A MANUALOF

BUSINESS LAWS

DR. S.N. MAHESHWARIPROFESSOR EMERITUS & ACADEMIC ADVISOR

DELHI INSTITUTE OF ADVANCED STUDIES, DELHI-110 085

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

DR. SUNEEL K. MAHESHWARIPROFESSOR

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

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

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

First Edition : 2003Second Edition : 2006

Third Revised Edition : 2008Reprint : 2009Reprint : 2010

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

Sixth Revised & Enlarged Edition : 2015Seventh Revised & Enlarged Edition : 2018

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Dedicated to

SHRI YADU HARI DALMIAHumanist, Philanthropist and Industrialist

Preface To The Seventh EditionWe are pleased to place before the esteemed readers the Seventh Revised and Enlarged Edit ion of our book:

‘A Manual of Business Laws’. The heart-warming response given by the readers to each new edit ion of book is a matterof great satisfaction and privilege for us.

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

The book meets all the more comprehensively the course content requirement of the students appearingin the paper Business Laws at the undergraduate and postgraduate examinations of different Universitiesand professional institut ions, viz., The Institute of Chartered Accountants of India, The Institute ofCompany Secretaries of India and The Institute of Cost Accountant of India.

Since the publication of the Sixth Edit ion, several new Acts governing business and industry have beenenacted and enforced. These include the following:

• The Companies Act, 2013, The Companies (Amendment) Act, 2015, and The Companies (Amendment)Act, 2017.

• The Payment of Bonus (Amendment) Act, 2015.

• The Payment of Gratuity (Amendment) Act, 2018.

• The Payment of Wages (Amendment) Act, 2017.

All these changes have been incorporated at proper places in the book.

Two new topics (i) “Secretarial Standards” and (ii) “Secretarial Audit” have been added in Chapter 14(Section 5), “Secretary, Secretarial Standards and Audit”, of the book.

A new chapter “The Environment Protection Act, 1986” has been added in Section 6: Miscellaneous, of thebook.

A new chapter, “Goods and Services Act” has been added in Section 6: Miscelleneous, replacing the CentralExcise Act, 1944 and Vat.

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

The latest questions and problems from recent University and professional examinations have been incorporatedin the relevant chapters of the book.

The book continues to follow an examination-oriented approach.

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

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

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

Preface To The First Edition

To the First Edition

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

The book has several dist inctive features. These include the following :

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

Written in simple and straight style.

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

Incorporates at the end of each chapter :

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

Essay type questions for review, discussion and practice.

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

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

Provides Learning Objectives at the beginning of each chapter to tell the students what they will learnafter studying the chapter.

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

Bound to prove a refreshing guide for business executives.

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

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

Contents

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

Section 1THE INDIAN CONTRACT ACT, 1872

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

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

3. Competence of Contracting Parties ....................................................................................... 1.31–1.39Learning Objectives ........................................................................................................................ 1.31Minor ........................................................................................................................................... 1.31Persons of Unsound Mind................................................................................................................ 1.36Persons Disqualified by Other Laws................................................................................................... 1.36Key Terms ..................................................................................................................................... 1.37Test Questions................................................................................................................................ 1.37Practical Problems .......................................................................................................................... 1.38

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

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

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

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

8. Contingent Contracts............................................................................................................ 1.82–1.85Learning Objectives ........................................................................................................................ 1.82Meaning of Contingent Contract ...................................................................................................... 1.82Essential Characterist ics .................................................................................................................. 1.83Rules Regarding Performance........................................................................................................... 1.83Contingent Contract and Wagering Agreement ................................................................................... 1.84Key Terms ..................................................................................................................................... 1.85

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Test Questions................................................................................................................................ 1.85Practical Problems .......................................................................................................................... 1.85

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

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

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

12. Remedies for Breach of Contract ...................................................................................... 1.111–1.124Learning Objectives .......................................................................................................................1.111Types of Remedies.........................................................................................................................1.111Rescission .....................................................................................................................................1.111Damages.......................................................................................................................................1.112Liquidated Damages and Penalty .....................................................................................................1.116Quantum Meruit ...........................................................................................................................1.118Specific Performance .....................................................................................................................1.119Injuct ion .....................................................................................................................................1.119Restitution ...................................................................................................................................1.120Key Terms ....................................................................................................................................1.120Test Questions...............................................................................................................................1.121Practical Problems .........................................................................................................................1.122

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

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

15. Contracts of Agency ......................................................................................................... 1.151–1.170Learning Objectives ...................................................................................................................... 1.151Meaning and Nature of Agency ...................................................................................................... 1.151Agent and Servant ....................................................................................................................... 1.152Agent and Bailee.......................................................................................................................... 1.152Kinds of Agents ........................................................................................................................... 1.152Creation of Agency ...................................................................................................................... 1.153Extent of Agent’s Authority .......................................................................................................... 1.156Delegation of Agent’s Authority .................................................................................................... 1.157Agency and Contracts with Third Persons ....................................................................................... 1.158Personal Liability of Agent ............................................................................................................ 1.160Rights of an Agent ...................................................................................................................... 1.161Duties of an Agent ....................................................................................................................... 1.163Termination of Agency ................................................................................................................. 1.164Key Terms ................................................................................................................................... 1.167Test Questions.............................................................................................................................. 1.167Practical Problems ........................................................................................................................ 1.168

