Key Highlights of the Companies (Amendment) Act, 2020

The Companies Amendment Act 2020

BE it enacted by Parliament in the Seventy-first Year of the Republic of India as follows:

Short title and commencement:

This Act may be called the Companies (Amendment) Act, of 2020.

  1. It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint:
  2. Provided that different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.

Amendment of section 2 18 of 2013: In the Companies Act, 2013 (hereinafter referred to as the principal Act), in section 2, in clause (52), the following proviso shall be inserted, namely:—

“Provided that such class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with the Securities and Exchange Board, shall not be considered as listed companies.

Amendment of section: In section 8 of the principal Act, in sub-section (11) —

  • The words “with imprisonment for a term which may extend to three years or” shall be omitted;
  • For the words “twenty-five lakh rupees, or with both”, the words “twenty-five lakh rupees” shall be substituted.

Amendment of section 16: In section 16 of the principal Act;—

  • In subsection (1), in clause (2), for the words “six months”, the words “three months” shall be substituted;
  • For sub-section (3), the following sub-section shall be substituted, namely: “(3)if a company is in default in complying with any direction given under sub-section (1), the

Central Government shall allot a new name to the company in such manner as may be prescribed and the Registrar

  • shall enter the new name in the register of companies in place of the old name and issue a fresh certificate of incorporation with the new name, which the company shall use thereafter:
  • Provided that nothing in this sub-section shall prevent a company from subsequently changing its name by the provisions of section 13.”

Amendment of Section 26: In Section 26 Of The Principle Act, In Sub-Section (9)-

  • The words “with imprisonment for a term which may extend to three years or” shall be omitted;
  • For the words “three lakh rupees, or with both”, the words “three lakh rupees” shall be substituted.
  • Amendement Of Section 40. In section 40 of the*principal Act, in sub-section (5)-
  • The words “with imprisonment for a term which may extend to one year or” shall be omitted;
  • For the words “three lakh rupees, or with both”, the words “three lakh rupees” shall be substituted.

Amendment Of Section 8: In section 48 of the principal Act, sub-section (5) shall be omitted.

Amendment Of Section 56. In section 56 of the principal Act, for sub-section (6), the following sub-section shall be substituted, namely: “(6) Where any default is made in complying with the provisions of sub-sections (1) to (5), the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

Amendment of section 59: In section 59 of the principal Act, sub-section (5) shall be omitted.

Amendment of section 62: In section 62 of the principal Act, in sub-section (1), in clause (a), in sub-clause, after the words “less than fifteen days”, the words “or such lesser number of days as may be prescribed” shall be inserted.

Amendment of section 64. In section 64 of the principal Act, in sub-section(2)-

  • For the words “one thousand rupees”, the words “five hundred rupees” shall be substituted;
  • For the words “or five lakh rupees whichever is less”, the words “subject to a maximum of five lakh rupees in case of a company and one lakh rupees in case of an officer who is in default” shall be substituted.

Amendment Of Section 66: In section 66 of the principal Act, sub-section (11) shall be omitted

Amendment of section 68: In section 68 of the principal Act, in sub-section (11)-

  • The words “with imprisonment for a term which may extend to three years or” shall be omitted;
  • For the words “three lakh rupees, or with both”, the words “three lakh rupees” shall be substituted.

Amendment of section 71: In section 71 of the principal Act, sub-section (11) shall be omitted.

Amendment of section 86: In section 86 of the principal Act, for sub-section (1), the following sub-section shall be substituted, namely:

“If any company is in default in complying with any of the provisions of this Chapter, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”.

Amendment of section 38: In section 80 of the principal Act, for sub-section (5), the following sub-section shall be substituted, namely—

(5)If a company does not maintain a register of members or debenture-holders or other security holders or fails to maintain them by the provisions of sub-section (1) or sub-section (2), the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

Amendment of Section 89: In section 89 of the principal Act, (a) for sub-section (5), the following sub-section shall be substituted, namely—

  • “(5) If any person fails to make a declaration as required under sub-section (1) or sub-section (2) or sub-section (3), he shall be liable to a penalty of fifty thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day after the first during which such failure continues, subject to a maximum of five lakh rupees.”;
  • (2) for sub-section (7), the following sub-section shall be substituted, namely:— “(7) If a company, required to file a return under sub-section (6), fails to do so before the expiry of the time specified therein, the company and every officer of the company who is in default shall be liable to a penalty of one thousand rupees for each day during which such failure continues, subject to a maximum of five lakh rupees in the case of a company and two lakh rupees in case of an _officer who is in default.
  • After sub-section (10), the following sub-section shall be inserted, namely: ‘(11) The Central Government may, by notification, exempt any class or classes of persons from complying with any of the requirements of this section, except sub-section (10), if it is considered necessary to grant such exemption in the public interest and any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.

Amendment of section 90: In section 90 of the principal Act,—

  1. For sub-section (10), the following sub-section shall be substituted, namely:— ‘(10) If any person fails to make a declaration as required under subsection (1), he shall be liable to a penalty of fifty thousand rupees and in case of continuing failure, with a further penalty of one thousand rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”
  2. For sub-section (11), the following sub-section shall be substituted, namely: “(11) If a company, required to maintain register under sub-section (2) and file the information under sub-section (4) or required to take necessary steps under sub-section (4A), fails to do so or denies inspection as provided therein, the company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day,
  3. After the first during which such failure continues, subject to a maximum of five lakh rupees, every officer of the company who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of two hundred rupees for each day, after the first during which such failure continues, subject to a maximum of one lakh rupees.

Amendment of section 92: In section 92 of the principal Act,—

1. In sub-section (5),—

  • For the words “fifty thousand rupees”, the words “ten thousand rupees’1 shall be substituted;
  • For the words “five lakh rupees”, the words “two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default11 shall be substituted;

2. In sub-section (6), for the words “punishable with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees”, the words “liable to a penalty of two lakh rupees” shall be substituted.

Amendment of section 105: In section 105 of the principal Act, in sub-section (5),

  • 1. For the words “who knowingly issues the invitations as aforesaid or wilfully authorizes or permits their issue shall be punishable with a fine which may extend to one lakh rupees”, the words
  • “who invites as aforesaid or authorizes or permits their issue, shall be liable to a penalty of fifty thousand rupees11 shall be substituted;
  • In the proviso, for the word “punishable, the word liable shall be substituted.

Amendment of section 117: In section 117 of the Principal Act,—

  • For Sub-Section (2), The Following Sub-Section Shall Be Substituted, Namely:— “(2) If any company fails to file the resolution of the agreement under sub-section (1) before the expiry of the period specified therein, such company shall be liable to a penalty of ten thousand rupees and in case of continuing failure.
  • with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees, and every officer of the company who is in default including the liquidator of the company.
  • , if any, shall be liable to a penalty of ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.11;

In subsection (3), in clause (g), for the second proviso, the following proviso shall be substituted, namely:—

  • “Provided further that nothing contained in this clause shall apply in respect of a resolution passed to grant loans, or give guarantee or provide security in respect of loans under clause (f)-of sub-section (3) of section 179 in the ordinary course of its business by,— (a) a banking company; -(b) company any class registeredof non-banking under.
  • 2 of 1934: Chapter 3B of the Reserve Bank of India Act, 1934, as may be prescribed in Consultation with the Reserve Bank of India;
  • 53 of 1987: Any class of housing finance company registered under the National Housing Bank Act, 1987, as may be prescribed in consultation with the National Housing Bank; and”.

