding up. When the
company is opposing a petition for winding up, a statement of affairs is to be filed by the company.
The consequences of the winding up order by the Tribunal are i) Intimation is sent to the official
liquidator and the registrar, ii) Winding up order is filed with the registrar within 30 days, iii) The
order is notified in the Official Gazette, iv) Winding-up order is deemed to be notice of discharge
for employees, v) Suits stayed unless the Tribunal gives leave to continue, vi) Order operates in
the interests of all creditors and contributories, vii) Official liquidator is the liquidator, and viii)
Boards powers come to an end.
Notes
The Tribunal hands over the statement of affairs to the liquidator and may direct the constitution
of a Committee of Inspection. Besides this the Tribunal has general powers like, to stay winding
up, to settle the list of contributories, to set off claims, to make calls, to order payment into bank
of money due to the company, to exclude creditors not proving on time, to adjust the right of
contributories, to summon persons suspected of having the property of the company, to order
public examination of promoters, directors etc., to arrest an absconding contributory, to order
costs and to order the dissolution of the company.
Liquidators main duty is to conduct the winding-up process. He discharges all the functions of
the board so long as the company is not dissolved/liquidated. For discharge of his duties he has
certain powers. His powers can be divided into two parts - one exercisable with the sanction of the
Tribunal - like to carry on business of the company, to sell the property of the company, to raise
money, to compromise etc., and second exercisable without the sanction of the Tribunal like
inspect the records and returns of the company with the registrar, or appoint any agent.
Voluntary winding-up is of two kinds a) Members voluntary winding-up, and b) Creditors voluntary
winding-up. Voluntary winding-up has effects i) On status of company, ii) Corporate powers to
continue until dissolution, iii) Boards power to cease on liquidators appointment iv) On companys
employee, and v) Avoidance of transfer of share. In members voluntary winding up two conditions
are to be satisfied - firstly a declaration of solvency is made and secondly shareholders resolution
is to be passed. In both types of voluntary winding-ups a meeting of shareholders or creditors is
held. Liquidator is appointed and notice of his appointment is given to the registrar. Boards
powers cease on appointment of the liquidator. Any vacancy in the office of liquidator is filled and
a final meeting is held where a resolution for the dissolution of the company is passed. Although
both members and creditors can resort to voluntary winding up of a company, yet there are some
differences in these two types of voluntary winding up.
Corporate Governance
This term has gained importance in the last two to three decades. A spate of scandals and corporate
collapses in the late 1980s and 1990s led shareholders and banks to think about the safety of
their investments. In U.K. first Cadbury Committee, followed by Hampel and finally Greenbury
Committee were constituted. In India also there were a number of committees which submitted
their reports from 1998 to 2005. First Rahul Bajaj Committee by CII in April 1998, then Kumar
Mangalam Birla Committee by SEBI in May 1997. Thereafter, in April 2002, Ganguly Committee
for Banks and Financial Institutions. The central government appointed Naresh Chandra Committee
which submitted its report on 23 Dec. 2002. Finally SEBI appointed Narayan Murthy Committee
which submitted its report to SEBI on 8 Feb. 2003. As a result SEBI revised clause 49 of the
Self-Learning Material 213
Notes
listing agreement which is effective from 1 Jan 2006. To amend company law, central government
appointed an Expert Committee under the chairmanship of Dr. J. J. Irani. This Committee submitted
its report on 31 May 2005. The changes in company law are awaited.
The concept of corporate governance has been used in different perspectives. Many authors have
defined this term in different ways. It is an umbrella term - encompassing the system by which
companies are directed and controlled. The main objectives of good corporate governance are i)
to promote healthy environment for long term investment, ii) to create a trust in the corporate, iii)
to promote business development, iv) to improve the efficiency of the capital markets, v) to enhance
the effectiveness in the service of the real economy, and vi) to exercise effective control on corporate
affairs by the board at all times. There are some fundamental principles of corporate
governance like i) ethics, ii) transparency, iii) accountability, iv) trusteeship v) empowerment vi)
fairness to all stakeholders viii) oversight, viii) external audit, ix) regulatory regime and x) whistle
blower policy.
In conclusion it can be said that good corporate governance is a must but its models vary from
country to country and company to company. There is no one cap which fits all sizes. Law alone
can bring minimal corporate governance, for a better corporate governance the management has
to be professional but the best corporate governance is possible only when ethical principles and
practices are adopted.
Review Questions
True or False
1.
2.
3.
Promoter is neither a trustee nor an agent of the company he promotes but stands in a
fiduciary position towards it.
4.
5.
6.
7.
In a company all shareholders are members but all members need not be shareholders.
8.
9.
10.
Every meeting, in order to be valid, must be duly convened, properly constituted and
conducted.
11.
12.
13.