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Section 2THE SALE OF GOODS ACT, 1930

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

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

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

4. Performance of a Contract of Sale ........................................................................................ 2.36–2.42Learning Objectives ........................................................................................................................ 2.36Duties of Seller and Buyer .............................................................................................................. 2.36Delivery ........................................................................................................................................ 2.36C.I.F. Contract ................................................................................................................................ 2.40Key Terms ..................................................................................................................................... 2.41Test Questions................................................................................................................................ 2.41Practical Problems .......................................................................................................................... 2.42

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

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

Section 3

THE INDIAN PARTNERSHIP ACT, 1932

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

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

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

4. Dissolution of Partnership Fi rms ......................................................................................... 3.35–3.42Learning Objectives ........................................................................................................................ 3.35Dissolution of Partnership and Dissolution of Firm ............................................................................ 3.35

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Modes of Dissolution of Firm........................................................................................................... 3.35Consequences of Dissolution ............................................................................................................ 3.37Rules for the Sett lement of Accounts after Dissolution ...................................................................... 3.38Public Notice ................................................................................................................................. 3.39Key Terms ..................................................................................................................................... 3.40Test Questions................................................................................................................................ 3.40Practical Problems .......................................................................................................................... 3.41

Section 4THE NEGOTIABLE INSTRUMENTS ACT, 1881

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

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

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

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

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

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

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

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Section 5ELEMENTS OF COMPANY LAW

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

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

3. Memorandum of Association ................................................................................................ 5.39–5.50Learning Objectives ........................................................................................................................ 5.39Meaning of Memorandum................................................................................................................ 5.39Clauses of Memorandum ................................................................................................................. 5.39Form of Memorandum ..........................................................................................................................5.41Alteration of Memorandum of Association ........................................................................................ 5.41Doctrine of Ultra-Vires.................................................................................................................... 5.46Key Terms ..................................................................................................................................... 5.48Test Questions................................................................................................................................ 5.48Practical Problems .......................................................................................................................... 5.49

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

5. Prospectus........................................................................................................................... 5.60–5.73Learning Objectives ........................................................................................................................ 5.60Need and Meaning .......................................................................................................................... 5.60Requirements as to Prospectus......................................................................................................... 5.60Contents of Prospectus ................................................................................................................... 5.62Effect of Omissions and Mis-statements in a Prospectus...................................................................... 5.63Deposits from Members or Public ..................................................................................................... 5.64Public Offer of Scurit ies of be in Dementerialized Form...................................................................... 5.66Advertisement of the Prospectus...................................................................................................... 5.66Shelf Prospectus............................................................................................................................. 5.66Red Herring Prospectus................................................................................................................... 5.66Listing of Securit ies ....................................................................................................................... 5.67Book Building ............................................................................................................................... 5.68Credit Rating .......................................................................................................................................5.69Insider Trading ....................................................................................................................................5.71Key Terms .................................................................................................................................. ...5.71Test Questions................................................................................................................................ 5.72Practical Problems .......................................................................................................................... 5.73

6. Allotment of Shares............................................................................................................. 5.74–5.78Learning Objectives ........................................................................................................................ 5.74General Principles of Allotment ....................................................................................................... 5.74Statutory Restrict ions on Allotment of Securit ies .............................................................................. 5.75Return of Allotment ....................................................................................................................... 5.76Key Terms ..................................................................................................................................... 5.76Test Questions................................................................................................................................ 5.77Practical Problems .......................................................................................................................... 5.77

7. Shares and Share Capi tal ................................................................................................... 5.79–5.101Learning Objectives ........................................................................................................................ 5.79Meaning of Share........................................................................................................................... 5.79Nature of Share.............................................................................................................................. 5.79Kinds of Shares.............................................................................................................................. 5.80Share Capital ................................................................................................................................. 5.81Shareholders’ Voting Rights............................................................................................................. 5.81Commission on Issue of Shares and Debentures ................................................................................. 5.81Purchase by Company of its Own Shares ........................................................................................... 5.82Loans by Company for Purchase of Own Shares ................................................................................. 5.82Power of Company to Purchase (Buy-Back) Own Securit ies.................................................................. 5.83

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Transfer to Capital Redemption Reserve ............................................................................................ 5.83Issue of Sweat Equity Shares ........................................................................................................... 5.84Employees Stock Option .................................................................................................................. 5.84Issue of Shares at Premium ............................................................................................................. 5.85Prohibit ion on Issue of Shares at Discount ....................................................................................... 5.85Issue and Redemption of Preference Shares....................................................................................... 5.86Further Issue of Capital .................................................................................................................. 5.86Conversion of Loans into Capital ..................................................................................................... 5.87Share Certificate............................................................................................................................. 5.88Stocks........................................................................................................................................... 5.88Transfer of Shares .......................................................................................................................... 5.89Transfer of Security in case of Listed Company ................................................................................. 5.93Transfer when Company is under Winding Up ................................................................................... 5.93Transmision of Shares..................................................................................................................... 5.94Nomination of Shares ..................................................................................................................... 5.95Lien on Shares............................................................................................................................... 5.95Dematerialization ........................................................................................................................... 5.96Key Terms ..................................................................................................................................... 5.97Test Questions................................................................................................................................ 5.97Practical Problems .......................................................................................................................... 5.99