Amendment of section 124: In section 124 of the principal Act, for sub-section (7), the following sub-section shall be substituted, namely:—

  • “(7) If a company fails to comply with any of the requirements of this section, such company shall be liable to a penalty of one lakh rupees and in case of continuing failure, with a further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of ten lakh rupees and every officer of the company
  • who is in default shall be liable to a penalty of twenty-five thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

Amendment of section 128: In section 128 of the principal Act, in sub-section (6)-

The words “with imprisonment for a term which may extend to one year or” shall be omitted;

The words “or with both” shall be omitted.

  • Insertion of new section 129A. Periodical financial results.
  • After section 129 of the principal Act, the following section shall be inserted, namely:—
  • “129A. The Central Government may require such class or classes of unlisted companies, as may be prescribed,—
  • To prepare the financial results of the company on such periodical basis in such form as may be prescribed;
  • To obtain approval of the Board of Directors and complete audit or limited review of such periodical financial results in such manner as may be prescribed; and

File a copy with the Registrar within thirty days of completion of the relevant period with such fees as may be prescribed.”

Amendment of section 134: In section 134 of the principal Act, for sub-section (8), the following sub-section shall be substituted, namely:

“(8) If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”

Amendment of Section 135: In section 134 of the principal Act, for sub-section (8), the following sub-section shall be substituted, namely:

“(8) If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”

Sub-section for such number of succeeding financial years and in such manner, as may be prescribed.’;

 For sub-section (7), the following sub-section shall be substituted, namely:—

  • ’(7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility
  • Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII,
  • Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less. (c) after sub-section (8),

The following sub-section shall be inserted, namely:—

“(9) Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for the constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.”

Amendment of section 135: In section 137 of the principal Act, in sub-section (3),— (a) for the words -one thousand rupees for every day during which the failure continues but which shall not be more than ten lakh rupees”, the words “ten thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees,” shall be substituted; (b) for the words “one lakh rupees”, the words “ten thousand rupees” shall be substituted; (c) for the words “five lakh rupees”, the words “fifty thousand rupees” shall be substituted.

Amendment of section 140: In section 140 of the principal Act, in sub-section (3), for the words “five lakh rupees”, the words “two lakh rupees” shall be substituted.

Amendment of section 143: In section 143 of the principal Act, for sub-section (15), the following sub-section shall be substituted, namely:—

  • “(15) If any auditor, cost accountant, or company secretary in practice does not comply with the provisions of sub-section (12), he shall,—
  • (1) In case of a listed company, be liable to a penalty of five lakh rupees; and
  • (2) In case of any other company, be liable to a penalty of one lakh rupees.”.

Amendment of section 147: In section 147 of the principal Act, (a) in sub-section (1),—

  • The words “with imprisonment for a term which may extend to one year or” shall be omitted;
  • For the words “one lakh rupees, or with both”, the words ’one lakh rupees* shall be substituted;
  • In subsection (2), the word and figures, “section 143” shall be omitted.

Amendment of section 149: In section 149 of the principal Act, in sub-section (9), the following proviso shall be inserted, namely:—

“Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 1 97, by the provisions of Schedule V.

Amendment of section 165: In section 165 of the principal Act, for sub-section (6), the following sub-section shall be substituted, namely:

“(6) If a person accepts an appointment as a director in violation of this section, he shall be liable to a penalty of two thousand rupees for each day after the first during which such violation continues, subject to a maximum of two lakh rupees.

Amendment of Section 167: In section 167 of the principal Act, in sub-section (2)-

  • The words ‘with imprisonment for a term which may extend to one year or” shall be omitted;
  • For the words “five lakh rupees, or with both”, the words “five lakh rupees” shall be substituted.

Amendment of section 172: For section 172 of the principal Act, the following section shall be substituted, namely:—

“172. If a company is in default in complying with any of the provisions of this Chapter and for which no specific penalty or punishment is provided therein, the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees, and in case of continuing failure, with a further penalty of five hundred rupees for each day during which such failure continues, subject to a maximum of three lakh rupees in case of a company and one lakh rupees in case of an officer who is in default.

Amendment of section 178: In section 178 of the principal Act, in sub-section (8), for the words ’punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both”, the words “liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of one lakh rupees shall be substituted.

Amendment of Section 184: In section 184 of the principal Act, in sub-section (4), for the words “punishable with imprisonment for a term which may extend to one year or with fine which may extend to one lakh rupees, or with both”, the words “liable to a penalty of one lakh rupees” shall be substituted.

Amendment of section 187: In section 1 87 of the principal Act, for sub-section (4), the following sub-section shall be substituted, namely:—

“(4) If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of five lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.”.

Amendment of section 188: In section 188 of the principal Act, in sub-section (5) (a) in clause (i), for the words “punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, or with both”, the words “liable to a penalty of twenty-five lakh rupees” shall be substituted; (b) in clause

For the words “punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees”, the words “liable to a penalty of five lakh rupees” shall be substituted.

Amendment of section 197: In section 1 97 of the principal Act, in sub-section (3), after the words “whole-time director or manager,”, the words “or any other non-executive director, including an independent director” shall be inserted.

Amendment of section 204: 41. In section 204 of the principal Act, in sub-section (4), for the words “punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees”, the words “liable to a penalty of two lakh rupees” shall be substituted.

Amendment of section 232: In section 232 of the principal Act, for sub-section (8), the following sub-section shall be substituted, namely: “(8) If a company fails to comply with sub-section (5), the company and every officer of the company who is in default shall be liable to a penalty of twenty thousand rupees, and where the failure is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such failure continues, subject to a maximum of three lakh rupees.”

Amendment of section 242: In section 242 of the principal Act, in sub-section (8) (a) the words “with imprisonment for a term which may extend to six months or” shall be omitted; (b) for the words “one lakh rupees, or with both”, the words “one lakh rupees” shall be substituted.

Amendment of section 243: In section 243 of the principal Act, in sub-section(2)-

1. The words “with imprisonment for a term which may extend to six months or” shall be omitted;

2. For the words “five lakh rupees, or with both”, the words “five lakh rupees” shall be substituted.

Amendment of section 247: In section 247 of the Principal Act, in sub-section (3), for the words “punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees”, the words “liable to a penalty of fifty thousand rupees” shall be substituted.

Amendment of section 284: In section 284 of the principal Act, for sub-section (2), the following sub-sections shall be substituted, namely:

“(2) If any person required to assist or cooperate with the Company Liquidatorundersub-section (1) does not assist or cooperate, the Company Liquidator may make an application to the Tribunal for necessary directions.

(3) On receiving an application under sub-section

(2), the Tribunal shall, by an order, direct the person required to assist or cooperate with the Company Liquidator to comply with the instructions of the Company Liquidator and to cooperate with him in discharging his functions and duties.”.

Amendment section 302: In section 302 of the principal Act,— (a) for sub-section (3), the following sub-section shall be substituted, namely:—

“(3) The Tribunal shall, within thirty days from the date of the order) forward a copy of the order to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company; and

(2) direct the Company Liquidator to forward a copy of the order to the Registrar who shall record in the register relating to the company minute of the dissolution of the company.”;

(2) sub-section (4) shall be omitted.

Amendment of section 342: In section 342 of the principal Act, sub-section (6) shall be omitted.

Amendment of section 34: In section 347 of the principal Act, in sub-section (4),-

1. The words “with imprisonment for a term which may extend to six months or” shall be omitted;

For the words“fifty thousand rupees, or with both”, the words “fifty thousand rupees” shall be substituted.

Amendment of section 348: In section 348 of the principal Act,— (a) for sub-section (6), the following sub-section shall be substituted, namely “(6) Where a Company Liquidator, who is an insolvency professional registered under the Insolvency and Bankruptcy Code, 2016 is in default in complying with the provisions of this section, then such default shall be deemed to be a contravention of the provisions of the said Code, and the rules and regulations made thereunder for proceedings under Chapter VI of Part IV of that Code.”; (b) sub-section (7) shall be omitted.