A majority, who has been rendered completely ineffective by the questionable acts of a
minority group, cannot complain of oppression or mismanagement.
14.
15.
Every company is required to file, along with the petition for winding-up, with the Tribunal,
a statement of its affairs.
Practical Problems
1.
214 Self-Learning Material
Akhil and Bharat were only two members of a private limited company. Both of them have
been killed in an air crash. Does this company cease to exist?
2.
All the seven signatures on a memorandum of association were forged by a person and a
certificate of incorporation was duly obtained. Is the certificate of incorporation valid?
3.
The directors of a company were authorised by the articles to borrow on bonds such sums
of money as should from time to time, by a resolution of the company in general meeting,
be authorised to be borrowed. One director gave a bond to Tara without the authority of
any such resolution. Is the company liable on the bond?
4.
Amar purchased from Dalal 1000 shares of a company on the basis of prospectus containing
wrong statement. What remedies are available to Amar against the company?
5.
Madhur, a director of ABC Ltd, died in a bomb blast. It has been decided to appoint Murali
in his place. Will the company be required to call extraordinary general meeting to approve
the latters appointment as a director?
6.
One general meeting was called by a company in December 2003. The meeting was
adjourned to March 2004 and then held. Subsequently meeting was held in February 2006.
Is the company liable for any irregularity?
7.
A company has 100 members. It sends notice of the general meeting to all of them. 20
members do not attend the meeting. Out of 80 members who are present 20 abstain from
voting. How many members should vote in favour of a resolution if it is to be passed as a
special resolution?
8.
X,Y,Z, Directors of a company were the major shareholders of the company. X was
the chairman of the company. At a meeting of the Board of Directors, it was decided to
increase the share capital. Y and Z did not have the money to take up additional shares and
feared that in consequence, X would corner all shares and become predominant in the
company. So a general meeting was called and it was resolved that the present members
alone shouldnot benefit from the prosperity of the company, but others also should share,
and a special resolution was passed that the new shares may be offered to about a dozen
persons who were not members of the company. X rushed to the Tribunal, complaining
of oppression, saying that Y and Z wanted to throw him out as director and chairman of the
company and they had passed a special resolution to bring about a change in management.
Will X succeed?
9.
10.
There are only two members of a company and both of them are not on speaking terms.
Can the company be wound up on this ground?
Notes
Test Questions
1.
2.
Explain the concept of Corporate veil and state the circumstances when it can be lifted.
3.
4.
5.
A Joint stock company is an artificial person created by law with a perpetual succession
and a common seal. Do you agree with this definition of a company?
6.
A company is a legal entity distinct from its members. In what cases do the courts
ignore this principle?
7.
Explain what is meant by a holding company and a subsidiary company. Give examples.
8.
Briefly describe the documents to the filed with the Registrar of Companies prior to
incorporation.
Self-Learning Material 215
Notes
9.
10.
11.
12.
13.
b.
14.
The Memorandum of Association is the fundamental law or a charter defining the objects
and limiting the powers of a company. Explain.
15.
Why is it necessary for a company to have a registered office? Can the registered office of
a company be changed?
16.
The doctrine of ultra vires is an illusory protection to the shareholders and a pitfull for
third parties. Discuss.
17.
What are Articles of Association? How can they be altered? Discuss the limit upon the
powers of a company to after or add to the Articles of Association.
18.
A prospectus must state truth and nothing but truth. Do you agree? Explain.
19.
b.
20.
21.
What is a prospectus? What are its contents? Is it obligatory for a company to file prospectus
or a statement in lieu of prospectus with the Registrar of Companies?
22.
In a company all shareholders are members but all members need not be shareholders.
Explain.
23.
In what ways may a person i) become, ii) cease to be, a member of company?
24.
Distinguish between:
a.
b.
25.
What are the conditions required to be complied with for a company to buy-back its shares?
26.
Give various classifications of capital and discuss the procedure for reduction of share
capital.
27.
Define share, What are the different types of shares that may be issued by a company?
28.
29.
What are the legal requirements which a company must comply with while borrowing?
30.
Discuss the provisions of company law regarding inter-corporate loans and investments.
31.
What is the statutory limitation to the borrowing power of the directors of a company?
32.
33.
34.
What is the legal position of a director in a company? Explain the powers of the Board of
Directors.
35.
A casual vacancy has occured in a public company due to a director vacating his office
before his term expires. How is the vacancy to be filled?
36.
The exact position of directors with regard to a company is hard to define. They are not
servants of the company but are rather in the position of managing partners. Discuss this
statement and bring out the exact position of directors in a company.
37.
38.
39.
40.
What books of accounts are required to be kept by a company? Explain the law relating to
authentication, adoption and filing of annual accounts.
41.
Who can be an auditor of a company and what are his disqualifications, rights and duties?
42.
The will of majority must prevail Is the principle of a company management. Are there
any exceptions to this rule?