8. Membership of Company ................................................................................................. 5.102–5.114Learning Objectives .......................................................................................................................5.102Members without being Shareholders ..............................................................................................5.102Shareholders without being Members ..............................................................................................5.103Modes of Acquiring Membership .....................................................................................................5.103Termination of Membership ............................................................................................................5.104Persons who can be Members ..........................................................................................................5.105Joint Shareholders ........................................................................................................................5.107Rights of Members ........................................................................................................................5.107Liability of Members......................................................................................................................5.108Calls on Shares .............................................................................................................................5.108Advance Payment of Calls ..............................................................................................................5.109Forfeiture of Shares .......................................................................................................................5.109Surrender of Shares.......................................................................................................................5.111Test Questions...............................................................................................................................5.112Practical Problems .........................................................................................................................5.113

9. Meetings and Proceedings ............................................................................................... 5.115–5.136Learning Objectives .......................................................................................................................5.115Kinds of Meetings .........................................................................................................................5.115Statutory Meeting .........................................................................................................................5.115Annual General Meeting ................................................................................................................5.116Extraordinary General Meeting ........................................................................................................5.118Meetings Convened by National Company Law Tribunal .....................................................................5.119Class Meetings...............................................................................................................................5.119Other Meetings .............................................................................................................................5.119Procedures and Requisites of Valid General Meeting ..........................................................................5.121Resolutions ..................................................................................................................................5.126Passing of Resolutions by Postal Ballot ............................................................................................5.127Minutes of the Proceedings ............................................................................................................5.129Key Terms ....................................................................................................................................5.130

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Test Questions.............................................................................................................................. 5.130Practical Problems ........................................................................................................................ 5.132

10. Borrowing Powers............................................................................................................ 5.137–5.147Learning Objectives ...................................................................................................................... 5.137Extent of Borrowing Powers .......................................................................................................... 5.137Powers to Give Security ................................................................................................................ 5.137Charge on Uncalled Capital ............................................................................................................ 5.137Consequences of Ultra Vires Borrowings.......................................................................................... 5.138Remedies available to the Lender of Money ..................................................................................... 5.138Debentures .................................................................................................................................. 5.139Difference between Debentures and Shares ...................................................................................... 5.142SEBI Guidelines for Issue of Debt Instruments ................................................................................ 5.143Charge ........................................................................................................................................ 5.144Key Terms ................................................................................................................................... 5.146Test Questions.............................................................................................................................. 5.147

11. Managerial Personnel and thei r Remuneration ................................................................ 5.148–5.155Learning Objectives ...................................................................................................................... 5.148Meaning of Managerial Personnel ................................................................................................... 5.148Key Managerial Personnel .............................................................................................................. 5.148Choice of the Managerial Personnel ................................................................................................ 5.149Overall Limit Managerial Remuneration .......................................................................................... 5.150Schedule (V) Part (II) Remuneration .............................................................................................. 5.151Key Terms ................................................................................................................................... 5.155Test Questions.............................................................................................................................. 5.155Practical Problems ........................................................................................................................ 5.155

12. Di rectors ......................................................................................................................... 5.156–5.173Learning Objectives ...................................................................................................................... 5.156Meaning of Directors .................................................................................................................... 5.156Number and Composit ion of Directors............................................................................................. 5.156Classification of Directors.............................................................................................................. 5.157Committees of Board of Directors................................................................................................... 5.160Number of Directorships................................................................................................................ 5.161Disqualification of Directors .......................................................................................................... 5.161Vacation of Office by A Director .................................................................................................... 5.162Removal of Directors .................................................................................................................... 5.162Resignation by Director ................................................................................................................ 5.163Loans to Directors ........................................................................................................................ 5.164Related Party Transactions............................................................................................................. 5.164Powers of Directors ....................................................................................................................... 5.165Further Restrict ions on the Powers of the Board .............................................................................. 5.166Duties of Directors ....................................................................................................................... 5.168Legal Posit ion of Directors............................................................................................................. 5.170Key Terms ................................................................................................................................... 5.170Test Questions.............................................................................................................................. 5.171Practical Problems ........................................................................................................................ 5.172

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13. Other Managerial Personnel ............................................................................................. 5.174–5.179Learning Objectives .......................................................................................................................5.174Managing Director .........................................................................................................................5.174Whole-t ime Directors .....................................................................................................................5.176Difference between A Managing Director and Whole-t ime Director ......................................................5.176Managerial Remuneration of Directors .............................................................................................5.176Manager .......................................................................................................................................5.177Key Terms ....................................................................................................................................5.178Test Questions...............................................................................................................................5.178Practical Problems .........................................................................................................................5.179