Amendment of section 356: In section 356 of the Principal Act, for sub-section (2), the following sub-section shall be substituted, namely “(2) The Tribunal shall— (a) forward a copy of the order, within thirty days from the date thereof, to the Registrar who shall record the same; and (b) direct the Company Liquidator or the person on file who sea certified application copy ofthetheorderorder, was within made, thirty to days from the date thereof or such further period as allowed by the Tribunal, with the Registrar who shall record the same.”

Insertion of new chapter XXIA: After section 378 of the principal Act, the following
Chapter shall be inserted, namely

Chapter XXIA

Producer Companies

Part-1

Preliminary

Definitions: 378A. In this Chapter, unless the context otherwise requires

“Active Member” means a Member who fulfills the quantum and period of patronage of the Producer Company as may be required by the articles;

“Chief Executive” means an individual appointed as such under sub-section (1) of section 378W

  • 39 of 2002: “Inter-state co-operative society” means a multi-state co-operative society as defined in clause (p) of section 3 of the Multi-State Co-operative Societies Act, 2002, and includes any co-operative society registered under any other law for the time being in force, which has, after its formation, extended any of its objects to more than one State by enlisting
  • The participation of persons or by extending any of its activities outside the State, whether directly or indirectly or through an institution of which it is a constituent;
  • “limited return” means the maximum dividend as may be specified by the articles;
  • Member” means a person or Producer Institution (whether incorporated or not) admitted as a Member of a Producer Company and who retains the qualifications necessary for continuance as such;
  • “Mutual assistance principles” means the principles set out in subsection (2) of section 378G;
  • “Officer” includes any director or Chief Executive or Secretary or any person by whose directions or instructions part or whole of the business of the Producer Company is carried on;
  • “Patronage” means the use of services offered by the Producer Company to its Members by participation in its business activities;
  • “Patronage bonus” means payments made by a ProducerCompany out of its surplus income to the Members in proportion to their respective patronage;
  • “primary produce” means —
  • Produce of farmers, arising from agriculture including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising, and farming plantation products), or from any other primary activity or service which promotes the interest of the farmers or consumers; or produce of persons engaged in handloom, handicraft, and other cottage industries; Or
  • Any product resulting from any of the above activities, including by-products of such products; or
  • Any product resulting from an ancillary activity that may assist or promote any of the aforesaid activities or anything ancillary thereto; or any activity that is intended to increase the production of anything referred to in sub-clauses

(1) to (4) or improve the quality thereof; means any person engaged in any activity connected with or relatable to any primary produce; “Producer Company” means a body corporate having objects or activities specified in section 378B and registered as Producer Company under this Act or under the Companies Act, 1956;

  • ‘Producer Institution” means a Producer Company or any other institution having only producer or producers or Producer Company or Producer Companies as its member whether incorporated or not having any of the objects referred to in section 378B and which agrees to make use of the services of the Producer Company or Producer Companies as provided in its articles;
  • withheld price means part of the price due and payable for goods supplied by any Member to the Producer Company; and as withheld by the Producer Company for payment on a subsequent date.

Objects of Producer Company: Part 2 Incorporation of Producer Companies and Other Flatters 378B. (1) The objects of the Producer Company shall relate to all or any of the following matters, namely:— “

  • Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import of goods or services for their benefit:
  • Provided that the Producer Company may carry on any of the activities specified in this clause either by itself or through another institution;
  • Processing including preserving, drying, distilling, brewing, venting, canning, and packaging of produce of its Members;
  • Manufacture, sale, or supply of machinery, equipment, or consumables mainly to its Members;
  • Providing education on the mutual assistance principles to its Members and others;
  • Rendering technical senses, consultancy services, training, research and development, and all other activities for the promotion of the interests of its Members;
  • Generation, transmission, and distribution of power, revitalization of land and water resources, their use, conservation, and communications relatable to primary produce;
  • Insurance of producers or their primary produce;
  • Promoting techniques of mutuality and mutual assistance;
  • Welfare measures or facilities for the benefit of Members as may be decided by the Board;
  • Any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner;
  • Financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) which include extending of credit facilities or any other financial services to its Members.”.
  • Every Producer Company shall deal primarily with the produce of its active Members for carrying out any of its objects specified in this section.

Formation of Producer Company and its registration:

378C.

  1. Any ten or more individuals, each of them being a producer or any two or more Producer Institutions, or a combination of ten or more individuals and Producer Institutions, desirous of forming a Producer Company having its objects specified in section 378B and otherwise complying with the requirements of this Chapter and the provisions of this Act in respect of registration, may form an incorporated company as a Producer Company under this Act.
  2.  If the Registrar is satisfied that all the requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereto, he shall, within thirty days of the receipt of the documents required for registration, register the memorandum, the articles, and other documents, if any, and issue a certificate of incorporation under this Act.
  3.  A Producer Company so formed shall have the liability of its Members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them and be termed a company limited by shares.
  4. The Producer Company may reimburse to its promoters all other direct costs associated with the promotion and registration of the company including registration, legal fees, printing of a memorandum and articles and the payment thereof shall be subject to the approval at its first general meeting of the Members.
  5. On registration under sub-section (2), the Producer Company shall become a body corporate as if it is a private limited company to which the provisions contained in this Chapter apply, without, however, any limit to the number of Members thereof, and the Producer Company shall not, under any circumstance, whatsoever, become or be deemed to become a public limited company under this Act.

Membership and voting rights of Members of Producer Company: 378D.

  1. In a case where the membership consists solely of individual Members, the voting rights shall be based on a single vote for every Member, irrespective of his shareholding or patronage of the Producer Company.
  2. In a case where the membership consists of Producer Institutions only, the voting rights of such ProducerInstitutions shall be determined based on their participation in the business of the Producer Company in the previous year, as may be
    specified by articles: Provided that during the first year of registration of a Producer Company, the voting rights shall be determined based on the shareholding by such Producer Institutions.
  3. In a case where the membership consists of individuals and Producer Institutions, the voting rights shall be computed based on a single vote for every Member.
  • The articles of any Producer Company may provide for the conditions, subject to which a Member may continue to retain his membership, and how voting rights shall be exercised by the Members.
  • Notwithstanding anything contained in sub-section (1) or sub-section (2), any Producer Company may, if so authorized by its articles, restrict the voting rights to active Members, in any special or general meeting.
  • No person, who has any business interest which conflicts with the business of the Producer Company, shall become a Member of that Company.
  • A Member, who acquires any business interest that conflicts with the business of the Producer Company, shall cease to be a Member of that Company and be removed as a Member by the articles.

Benefits to Members

378E.

(1) Subject to the provisions made in articles, every Member shall initially receive only such value for the produce or products pooled and supplied as the Board of Producer Company may determine, and the withheld price may be disbursed later in cash or kind or by allotment of equity shares, in proportion to the produce supplied to the Producer Company during the financial year Jo such extent and in such manner and subject to such conditions ‘as may be decided by the Board.

(2) Every Member shall, on the share capital contributed, receive only a limited return: Provided that every such Member may be allotted bonus shares by the provisions contained in section 378ZJ.

(3) The surplus if any, remaining after making provision for payment of limited return and reserves referred to in section 378ZI, may be disbursed as a patronage bonus, amongst the Members, in proportion to their participation in the business of the Producer Company, either in cash or by way of allotment of equity shares, or both, as may be decided by the Members at the general meeting.