43.
Majority will have its way but the minority must be allowed to have its say. Discuss this
proposition with reference to prevention of oppression and mismanagement in a company.
44.
A, B and C own respectively 50%, 30% and 20% of the issued share capital of a company
and A and B are its directors. The company has made good profits but the directors refuse
to recommend the declaration of dividend and A and B, as majority shareholders, pass a
resolution at a general meeting to the effect that their remuneration as directors shall be
90% of the profits. To wind up the company would, in this case, unfairly prejudice the
minority shareholder. What alternative remedy is available to C and how may it be appled?
45.
What is meant by oppression? How does the Companies Act, 1956 attempt to prevent
oppression and mismanagement?
46.
47.
What do you understand by winding-up of a company? What are the various modes of
winding-up?
48.
49.
50.
Notes
2. False 3. True
9. False 10. True
4. False
11. False
5. True
12. False
6. False
13. False
7. True
14. True
No, a company is an entity distinct from its members. Death, insolvency or retirement of its
members, therefore, leave the company unaffected.
2.
Yes, the certificate of incorporation given by the registrar in respect of any company shall
be conclusive evidence that all the requirements of the Act have been complied with in
respect of registration and matters precedent thereto.
3.
Yes, the company was liable on the bond, as Tara was entitled to assume that the resolution
of the company in general meeting has been passed. (Doctrine of Indoor-Management).
Self-Learning Material 217
Notes
4.
Amar shall have no remedy against the company, there being no privity of contract between
Amar and the company.
5.
The vacancy being a casual vacancy can be filled by the board of directors at its meeting.
It may also be filled in a general meeting. Thus, there is no need to call an extra-ordinary
general meeting for this purpose.
6.
The Act (Sec. 166) requires a company to hold its annual general meeting every calendar
year. So there should be one meeting per year and as many meetings as there are years.
Thus in this case the meeting held in March 2004 is actually the meeting of December
2003. Since, next meeting is held only in Feb. 2006, the meeting of2004 has been missed.
Under these circumstances, unless permission of the registrar was obtained for extension
of time which may be granted upto a period of 3 months under certain special circumstances,
the company shall be proceeded against.
7.
For a valid special resolution, votes cast in favour must at least be 3 times the votes cast
against the resolution, if any. Those who abstain are not to be counted. Thus, 3/4th of 60
i.e. at least 45 members must vote in favour of the resolution.
8.
No, seeking change in management does not, prima-facie, amount to oppression. The conduct
of majority does not show any lack of probity, unfair conduct, or prejudice in the exercise
of legal and proprietary rights as a shareholder.
9.
No, director cannot refuse to call EGM requisitioned by members in this case. The Tribunal
cannot prevent a company from holding an EGM for considering the proposed modification
of a scheme.
10.
Yes, company can be wound up on just and equitable ground as there was a deadlock in
management.
References
Section 617
Section 591
Section 4
Section 45
10
11
Notes
Section 62
Section 542
12
Section 69
13
Section 147
14
[1916] 2 AC 307
15
16
17
18
19
In Whaley Bridge Printing Company v. Green [1880] 5 B.D. 109 at page 111
20
21
Section 2 (28)
22
24
30
31
32
Section 2(36)
33
Nandita Jain v. Bennett Coleman and Co. Ltd., Appeal No. 27 of 1972
34
Section 150
35
Section 151
36
Section 2(46)
37
Section 114
38
(Amendment) Act, 1999 w.e.f. 31.10.1998 41Section 2(13) 42Section 270 43Section 265 44Section
318
45
Companies (Amendment) Act 2000 based on the recommendations of Kumar Mangalam Birla
Committee Report
52
54
Lord Cooper in the Scottish case of Elder v. Elder and Watson Ltd 1952 SC 49 Scotland. It was
cited with approval by Justice Wanchoo, (afterwards chief justice) of the Supreme Court of India
in Shanti Prasad Jain v. Kalinga Tubes [1965] 1 Comp LJ 193, 204 = AIR 1965 SC 1553 = [1965]
Self-Learning Material 219
1 SC A 556
Notes
55
Section 397.
56
Section 390(b)
57
58
Section 433
59
60
61
Rajamundary Electric Supply Corp. Ltd. v. Nageshwara Rao, AIR (1956) S.C. 213
62
Section 439
63
National Textile Workers Union v. P.R Ramakrishnan [1983] 53. Comp. Cas. 184 (SC)
64
65
Summary of all these Committees Reports can be seen in Corporate Governance- Global
Concepts and practices by Dr S.Singh (Excel Books) 1st Ed. 2005 in Part IV (from Page 285 to
page 419)
66
Expert Committee Report on Company Law is published in Corporate Law Advisor June (2)
2005 from page 112 to 204 = 200566 CLA (st) 112