14. Secretory, Secretarial Standards and Audi t ...................................................................... 5.180–5.189Learning Objectives .......................................................................................................................5.180Meaning of Secretary .....................................................................................................................5.180Appointment of Secretary ..............................................................................................................5.181Dismissal of Secretary ....................................................................................................................5.182Status of Secretary ........................................................................................................................5.182Duties of Secretary ........................................................................................................................5.183Liabilit ies of a Company Secretary ...................................................................................................5.184Secretarial Standards .....................................................................................................................5.185Secretarial Audit ...........................................................................................................................5.186Key Terms ....................................................................................................................................5.188Test Questions...............................................................................................................................5.188Practical Problems .........................................................................................................................5.189

15. Accounts, Audi t and Investigation ................................................................................... 5.190–5.213Learning Objectives .......................................................................................................................5.190Books of Account .........................................................................................................................5.190Statutory Books of Account and Statutory Registers.........................................................................5.191Financial Statements .....................................................................................................................5.196National Financial Reporting Authority ...........................................................................................5.200Corporate Social Responsibility .......................................................................................................5.200Internal Audit ..............................................................................................................................5.202Audit and Auditors .......................................................................................................................5.202Cost Records and Cost Audit ...........................................................................................................5.207Investigation ................................................................................................................................5.208Key Terms ....................................................................................................................................5.211Test Questions...............................................................................................................................5.212Practical Problems .........................................................................................................................5.213

16. Corporate Governance...................................................................................................... 5.214–5.235Learning Objectives .......................................................................................................................5.214Concept of Corporate Governance....................................................................................................5.214Emergence of Corporate Governance................................................................................................5.215Global Institut ions for Corporate Governance ...................................................................................5.216Requirements as to Corporate Governance........................................................................................5.217As per SEBI’S Clause 49 of List ing Agreement ..................................................................................5.222Practicles......................................................................................................................................5.222Annexure X to the List ing Agreement .............................................................................................5.228Annexure XI to the List ing Agreement ............................................................................................5.229Annexure XII to the List ing Agreement ..........................................................................................5.230

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Annexure XIII to the List ing Agreement ........................................................................................ 5.231Comparission of Corporate Governance Requirement ......................................................................... 5.231Evaluation of Corporate Governance Measures ................................................................................. 5.233Conclusion .................................................................................................................................. 5.234Key Terms ................................................................................................................................... 5.235Test Questions.............................................................................................................................. 5.235Practical Problem ......................................................................................................................... 5.235

17. Dividends, Bonus and Interest ......................................................................................... 5.236–5.244Learning Objectives ...................................................................................................................... 5.236Dividends .................................................................................................................................... 5.236Bonus Shares............................................................................................................................... 5.241Key Terms ................................................................................................................................... 5.242Test Questions.............................................................................................................................. 5.243Practical Problems ........................................................................................................................ 5.244

18. Compromises, Arrangements and Amalgamation .............................................................. 5.245–5.252Learning Objectives ...................................................................................................................... 5.245Compromises and Arrangements..................................................................................................... 5.245Reconstruction and Amalgamation ................................................................................................. 5.248Amalgamation of Companies in Public Interest ................................................................................ 5.250Preservation of Books and Papers of the Amalgamated Company ........................................................ 5.251Key Terms ................................................................................................................................... 5.251Test Questions.............................................................................................................................. 5.251Practical Problems ........................................................................................................................ 5.251

19. Supremacy of Majori ty and Protection of Minori ty ........................................................... 5.253–5.256Learning Objectives ...................................................................................................................... 5.253Rule of Supremacy of Majority ...................................................................................................... 5.253Exceptions to the Rule Supremacy of Majority ................................................................................ 5.254Key Terms ................................................................................................................................... 5.256Test Questions.............................................................................................................................. 5.256Practical Problems ........................................................................................................................ 5.256

20. Prevention of Oppression and Mismanagement ................................................................ 5.257–5.262Learning Objectives ...................................................................................................................... 5.257Oppression ................................................................................................................................... 5.257Mismanagement ........................................................................................................................... 5.258Key Terms ................................................................................................................................... 5.261Test Questions.............................................................................................................................. 5.261Practical Problems ........................................................................................................................ 5.262

21. Winding Up .................................................................................................................... 5.263–5.288Learning Objectives ...................................................................................................................... 5.263Meaning of Winding Up................................................................................................................ 5.263Meaning of Dissolution ................................................................................................................. 5.263Winding Up by the Tribunal .......................................................................................................... 5.264Liquidation Under Insolvency and Bankruptcy Code 2016 ................................................................ 5.274Voluntary Liquidation of Company ................................................................................................. 5.280Conduct of Winding Up ................................................................................................................ 5.281Key Terms ................................................................................................................................... 5.281

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Test Questions...............................................................................................................................5.287Practical Problems .........................................................................................................................5.288