Memorandum of Producer Company: 378F. The memorandum of association of every Producer Company shall state—

  • The name of the company with “Producer Company Limited” as the last words of the name of such Company;
  • The State in which the registered office of the Producer Company is to be situated;
  • The main objects of the Producer Company shall be one or more of the objects specified in section 378B;
  • The names and addresses of the persons who have subscribed to the memorandum;
  • The amount of share capital with which the ProducerCompany is to be registered and division thereof into shares of a fixed amount;
  • The names, addresses, and occupations of the subscribers being producers, who shall act as the first directors by sub-section (2) of section 378J;
  • That the liability of its members is limited;
  • Against the subscriber’s name, the number of shares each subscriber takes: Provided that no subscriber shall take less than one share;
  • That in case the objects of the Producer Company are not confined to one State, the States to whose territories the objects extend.’

Article Of Association:

378G

  • There shall be presented, for registration to the Registrar of the State to which the registered office of the Producer Company is, stated by the memorandum of association, to be situated—
  • Memorandum of the Producer Company;
  • Its articles are duly signed by the subscribers to the memorandum.
  • The articles shall contain the following mutual assistance principles, namely:
  • The membership shall be voluntary and available, to all eligible persons who can participate or avail of the facilities or services of the Producer Company, and are willing to accept the duties of membership;
  • Each Member shall save as otherwise provided in this Chapter, have only a single vote irrespective of the shareholding;
  • The Producer Company shall be administered by a Board consisting of persons elected or appointed as directors in a manner consistent with the provisions of this Chapter and the Board shall be accountable to the Members;
  • Particulars on limited return on share capital;
  • The surplus arising out of the operations of the Producer Company shall be distributed equitably by—
  • Providing for the development of the business of the Producer Company;
  • Providing for common facilities; and
  • Distributing amongst the Members, as may be admissible in proportion to their respective participation in the business. provision for the education of Members, employees, and others, on the principles of mutuality and techniques of mutual assistance;
  • The Producer Company shall actively cooperate with other Producer Companies (and other organizations following similar principles) at local, national, or international levels to best serve the interest of their Members and the communities it purports to serve.
  • Without prejudice to the generality of the foregoing provisions of sub-sections (1) and (2), the articles shall contain the following provisions, namely:
  • The qualifications for membership, the conditions for continuance or cancellation of membership, and the terms, conditions, and procedure for transfer of shares;
  • The manner of ascertaining the patronage and voting rights based on patronage;
  • Subject to the provisions contained in sub-section (1 ) of section 378N, the manner of constitution of the Board, its powers and duties, the minimum and maximum number of directors, manner of election and appointment of directors and retirement by rotation, qualifications for being elected or continuance as such, and the terms of office of the said directors,
  • Their powers and duties, conditions for election or co-option of directors, method of removal of directors and the filling up of vacancies on the Board, and the manner and the terms of appointment of the Chief Executive;

The election of the Chairman, term of office of directors and the Chairman, manner of voting at the general or special meetings of Members, procedure for voting, by directors at meetings of the Board, powers of the Chairman, and the circumstances under which the Chairman may exercise a casting vote;

  • The circumstances under which, and how, the withheld price is to be determined and distributed;
  • The manner of disbursement of patronage bonuses in cash by issue of equity shares, or both;
  • The contribution to be shared and related matters referred to in sub-section (2) of section 378ZI;
  • The matters relating to the issue of bonus shares out of general reserves as set out in section 378ZJ;
  • The basis and manner of allotment of equity shares of the Producer Company instead of the whole or part of the sale proceeds of produce or products supplied by the Members;
  • The amount of reserves, sources from which funds may be raised, limitation on raising of funds, restriction on the use of such funds, and the extent of debt that may be contracted and the conditions thereof;
  • The credit, loans, or advances which may be granted to a Member and the conditions for the grant of the same;
  • The right of any Member to obtain information relating to the general business of the company.
  • The basis and manner of distribution and disposal of funds available after meeting liabilities in the event of dissolution or liquidation of the Producer Company;
  • The authorization for division, amalgamation, merger, creation of subsidiaries and the entering into joint ventures and other matters connected therewith;
  • Laying of the memorandum and articles of the Producer Company before a special general meeting to be held within ninety days of its registration;
  • Any other provision, which the Members may, by special resolution recommend to be included in the articles.

Amendment Of Memorandum:

378H.

A Producer Company shall not alter the conditions contained in its memorandum except in the cases, by the mode and to the extent for which express provision is made in this Act. .

  • A Producer Company may, by special resolution, not inconsistent with section 378B, alter its objects specified in its memorandum.
  • A copy of the amended memorandum, together with a copy of the special resolution duly certified by two directors, shall be filed with the Registrar within thirty days from the date of adoption of any resolution referred to in subsection (2):
  • Provided that in the case of transfer of the registered office of a Producer Company from the jurisdiction of one Registrar to another, certified copies of the special resolution certified by two directors.
  • Shall be filed with both the Registrars within thirty days, and each Registrar shall record the same, and thereupon the Registrar from whose jurisdiction the office is transferred, shall forthwith forward to the other Registrar all documents relating to the Producer Company.
  • The alteration of the provisions of the memorandum relating to the change of the place of its registered office from one State to another shall not take effect unless it is approved by the Central Government on an application in such form and manner as may be prescribed.

Amendment Of Articles:

378-I

  • Any amendment of the articles shall be proposed by not less than two-thirds of the elected directors or by not less than one-third of the Members of the Producer Company, and adopted by the Members by a special resolution.
  • A copy of the amended articles together with the copy of the special resolution, both duly certified by two directors, shall be filed with the Registrar within fifteen days from the date of its adoption.

Option to inter-state co-operative societies to become Producer Companies:

378J:

Notwithstanding anything contained in sub-section (1) of section 378C, any inter-State co-operative society with objects not confined to one State may make an application to the Registrar for registration as a Producer Company under this Chapter.

  • Every application under sub-section (1) shall be accompanied by—
  • A copy of the special resolution, of not less than two-thirds of the total members of inter-state co-operative society, for its incorporation as a Producer Company under this Act;

A Statement Showing: Names and addresses or the occupation of the directors and the Chief Executive, if any, by whatever name called, of such co-operative; and

List of members of such inter-State co-operative society;

  • A statement indicating that the inter-state co-operative society is engaged in any one or more of the objects specified in section 378B;
  • A declaration by two or more directors of the inter-state co-operative society certifying that particulars given in clauses (a) to (c) are correct.
  • When an inter-state co-operative society is registered as a Producer Company, the words “Producer Company Limited” shall form part of its name with any word or expression to show its identity preceding it.
  • In compliance with the requirements of sub-sections (1) to (3), the Registrar shall, within thirty days of the receipt of the application, certify under his hand that the inter-State co-operative society applying for registration is registered and thereby incorporated as a Producer Company under this Chapter.

A co-operative society formed by producers, by federation or union of co-operative societies of producers or co-operatives of producers, registered under any law for the time being in force which has extended its objects outside the State, either directly or through a union or federation of co-operatives of which it is a constituent, as the case may be, and any

  • Federation or unions of such co-operatives, which has so extended any of its objects or activities outside the State, shall be eligible to apply under sub-section (1) and obtain registration as a Producer Company under this Chapter.
  • The inter-state co-operative society shall, upon registration under sub-section (1), stand transformed into a Producer Company, and thereafter shall be governed by the provisions of this Chapter to the exclusion of the law by which it was earlier governed, save in so far as anything done or omitted to be done before its registration as a Producer Company, and notwithstanding anything contained in any other law for the time being in force, no person shall have any claim against the co-operative institution or the company because of such conversion or transformation.
  • Upon registration as a Producer Company, the Registrar of Companies who registers the company shall intimate the Registrar with whom the erstwhile inter-State co-operative society was earlier registered for deletion of the society from its register.

Effect of incorporation of Producer Company:

378K:

Every shareholder of the inter-State co-operative society immediately before the date of registration of Producer Company (hereafter in this Chapter referred to as the date of transformation) shall be deemed to be registered on and from that date as a shareholder of the Producer Company to the extent of the face value of the shares held by such shareholder.