22. Company Law in a Computerized Envi ronment: E-Fi ling .................................................. 5.289–5.295Learning Objectives .......................................................................................................................5.289Background – MCA 21 ...................................................................................................................5.289Key Benefits of MCA 21 Project ......................................................................................................5.290Scope of MCA 21...........................................................................................................................5.290Services Available on MCA 21 .........................................................................................................5.290Organization of Work Under MCA 21 ...............................................................................................5.291E-Filing ........................................................................................................................................5.291Online Registration of Company ......................................................................................................5.292Digital Signature Certificate ...........................................................................................................5.292Director Identification Number .......................................................................................................5.292Corporate Identity Number .............................................................................................................5.293The Companies Act and E-Filing .....................................................................................................5.294Conclusion ...................................................................................................................................5.294Key Terms ....................................................................................................................................5.294Test Questions...............................................................................................................................5.294Practical Problems .........................................................................................................................5.295

23. Global Companies ............................................................................................................ 5.296–5.299Learning Objectives .......................................................................................................................5.296Concept of Global Company ............................................................................................................5.296Difference between Global Company and Other Companies .................................................................5.296Formation of Global Company .........................................................................................................5.297Characterist ics of Global Company ...................................................................................................5.297Administration of Global Company ..................................................................................................5.298Indian Companies in Forbes Global 2000 List-2014 ............................................................................5.299Key Terms ....................................................................................................................................5.299Test Questions...............................................................................................................................5.299

24. Other Companies ............................................................................................................. 5.300–5.312Learning Objectives .......................................................................................................................5.300One Person Company (OPC) .............................................................................................................5.300Small Company .............................................................................................................................5.302Dormant Company .........................................................................................................................5.302Defunct Company ..........................................................................................................................5.303Producer Company .........................................................................................................................5.304Sick Industrial Company ................................................................................................................5.306Key Terms ....................................................................................................................................5.310Test Questions...............................................................................................................................5.311Practical Problems .........................................................................................................................5.312

Section 6MISCELLANEOUS

1. The Essential Commodi t ies Act, 1955 ...................................................................................... 6.3–6.7Learning Objectives .......................................................................................................................... 6.3Important Terms .............................................................................................................................. 6.3

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Powers of Central Government ........................................................................................................... 6.4Test Questions.................................................................................................................................. 6.7

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

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

Practical Problems .......................................................................................................................... 6.274. The Mult i -State Co-operative Societies Act, 2002 ................................................................. 6.28–6.44

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

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

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

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6. The Employees Provident Funds andMiscellaneous Provisions Act, 1952 ..................................................................................... 6.58–6.79Learning Objectives ........................................................................................................................ 6.58Scope and Application .................................................................................................................... 6.58Definit ions .................................................................................................................................... 6.59Employees Provident Funds Scheme ................................................................................................. 6.61Employees’ Pension Scheme............................................................................................................. 6.61Employees’ Deposit-Linked Insurance Scheme.................................................................................... 6.62Administration of Schemes ............................................................................................................. 6.63Membership of the Fund ................................................................................................................. 6.65Contributions to the Fund .............................................................................................................. 6.67Duties of Employer ......................................................................................................................... 6.68Nominations, Payments and Withdrawals from the Fund ..................................................................... 6.70Payment of Provident Fund ............................................................................................................. 6.71Schedule I ..................................................................................................................................... 6.72Schedule II ................................................................................................................................... 6.75Schedule III ................................................................................................................................ ..6.76Schedule IV................................................................................................................................... 6.76Test Questions................................................................................................................................ 6.77Practical Problem ........................................................................................................................... 6.78

7. The Payment of Gratui ty Act, 1972 ...................................................................................... 6.80–6.86Learning Objectives ........................................................................................................................ 6.80Scope and Application .................................................................................................................... 6.80Important Terms ............................................................................................................................ 6.80Administration of the Act ............................................................................................................... 6.82Test Questions................................................................................................................................ 6.85Practical Problems .......................................................................................................................... 6.86

8. The Payment of Wages Act, 1936 ......................................................................................... 6.87–6.95Learning Objectives ........................................................................................................................ 6.87Scope and Application .................................................................................................................... 6.87Definit ions .................................................................................................................................... 6.87Wages : Payment and Deductions ..................................................................................................... 6.88Records and Inspection ................................................................................................................... 6.92Contracting Out ............................................................................................................................. 6.94Test Questions................................................................................................................................ 6.94Practical Problems .......................................................................................................................... 6.95

9. The Payment of Bonus Act, 1965 ....................................................................................... 6.96–6.113Learning Objectives ........................................................................................................................ 6.96Objective and Application of the Act ............................................................................................... 6.96Definit ions .................................................................................................................................... 6.98Liability to Pay Bonus ...................................................................................................................6.100Eligibility for Bonus......................................................................................................................6.100Amount of Bonus .........................................................................................................................6.100Applicability of Act to Establishments Newly Setup ..........................................................................6.101Payment of Bonus.........................................................................................................................6.102

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Miscellaneous Provisions ............................................................................................................... 6.102The First Schedule........................................................................................................................ 6.103The Second Schedule.................................................................................................................... 6.105The Third Schedule ...................................................................................................................... 6.107The Fourth Schedule..................................................................................................................... 6.110Test Questions.............................................................................................................................. 6.110Practical Problems ........................................................................................................................ 6.111

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

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

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

12. The Income Tax Act, 1961 ............................................................................................... 6.145–6.151Learning Objectives ...................................................................................................................... 6.145Scope and Application .................................................................................................................. 6.145Finance Act ................................................................................................................................. 6.145Scheme of Taxation ...................................................................................................................... 6.146

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Important Concepts .......................................................................................................................6.146Deduction of Tax at Source ............................................................................................................6.147Advance Payment of Tax ................................................................................................................6.148Assessment Procedure ....................................................................................................................6.148Types of Assessment ......................................................................................................................6.149Key Terms ....................................................................................................................................6.150Test Questions...............................................................................................................................6.150

13. Goods and Services Tax (GST) .......................................................................................... 6.152–6.164Learning Objectives .......................................................................................................................6.152Int roduct ion .................................................................................................................................6.152GST Rates.....................................................................................................................................6.155Key Terms ....................................................................................................................................6.164Test Questions...............................................................................................................................6.164

14. The Competi t ion Act, 2002 .............................................................................................. 6.165–6.179Learning Objectives .......................................................................................................................6.165Scope and Applications..................................................................................................................6.165Definit ions ...................................................................................................................................6.166Prohibit ion of Agreements .............................................................................................................6.167Prohibit ion of Abuse of Dominant Posit ion ......................................................................................6.168Regulations of Combinations ..........................................................................................................6.169Competit ions Commission of India ..................................................................................................6.171Director General ............................................................................................................................6.172Registrar and Officers and Other Employees of Commission ................................................................6.173Duties, Powers and Functions of Competit ion Commission of India.....................................................6.173Penalties.......................................................................................................................................6.176Miscellaneous................................................................................................................................6.177Key Terms ....................................................................................................................................6.178Test Questions...............................................................................................................................6.178

15. The Limi ted Liabi li ty Partnership Act ............................................................................. 6.180–6.193Learning Objectives .......................................................................................................................6.180Int roduct ion .................................................................................................................................6.180Meaning and Nature of Limited Partnership......................................................................................6.180Formation of Limited Liability Partnership .......................................................................................6.181Designated Partners .......................................................................................................................6.181Limited Liability Partnership V/ s. Partnership Firm ...........................................................................6.182Limited Liability Partnership V/ s. Limited Liability Company .............................................................6.183Partners and their Relations ...........................................................................................................6.184Cessation of Partnership .................................................................................................................6.185Extent and Limitation of Liability of Limited Liability Partnership and Partners...................................6.186Financial Disclosures......................................................................................................................6.182Contributions ...............................................................................................................................6.187Assignment and Transfer of Partnership Rights ................................................................................6.187Investigation ................................................................................................................................6.187

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Conversion from Firm into Limited Liability Partnership................................................................... 6.188Conversion from Private Company into Limited Liability Partnership ................................................. 6.189Conversion from Unlisted Public Company into Limited Liability Partnership ...................................... 6.190Winding Up and Dissolution .......................................................................................................... 6.191Key Terms ................................................................................................................................... 6.192Test Questions.............................................................................................................................. 6.192

16. The Prevention of Money Laundering Act, 2002............................................................... 6.194–6.201Learning Objectives ...................................................................................................................... 6.194Int roduct ion ................................................................................................................................ 6.194Offence of Money Laundering........................................................................................................ 6.194Attachment, Adjudication and Confiscation .................................................................................... 6.195Obligations of Banking Companies, Financial Institut ions and Intermediaries ..................................... 6.197Summons, Searches and Seizures, etc. ............................................................................................ 6.197Appellate Tribunal ........................................................................................................................ 6.199Special Courts .............................................................................................................................. 6.199Miscellaneous............................................................................................................................... 6.199Key Terms ................................................................................................................................... 6.200Test Questions.............................................................................................................................. 6.200

17. Indian Copyright Act, 1957 ............................................................................................. 6.202–6.212Learning Objectives ...................................................................................................................... 6.202Int roduct ion ................................................................................................................................ 6.202Definit ions .................................................................................................................................. 6.202Publication .................................................................................................................................. 6.204Copyright Office and Copyright Board ............................................................................................ 6.204Copyright .................................................................................................................................... 6.205Ownership of Copyright and Rights of the Owner ............................................................................ 6.206Terms of Copyright ....................................................................................................................... 6.207International Copyright ................................................................................................................ 6.208Registration of Copyright .............................................................................................................. 6.208Infringement of Copyright ............................................................................................................ 6.209Civil Remedies ............................................................................................................................. 6.211Offences...................................................................................................................................... 6.211Key Terms ................................................................................................................................... 6.212Test Questions.............................................................................................................................. 6.212

18. The Envi ronment Protection Act, 1986 ............................................................................ 6.213–6.218Int roduct ion ................................................................................................................................ 6.213Definit ions .................................................................................................................................. 6.213General Powers of The Central Government ..................................................................................... 6.214Prevention, Control, and Abatement of Environmental Pollution....................................................... 6.215Miscellaneous............................................................................................................................... 6.216Key Terms ................................................................................................................................... 6.217Test Questions.............................................................................................................................. 6.217

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INTRODUCTORY

LEARNING OBJECTIVES A careful study of this chapter wi ll enable you to : understand the concept of law; differentiate between Law and Mercantile Law; identify the different sources of Indian Mercantile Law; and explain the meaning of certain key terms.