Vesting of undertaking in Producer Company:

378L:

All properties and assets, movable and immovable, of, or belonging to, the inter-State co-operative society as of the date of transformation, shall vest in the Producer Company. ,

  • All the rights, debts, liabilities, interests, privileges, and obligations of the inter-State co-operative society as on the date of transformation shall stand transferred to, and be the rights, debts, liabilities, interests, privileges, and obligations of, the Producer Company.
  • Without prejudice to the provisions contained in sub-section (2), all debts, liabilities, and obligations incurred, all contracts entered into, and all matters and things engaged to be done by, with or for, the society as on the date of transformation for or in connection with their purposes, shall be deemed to have been incurred, entered into, or engaged to be done by, with or for, the Producer Company.
  • All sums of money due to the inter-state co-operative society immediately before the date of transformation shall be deemed to be due to the Producer Company.
  • Every organization, which was being managed immediately before the date of transformation by the inter-State co-operative society shall be managed by the Producer Company for such period, to such extent and in such manner as the circumstances may require.
  • Every organization which was getting financial, managerial, or technical assistance from the inter-State co-operative society, immediately before the date of transformation, may continue to be given financial, managerial, or technical! assistance, as the case may be, by the Producer Company, for such period, to such extent and in such manner as that company may deem fit.
  • The amount representing the capital of the erstwhile inter-state co-operative society shall form part of the capital of the Producer Company.
  • Any reference to the inter-state co-operative society in any law other than this Act or in any contract or other instrument shall be deemed to be a reference to the Producer Company.
  • If, on the date of transformation, there is pending any suit, arbitration, appeal, or another legal proceeding of whatever nature by or against the inter-state co-operative society, the same shall not abate, be discontinued, or be in any way prejudicially affected because of the incorporation of the Producer
  • Company under section 378C or transformation of the inter-state co-operative society as a Producer Company under section 378J, as the case may be, but the suit, arbitration, appeal, or another proceeding, may be continued, prosecuted, and enforced by or against.
  • The Producer Company in the same manner and to the same extent as it would have, or may have been continued, prosecuted, and enforced by or against the inter-state co-operative society as if the provisions contained in this Chapter had not come into force.

Concession, etc., to be deemed to have been granted to Producer Company:

378M:

With effect from the date of transformation, all fiscal and other concessions, licenses, benefits, privileges, and exemptions granted to the inter-state co-operative society in connection with the affairs and business of the inter-state co-operative society under any law for the time being in force shall be deemed to have been granted to the Producer Company.

Provisions in respect of I officers and other employees of inter-State co-operative society:

378N:

Notwithstanding anything contained in section 378-0, all the directors in the inter-state co-operative society before the incorporation of the Producer Company shall continue in office for one year from the date of transformation and, by the provisions of this Act.

  • Every officer or other employee of the inter-State co-operative society (except a director of the Board, Chairman, or Managing Director) serving in its employment immediately before the date of transformation shall,
  • In so far as such officer or other employee is employed in connection with the inter-State co-operative society which has vested in the Producer Company by this Act, become, as from the date of transformation, an officer or, as the case may be, another employee
  • The Producer Company shall hold his office or service therein by the same tenure, at the same remuneration, upon the same terms and conditions, with the same obligations and with the same rights and privileges as to leave, leave travel concession, welfare scheme, medical benefits scheme, insurance, provident fund, other funds,
  • I retirement, voluntary retirement, gratuity, and other benefits as he would have held under the erstwhile inter-State co-operative society if its undertaking had not vested in the Producer Company and shall continue to do so as an officer or, as the case may be, other employees of the Producer Company.

14 Of 1947: Where an officer or other employee of the inter-State co-operative society opts under sub-section (2) not to be in employment or service of the Producer Company, such officer or other employee shall be deemed to have resigned.

  • Notwithstanding anything contained in the Industrial Disputes Act, 1947 or in any other law for the time being in force, the transfer of the services of any officer or other employee of the inter-state co-operative society to the Producer Company shall not entitle such officer or other employee to any compensation under this Act or any other law for the time being in force and no such claim shall be entertained by any court, tribunal or other authority.
  • The officers and other employees who have retired before the date of transformation from the service of the inter-State co-operative society and are entitled to any benefits, rights, or privileges, shall be entitled to receive the same benefits, rights, or privileges from the Producer Company.

The trusts of the provident fund or the gratuity fund of the inter-state co-operative society and any other bodies created for the welfare of officers or employees shall continue to discharge functions in the Producer Company as was being done hitherto in the inter-state co-operative society and any tax exemption granted to the provident fund or the gratuity fund would continue to be applied to the Producer Company.

  • Notwithstanding anything contained in this Act or any other law for the time being in force or the regulations of the inter-State co-operative society, no director of the Board, Chairman, Managing
  • Director or any other person entitled to manage the whole or substantial part of the business and affairs of the inter-State co-operative society shall be entitled to any compensation against the inter-State co-operative society or the Producer Company for the loss of office or the premature termination of any contract of management entered into by him with the inter-State co-operative society.

Number of Directors Part III

Management of Producer Company

378-0. Every Producer Company shall have at least five and not more than fifteen directors:

  • Provided that in the case of an inter-state co-operative society incorporated as a Producer Company, such company may have more than fifteen directors for one year from the date of its incorporation as a Producer Company.
    Appointment of directors 378P
  • Save as otherwise provided in section 378N, the Members who sign the memorandum and the articles may designate therein the Board of Directors, not less than five, who shall govern the affairs of the Producer Company until the directors are elected by the provisions of this section.
  • The election of directors shall be conducted within ninety days of the registration of the Producer Company:

Provided that in the case of an inter-state co-operative society that has been registered as a Producer Company under sub-section (4) of section 378J in which at least five directors [including the directors continuing in office under sub-section (1) of section 378N] hold office as

  • such on the date of registration of such company, the provisions of this sub-section shall have effect as if for the words “ninety days”, the words “three hundred and sixty-five days” had been substituted.
  • Every person shall hold office of a director for a period not less than one year but not exceeding five years as may be specified in the articles.
  • Every director, who retires by the articles, shall be eligible for re-appointment as a director.
  • Save as otherwise provided in subsection (2), the directors of the Board shall be elected or appointed by the Members in the annual general meeting.
  • The Board may co-opt one or more expert directors or an additional director not exceeding one-fifth of the total number of directors or appoint any other person as additional director for such period as the Board may deem fit:
  • Provided that the expert directors shall not have the right to vote in the election of the Chairman but shall be eligible to be elected as Chairman if so provided by its articles:
  • Provided further that the maximum period, for which the expert director or the additional director holds office, shall not exceed such period as may be specified in the articles.

Vacation of office by directors 378Q

The office of the director of a Producer Company shall become vacant if,—

  • He is convicted by a court of any offense involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months;
  • The Producer Company, in which he is a director, has made a default in repayment of any advances or loans taken from any company or institution or any other person, and such default continues for ninety days;
  • He has made a default in repayment of any advances or loans taken from the Producer Company in which he is a director;

The Producer Company, in which he is a director—

  • Has not filed the annual accounts and annual return for any continuous three financial years; or
  • Has failed to, repay its deposit or withheld price or patronage bonus or interest thereon on the due date, or pay a dividend and such failure continues for one year or more;
  • Default is made in holding an election for the office of director, in the Producer Company in which he is a director, by the provisions of this Act and articles;
  • The annual general meeting or extraordinary general meeting of the Producer Company, in which he is a director, is not called by the provisions of this Act except due to natural calamity or such other
    reason.
  • The provisions of sub-section (1) shall, as far as may be, apply to the director of a Producer! Institution which is a member of a Producer Company.