MEANING OF LAWThe term law refers to rules of conduct enforced by the State to maintain peace and order in the society. Their objectiveis to provide security and uniformity by regulating human actions. In the absence of law, life and business will becomea matter of survival not only of the fit test but also of the most ruthless. Since laws are backed by the authority and thepower of the State, they are enforceable against all individuals irrespective of their social status.

It will be appropriate here to give definit ions of the term law by some eminent scholars :“Law is the body of principles recognised and applied by the State in administrat ion of just ice.” — Salmond“A law is a rule of conduct imposed and enforced by the sovereign.” — Austin“Law in its most general and comprehensive sense signifies a rule of act ion and is applied indiscriminately to all kinds of

act ions whether animate or inanimate, rat ional or irrat ional.” — BlackstoneThus, law may be defined as the system of rights and obligations which the State enforces.

MEANING OF MERCANTILE LAWThe term ‘Mercantile Law’ or ‘Law Merchant’ refers to those legal rules which govern and regulate mercantile or businesstransactions. These rules, regulations, etc. bring a sense of seriousness and definiteness in business dealings. They providefor rules regarding the validity of making contracts and their performance. They deal with various types of contracts suchas those relating to partnership, sale of goods, agency, bailment, indemnity and guarantee. Mercantile Law also includesin its fold the laws relating to the joint stock companies, carriage of goods, insurance, insolvency, etc.

SOURCES OF INDIAN MERCANTILE LAW

The main sources of Indian Mercantile Law are as follows :

(1) English Mercanti le Law : Indian Mercantile Law is largely based on English Mercantile Law. As a matter of fact,even after independence, in the absence of provisions regarding any matter of the Indian law, the provisions ofthe English law are generally accepted in the Indian Courts.

(2) Statutes of Indian Legislatures : Most of the Indian laws are in the form of Acts passed by the Legislatures.Both the Central Legislatures (i.e., the Parliament) and the state Legislatures are empowered to enact lawsrelating to matters which come within their jurisdiction. For example, the Companies Act, 1956 has been enactedby the Parliament while the different State Legislatures have enacted the Sales Tax Acts applicable to theirrespective States.

1.2 Introductory

(3) Judicial Decisions : Past judicial decisionsacquire the force of precedents and aregenerally followed by law courts in decidingsimilar cases. In our country, the courtshave been divided into three groups :(i) the Supreme Court, (ii) the High Courtsand (i i i) the Sub-ordinate Courts. TheSupreme Court is the final court of appeal.For t he court of same stature, earlierdecisions have only a guiding and persuasivevalue. However, for a court of a lowerstature, the decision given by the court of a higher stature regarding the same subject matter is usually takenas having binding effects.

(4) Customs and Usage : Customs and Usage also play a significant role in regulating business transactions. Thisfact has been accepted by many Indian statutes. For example section 1 of the Indian Contract Act states that‘nothing therein contained shall affect any usage or customs of trade’. Similarly Section 1 of the NegotiableInstruments Act also provides that ‘nothing therein contain shall affect any legal usage relating to Instrumentsin an oriental language1.

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

Law : Rules of conduct enforced by State to maintain peace and order in the society. Mercanti le Law : Legal rules which govern and regulate mercantile transactions.

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

Object ive Type : Test Your Knowledge

1. State whether each of the following statements is True or False

(i) Laws are framed by the State to maintain peace and order in the society.(ii) Mercant ile Law and Law Merchant are synonymous terms.(iii) Customs and usages have no role to play in regulat ing business transact ions.(iv) Past judicial decisions have to be accepted by the law courts while giving decisions in future.(v) Both the Parliament and State Legislatures have the power to make laws.

[Ans. (i) True; (ii) True; (iii) False; (iv) False; (v) True]

2. Fill in the blanks:

(i) The decisions of a High Court are binding on all the ___________ Courts. (CS Foundation, June 2008)(ii) Law means a ___________ of rules. (CS Foundation, June 2008)

[Ans. (i) Subordinate (ii) Set]

Essay Type : For Review, Discussion and Pract ice

1. Explain the meaning of the term ‘law’. Different iate it from Mercant ile Law.

2. State the main sources of Indian Mercant ile Law. (CS Foundation, Dec. 2004, June 2011)

1. These Instruments are popularly termed as ‘Hundis’.

SECTION 1

THE INDIAN CONTRACT ACT, 1872

Chapter 1

GENERAL PRINCIPLES

LEARNING OBJECTIVES

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

SCOPE AND APPLICATION

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

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

The Act largely deals with :

(i) the general principles applicable to contracts;

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

(iii) the principles applicable to quasi contracts; and

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

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

1.6 The Indian Contract Act, 1872

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

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

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

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

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

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

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

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

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

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

The essential requirements of a contract, based on the above definit ions can be put as follows :(1) Two Parties : Two parties are necessary to make a contract. The person who makes the promise is known as

the ‘promisor’ and the person to whom the promise is made is known as the ‘promisee’. As a matter of fact,in a contract, each party is a promisor as well as a promisee. For example, when A promises to sell his car fora sum of Rs. 10,000 to B, A is a promisor because he has promised to sell his car while he is also a promiseebecause there is a promise from B to pay a sum of Rs. 10,000 to him. The same is also applicable to B.