Power And Functions Of Board:

378R:

Subject to the provisions of this Act and articles, the Board of Directors of a Producer Company shall exercise all such powers and do all such acts and things, as that Company is authorized so to do.

  • In particular and without prejudice to the generality of the. foregoing powers, such powers may include all or any of the following matters, namely:—
  • determination of the dividend payable;
  • Determination of the quantum of withheld price and recommend patronage to be approved at a general meeting;
  • Admission of new Members;
  • Pursue and formulate the organizational policy, and objectives, establish specific long-term and annual objectives, and approve corporate strategies and financial plans;
  • Appointment of a Chief Executive and such other officers of the Producer Company, as may be specified in the articles;
  • Exercise superintendence, direction, and control over the Chief Executive and other officers appointed by it;
  • Cause proper books of account to be maintained; prepare annual accounts to be placed before the annual general meeting with the report of the auditor and the replies on qualifications, if any, made by the auditors;
  • Acquisition or disposal of property of the Producer Company in its ordinary course of business;
  • Investment of the funds of the Producer Company in the ordinary course of its business;
  • Sanction any loan or advance, in connection with the business activities of the Producer Company to any Member, not being a director or his relative;
  • Take such other measures or do such other – acts as may be required in the discharge of its functions or exercise of its powers.

All the powers specified in sub-sections (1) and (2) shall be exercised by the Board, through a resolution passed at its meeting on behalf of the Producer Company.

Explanation: For the removal of doubts, it is hereby declared that a director or a group of directors, do not constitute the Board, and shall not exercise any of the powers exercisable by it.

  • Matters are to be transacted at general meeting 378S. The Board of Directors of a Producer Company shall exercise the following powers on behalf of that Company, and it shall do so only through resolutions passed at the annual general meeting of its Members, namely:—
  • Approval of budget and adoption of annual accounts of the Producer Company;
  • Approval of patronage bonus;
  • Issue of bonus shares;
  • Declaration of limited return and decision on the distribution of patronage;
  • Specify the conditions and limits of loans that may be given by the Board to any director; and
  • Approval of any transaction of the nature as is to be reserved in the articles for approval by the Members.

Liability of directors:

378T:

When the directors vote for a resolution, or approve by any other means, anything done in contravention of the provisions of this Act or any other law for the time being in force or articles, they shall be jointly and severally liable to make good any loss or damage suffered by the Producer Company. ,

  • Without prejudice to the provisions contained in sub-section (1), the Producer Company shall have the right to recover from its director—
  • where such director has made any profit as a result of the contravention specified in sub-section (1), an amount equal to the profit so made;
  • where the Producer Company incurred a loss or damage as a result of the contravention specified in sub-section (1), an amount equal to that loss or damage.
  • The liability imposed under this section shall be in addition to and not in derogation of a liability imposed on a director under this. Act or any other law for the time being in force.

Committee of Directors:

378U:

The Board may constitute such number of committees as it may deem fit for assisting the Board in the efficient discharge of its functions:

  • Provided that the Board shall not delegate any of its powers or assign the powers of the Chief Executive, to any committee.
  • A committee constituted under sub-section (1) may, with the approval of the Board, co-opt such number of persons as it deems fit as members of the committee:
  • Provided that the Chief Executive appointed under section 378W or a director of the Producer Company shall be a member of such committee.
  • Every such committee shall function under the. general superintendence, direction, and control of the Board, for such duration, and in such manner as the Board may direct.
  • The fee and allowances to be paid to the members of the committee shall be such as may be determined by the Board.
  • The minutes of each meeting of the committee shall be placed before the Board at its next meeting.

Meetings of Board and Quorum:

378V:

A meeting of the Board shall be held not less than once every three months and at least four such meetings shall be held every year.

  • Notice of every meeting of the Board of Directors shall be given in writing to every director for the time being in India, and at his usual address in India to every other director.
  • The Chief Executive shall give notice as aforesaid not less than seven days before the date of the meeting of the Board and if he fails to do so, he shall be liable to a penalty of five thousand rupees:-
  • Provided that a meeting of the Board may be called at shorter notice and the reasons thereof shall be recorded in writing by the Board.
  • The quorum for a meeting of the Board shall be one-third of the total strength of directors, subject to a minimum of three.

Committee of Directors:

378U:

The Board may constitute such number of committees as it may deem fit for assisting the Board in the efficient discharge of its functions:

  • Provided that the Board shall not delegate any of its powers or assign the powers of the Chief Executive, to any committee.
  • A committee constituted under sub-section (1) may, with the approval of the Board, co-opt such number of persons as it deems fit as members of the committee:
  • Provided that the Chief Executive appointed under section 378W or a director of the Producer Company shall be a member of such committee.
  • Every such committee shall function under the general superintendence, direction, and control of the Board, for such duration, and in such manner as the Board may direct.
  • The fee and allowances to be paid to the members of the committee shall be such as may be determined by the Board.
  • The minutes of each meeting of the committee shall be placed before the Board at its next meeting.

Meetings of Board and Quorum:

378V:

A meeting of the Board shall be held not less than once every three months and at least four such meetings shall be held every year.

  • Notice of every meeting of the Board of Directors shall be given in writing to every director for the time being in India, and at his usual address in India to every other director.
  • The Chief Executive shall give notice as aforesaid not less than seven days before the date of the meeting of the Board and if he fails to do so, he shall be liable to a penalty of five thousand rupees:-
  • Provided that a meeting of the Board may be called at shorter notice and the reasons thereof shall be recorded in writing by the Board.
  • The quorum for a meeting of the Board shall be one-third of the total strength of directors, subject to a minimum of three ave as provided in the articles, directors including the co-opted director, may be paid such fees and allowances for attendance at the meetings of the Board, as may be decided by the Members in the general meeting.

Chief Executive and his functions 378W.

Every Producer Company shall have a full-time Chief Executive, by whatever name called, to be appointed by the Board from amongst persons other than Members.

  • The Chief Executive shall be ex officio director of the Board and such director shall not retire by rotation.
  • Save as otherwise provided in articles, the qualifications, experience, and the terms and conditions of service of the Chief Executive shall be such as may be determined by the Board.
  • The Chief Executive shall be entrusted with substantial powers of management as the Board may determine.
  • Without prejudice to the generality of subsection (4), the Chief Executive may exercise the powers and discharge the functions, namely:—
  • Do administrative acts of a routine nature including managing the day-to-day affairs of the Producer Company;
  • Operate bank accounts or authorize any person, subject to the general or special approval of the Board on this behalf, to operate the bank account;

Make arrangements for safe custody of cash and other assets of the Producer Company Sign such documents as may be authorized by the Board, for and on behalf of the company

  • Maintain proper books of account; prepare annual accounts and audit thereof; place the audited accounts before the Board and in the
    , the annual general meeting of the Members;
  • Furnish Members with periodic information to apprise them of the operation and functions of the Producer Company;
  • Make appointments to posts under the powers delegated to him by the Board;
  • Assist the Board in the formulation of goals, objectives, strategies, plans, and policies;
  • Advise the Board concerning legal and regulatory matters concerning the proposed, and ongoing activities and take necessary action in respect thereof;
  • Exercise the powers as may be necessary in the ordinary course of business;
  • Discharge such other functions, and exercise such other powers, as may be delegated by the Board.
  • The Chief Executive shall manage the affairs of the Producer Company under the general superintendence, direction, and control of the Board and be accountable for the performance of the Producer Company.

Secretary of Producer Company:

378X:

Every Producer Company having an average annual turnover exceeding five crore rupees or such other amount as may be prescribed in each of three consecutive financial years shall have a whole-time secretary.

15 Of 1980

No individual shall be appointed as v/hole-time secretary unless he possesses membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980.

  • If a Producer Company fails to comply with the provisions of sub-section (1), the Company and every officer of the Company who is in default shall be liable to a penalty of one hundred rupees for every day during which the default continues subject to a maximum of rupees one lakh:
  • Provided that in any proceedings against a person in respect of a default under this sub-section, no penalty shall be imposed if it is shown that all reasonable efforts to comply with the provisions of sub-section (1) were taken or that the financial position of the Company was such that it was beyond its capacity to engage a whole-time secretary.

Quorum:

378Y:

Unless the articles require a larger number, one-fourth of the total membership shall constitute the quorum at a general meeting, 378Z. Save as otherwise provided in sub-sections (1) and (3) of section 378D, every Member shall have one vote and in the case of equality of votes, the Chairman or the person presiding shall have a casting vote except in the case of election of the Chairman.

Annual General Meetings

Part IV

General Meetings

378ZA.

Every Producer Company shall in each year, hold, in addition to any other meetings, a general meeting, as its annual general meeting and shall specify the meeting as such in the notices calling

  • it, and not more than fifteen months shall elapse between the date of one annual general meeting of a Producer Company and that of the next: Provided that the Registrar may, for any special reason, permit extension of the time for holding any annual general meeting (not being the first annual general meeting) by a period not exceeding three months.
  • A Producer Company shall hold its first annual general meeting within ninety days from the date of its incorporation.
  • The Members shall adopt the articles of the Producer Company and appoint directors of its Board in the annual general meeting.

The notice calling the annual general meeting shall be accompanied by the following documents, namely:—

  • The agenda of the annual general meeting;
  • The minutes of the previous annual general meeting or the extraordinary general meeting;
  • The names of candidates for election, if any, to the office of director including a statement of qualifications in respect of each candidate;
  • The audited balance sheet and profit and loss accounts of the Producer Company and its subsidiary, if any, together with a report of the Board of Directors of such Company concerning—
    • The state of affairs of the Producer Company;
    • The amount proposed to be carried to reserve;
    • The amount to be paid as a limited return on share capital;
    • The amount proposed to be disbursed as a patronage bonus;

The material changes and commitments, if any, affecting the financial position of the Producer Company and its subsidiary, which have occurred between the date of the annual accounts of the Producer Company to which the balance sheet relates and the date of the report of the Board;

  • Any other matter of importance relating to energy conservation, environmental protection, expenditure, or earnings in foreign exchanges;
  • Any other matter which is required to be, or maybe, specified by the Board;
  • The text of the draft resolution for the appointment of auditors;
  • The text of any draft resolution proposing an amendment to the memorandum or articles is to be considered at the general meeting, along with the recommendations of the Board.
  • The Board of Directors shall, on the requisition made in writing, duly signed and setting out the matters for the consideration, made by one-third of the Members entitled to vote in any general meeting, proceed to call an extraordinary general meeting by the relevant provisions contained in Chapter VII.

Every annual general meeting shall be called, for a time during business hours, on a day that is not a public holiday and shall be held at the registered office of the Producer Company or at some other place within the city town or village in which the registered office of the Company is situated.

  • A general meeting of the Producer Company shall be called by giving not less than fourteen days prior notice in writing.
  • The notice of the general meeting indicating the date, time, and place of the meeting shall be sent to every Member and auditor of the Producer Company.
  • Unless the articles, of the Producer Company provide for a larger number, one-fourth of the total number of members of the Producer Company shall be the quorum for its annual general meeting.
  • The proceedings of every annual general meeting along with the report of the Board of Directors, the audited balance sheet, and the profit and loss account shall be filed with the Registrar within sixty days of the date on which the annual general meeting is held, with an annual return along with the filing fees as applicable under the Act.
  • ln the case where a Producer Company is formed by Producer Institutions, such Institutions shall be represented in the general body through the Chairman or the Chief Executive thereof who shall be competent to act on its behalf:
  • Provided that a Producer Institution shall not be represented if such Institution is in default or failure referred to in clauses (d) to (f) of sub-section (1) of section 378Q.

Share capital Part V

Share Capital and Member’s Rights

378ZB.

  • The share capital of a Producer Company shall consist of equity shares only.
  • The shares held by a Member in a Producer Company, shall as far as may be, be in proportion to the patronage of that company.

Special user rights 378ZC.

  • The producers, who are active Members may, if so provided in the articles, have special rights and the Producer Company may issue appropriate instruments to them in respect of such special rights.
  • The instruments of the Producer Company issued under sub-section (1) shall, after obtaining approval of the Board on that behalf, be transferable to any other active Member of that Producer Company.

Explanation: For this section, the expression “special right” means any right relating to the supply of additional produce by the active Member or any other right relating to his produce that may be conferred upon him by the Board.

Transferability of shares and attendant rights 378ZD.

Save as otherwise provided in sub-sections (2) to (4), the shares of a Member of a Producer Company shall not be transferable.

  • A Member of a Producer Company may, after obtaining the previous approval of the Board, transfer the whole or part of his shares along with any special rights, to an active Member at par value.
  • Every Member shall, within three months of his becoming a Member in the Producer Company, nominate, in the manner specified in articles, a person to whom his shares in the Producer Company shall vest in the event of his Death.
  • The nominee shall, on the death of the Member, become entitled to all the rights in the shares of the Producer Company, and the Board of that Company shall transfer the shares of the Deceased member to his nominee:
  • Provided that in a case where such nominee is not a producer, the Board shall direct the surrender
  • I share with special rights, if any, to the Producer Company at par value or such other value as may be determined by the Board.
  • Where the Board of a Producer Company is satisfied that
  • Any Member has ceased to be a primary producer;
  • Any Member has failed to retain his qualifications to be a Member as specified in articles, the Board shall direct the surrender of shares together with special rights, if any, to the Producer Company at par value or such! other value as may be determined by the Board:

I Provided that the Board shall not direct such! surrender of shares unless the Member has been served with a written notice and allowed to be heard.

Books of Account Part VI

Finance, Accounts and Audit

378ZE

Every Producer Company shall keep at its! registered office proper books of account concerning—

  • All sums of money received and expended by the Producer Company and the matters in respect of which the receipts and expenditure! take place;
  • All sales and purchase of goods by the Producer Company;
  • The instruments of liability executed by or on behalf of the Producer Company;
  • The assets and liabilities of the Producer Company;
  • In the case of a Producer Company engaged in production, processing, and manufacturing, the particulars relating to the utilization of materials or labor or other items of costs.
  • The balance sheet and profit and loss accounts of the Producer Company shall be prepared, as far as may be, under the provisions contained in section 129
  • Internal 2udrt 378ZF. Every Producer Company shall have an internal audit of its accounts carried out, at such interval and in such manner as may be specified in articles, by a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered

38 of 1949 Accountants Act, 1949.

Duties of auditor under this Chapter 378ZG:

Without prejudice to the provisions contained in section 143, the auditor shall report on the following additional matters relating to the Producer Company, namely:

  • The amount of debts due along with particulars of bad debts, if any;
  • The verification of cash balance and securities;
  • The details of assets and liabilities;
  • All transactions which appear to be contrary to the provisions of this Chapter;
  • The loans given by the Producer Company to the directors;
  • The donations or subscriptions given by the] Producer Company;
  • Any other matter as may be considered necessary) by the auditor.
  • Donation or subscription by Producer Company

1378ZH:

A Producer Company may, by special resolution, make a donation or subscription to any institution or individual for the purposes

  • Promoting the social and economic welfare of Producer Members or producers or the general public
  • Promoting the mutual assistance principles: Provided that the aggregate amount of all such] donations and subscriptions in any financial year shall not exceed three percent, of the net profit of the Producer Company in the financial year immediately preceding the financial year in which the donation or subscription was made:
  • Provided further that no Producer Company shall make directly or indirectly to any political party or for any political purpose to any person any contribution or subscription or make available any] facilities including personnel or material.