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

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

From the above following conclusions can be drawn :

(a) All agreements are not contracts : Agreement is a much wider term than a contract. As stated above, an agreementmay or may not give rise to legal obligations. An agreement which does not create legal obligation, is not a contract.Agreements which the part ies declare not to be binding also do not constitute contract. They may be just ‘honourablepledges’ and expressly stated to be ‘outside the jurisdiction of any court.’2

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

(ii) A of Ceylon came to England with his wife for a holiday. While returning to Ceylon on the expiry of his leave, hepromised his wife, who on medical grounds had to remain in England, a household allowance of £ 30 a month unt il she joinedhim in Ceylon. After some t ime when the two part ies separated from each other, the wife claimed the allowance. The Courtdid not allow the claim on the ground that domest ic arrangements are outside the realm of cont ract altogether.3

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

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

ESSENTIAL ELEMENTS OF A VALID CONTRACT

The following are the essential elements of a valid contract :

(1) Agreement : Agreement means communicat ion by the part ies to one another their intention to createrelationship. This requires a proposal from the side of one party and its acceptance by the other party. Thus,a contract requires two parties— one making the proposal and the other accepting it .

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

(3) Free Consent : The term consent means understanding the same thing in the same sense by the parties enteringinto an agreement. Consent is said to be free if it has been given by the part ies independently without anyfear or favour. In order to make a contract valid, it is necessary that part ies to the contract not only give theirconsent, but should also be free.

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

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

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

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

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

General Principles

1.8 The Indian Contract Act, 1872

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

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

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

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

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

CLASSIFICATION OF CONTRACTS

Enforceability M ode of C reation

Express C ontracts

Valid Void Illegal U nenfor-ceable

Execu-ted

Execu-tory

Im plied Contracts

Extent of Execution

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

CLASSIFICATION OF CONTRACTS

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

1. Classification of Contracts on the Basis of Enforceability

(a) Valid Contracts : Contracts which satisfy all the essential elements of a valid contract as laid down by Section 10,are enforceable in a court of law. Such contracts are termed as valid contracts.

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

Following are some of such contracts :

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

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

1.9

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

Examples : (i) On 15th January. A agrees with B to sell him horse for a sum of Rs. 500 on 20th February. The horsedies on 21st January. The performance of the agreement was possible at the t ime when it was made, but now its performancebecomes impossible on account of supervening impossibil ity. It is, therefore, a void cont ract .

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

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

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

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

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

Void Agreement and Void Contract

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

(a) The agreement shall be unenforceable.

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

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

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

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

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

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

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

General Principles

1.10 The Indian Contract Act, 1872

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

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

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

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

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

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

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

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

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

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

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

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

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

Difference between Void and Illegal Agreements1. All illegal agreements are void, but all void agreements are not illegal.2. Unlike illegal agreements, there is no punishment to the part ies to a void agreement.

1.11

3. Agreements collateral to void agreements are valid but agreements collateral to illegal agreements are void ab-initio.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

General Principles

1.12 The Indian Contract Act, 1872

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

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

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

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

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

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

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

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

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

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

option of the other or others.

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

Object ive Type : Test Your Knowledge

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

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

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

(a) X agrees with Y to discover a treasure by magic.(b) X bids at a public auct ion.

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(c) A takes a sit in a public omni bus.(d) X promises in writ ing to give Rs. 500 to Y.

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

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

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

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

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

Essay Type : For Review, Discussion and Pract ice

1. Explain the essent ials which must be fulfilled before an agreement becomes enforceable at law.2. “The law of contracts is not the whole law of agreements nor is it the whole law of obligat ions.” — (Salmond).

Comment .3. How do you dist inguish between Void, Voidable, Unenforceable and Illegal Contracts?4. Different iate between (i) Executed and Executory Contracts, (ii) Formal and Simple Contract.5. Different iate between :

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

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

( i ) A voidable contract is valid t il l the aggrieved party opts to avoid it . (ICWA Foundation, June 1998)( i i ) Is there any difference between agreement and contract? (ICWA Foundation, June 2000)

( i i i ) Illegal agreements and void agreements are the same. (ICWA Foundation, Dec. 1999; Dec. 2000)( iv) An agreement to agree is a valid contract. (ICWA Foundation, June 2000)(v) Dist inguish between void agreement and voidable cont ract. (ICWA Foundation, Dec. 2000)

(vi ) “All il legal agreements are void”— Comment . (ICWA Foundation, Dec. 2000)(vi i) What are essent ials for validity of a contract? (ICWA Foundation, June 2001)

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

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

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

(B.Com. (Hons.), Delhi, 1988)12. “The law of contract is not the whole law of obligat ions.” Comment. (B.Com. (Hons.), Delhi, 1991)13. “An agreement enforceable at law is a contract .” Explain. (B.Com. (Pass) , Delhi 2005)

General Principles