General and other reserves

Every Producer Company shall maintain a general serve in every financial year, in addition to any reserve maintained by it as may be specified in articles.

  • In a case where the Producer Company does not have sufficient funds in any financial year for transfer to maintain the reserves as may be specified in articles,
  • The contribution to the reserve shall be shared amongst the Members in proportion to their patronage in the business of that Company in that year.

Issue Of Bonus Shares:

378ZJ:

Any Producer Company may, upon ‘recommendation of the Board and passing of resolution in the general meeting, issue bonus shares by capitalization of amounts from general reserves referred to in section 378Z-I in proportion to the shares held by the Members on the date of the issue of such shares.

Loan, etc., to Members Part VII

Loans to Members and Investments

378ZK:

The Board may, subject to the provisions made in articles, provide financial assistance to the Members of the Producer Company by way of—

  • credit facility, to any Member, in connection with the business of the Producer Company, for a period not exceeding six months;
  • Loans and advances, against security specified in articles to any Member, repayable within a period exceeding three months but not exceeding seven years from the date of disbursement of such loan or advances:
  • Provided that any loan or advance to any director or his relative shall be granted. only after the approval by the Members in the general meeting.

Investment In Other Companies, Formation Subsidiaries, Etc.

378ZL:

The general reserves of any Producer Company shall be invested to secure the highest returns available from approved securities, fixed deposits, units, and bonds issued by the Government or cooperative or scheduled bank or in such other mode as may be prescribed.

  • Any Producer Company may, for the promotion of its objectives acquire the shares of another Producer Company.
  • Any Producer Company may subscribe to the share capital of, or enter into any agreement or other arrangement, whether by way of formation of its subsidiary company, joint venture or in any other manner with any body corporate, to promote the objects of the Producer) Company by special resolution on this behalf.
  • Any Producer Company, either by itself or together with its subsidiaries, may invest, by way of subscription, purchase, or otherwise, shares in any other company, other than a Producer Company, specified under sub-section (2), or subscription of capital under sub-section (3), for an amount not exceeding thirty percent, of the aggregate of its) paid-up capital and free reserves:
  • Provided that a Producer Company may, by) a special resolution passed in its general meeting and with prior approval of the Central Government, invest more than the limits specified in this| section.
  • All investments by a Producer Company may be) made if such investments are consistent with the| objectives of the Producer Company.
  • The Board of a Producer Company may, with the) previous approval of Members by a special resolution, dispose of any of its investments) referred to in sub-sections (3) and (4).
  • Every Producer Company shall maintain a register containing particulars of all the investments, showing the names of the companies in which shares have been acquired, the number and value of shares; the date of acquisition; and the manner) and the price at which any of the shares have been) subsequently disposed of.

The register referred to in sub-section (7) shall be kept at the registered office of the Producer Company and the same shall be open to inspection by any Member who may take extracts therefrom.

Penalty for contravention Part VIII Penalties:

378ZM:

If any person, other than a Producer Company registered under this Chapter, carries on business under any name which contains the words “Producer Company Limited”, he shall be punishable with a fine which may extend to ten thousand rupees for every day during which such name has been used by him.

If a director or an officer of a Producer Company, who wilfully fails to furnish any information relating to the affairs of the Producer Company required by a Member or a person duly authorized on this behalf, he shall be liable to imprisonment for a term which may extend to six months and with a fine equivalent to five percent, of the turnover of that Company during the preceding financial year.

If A Director Or Officer Of A Producer Company—

Fails to hand over the custody of books of account and other documents or property in his custody to the Producer Company of which he is a director or officer; or

Fails to convene the annual general meeting or other general meetings, he shall be punishable with a fine which may extend to one lakh rupees, and in the case of a continuing default or failure, with an additional fine which may extend to ten thousand rupees for every day during which such default or failure continues.

Part IX

Amalgamation, Merger or Division

378ZN:

A Producer Company may, by a resolution passed| at its general meeting,—

Decide to transfer its assets and liabilities, in whole or in part, to any other Producer Company, which agrees to such transfer by a resolution passed at its general meeting, for any of the objects specified in section 378B;

  • Divide itself into two or more new producer Companies.
  • Any two or more Producer Companies may, by a resolution passed at any general or special meetings of its Members, decide to—
  • Amalgamate and form a new Producer Company; or
  • Merge one Producer Company (hereafter in this Chapter referred to as “merging company”) with another Producer Company (hereafter in this Chapter referred to as “merged company”).
  • Every resolution of a Producer Company under this section shall be passed at its general meeting by a majority of total Members, with the right of vote not less than two-thirds of its Members present and voting and such resolution shall contain all particulars of the transfer of assets and liabilities, or division, amalgamation, or merger, as the case] may be.
  • Before passing a resolution under this section, the Producer Company shall give notice thereof in writing together with a copy of the proposed resolution to all the Members and creditors who may give their consent.
  • Notwithstanding anything contained in articles or any contract to the contrary, any Member, or any creditor not consenting to the resolution shall, during one month of the date of service of the notice on him, have the option,—
  • In the case of any such Member, to transfer his shares with the approval of the Board to any active Member thereby ceasing to continue as a Member of that Company; or
  • In the case of a creditor, to withdraw his deposit or loan or advance, as the case may be.
  • Any Member or creditor, who does not exercise his option within the period specified in sub-section (5), shall be deemed to have consented to the resolution.
  • A resolution passed by a Producer Company under this section shall not take effect until the expiry of one month or until the assent thereto of all the Members and creditors has been obtained, whichever is earlier.

The resolution referred to in this section shall provide for—

  • The regulation of the conduct of the affairs of the Producer Company in the future;
  • The purchase of shares or interest of any Members of the Producer Company by other Members or by the Producer Company;
  • The consequent reduction of its share capital, in case of the purchase of shares of one Producer Company by another Producer Company;
  • Termination, setting aside, or modification of any agreement, howsoever arrived between the company on the one hand and the directors,
  • secretaries, and manager on the other hand, apart from such terms and conditions as may, in the opinion of the majority of shareholders, be just and equitable in the circumstances of the case;
  • Termination, setting aside, or modification of any agreement between the Producer Company and any person not referred to in clause (d):
  • Provided that no such agreement shall be terminated, set aside, or modified except after giving due notice to the party concerned
  • Provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;
  • The setting aside of any transfer, delivery of goods, payment, execution, or other act relating to property, made or done by or against
  • The Producer Company within three months before the date of passing of the resolution, which would if made or done against any individual, be deemed in his insolvency to be a fraudulent preference;
  • The transfer to the merged company of the whole or any part of the undertaking, property, or liability of the Producer Company;
  • The allotment or appropriation by the merged company of any shares, debentures, policies, or other like interests in the merged company;
  • The continuation by or against the merged company of any legal proceedings pending by or against any Producer Company;
  • The dissolution, without winding up, of any Producer Company;
  • The provision to be made for the Members or creditors who make dissent;
  • The taxes, if any, to be paid by the Producer Company;

Such incidental, consequential, and supplemental matters are necessary to ensure that the division, amalgamation or merger shall be fully and effectively carried out. When a resolution passed by a Producer Company under this section- takes effect, the resolution shall be a sufficient conveyance to vest the assets and liabilities in the transferee.

  • The Producer Company shall make arrangements for meeting in full or otherwise satisfying all claims of the Members and the creditors who exercise the option, within the period specified in sub-section (4), not to continue as the Member or creditor, as the case may be.
  • Where the whole of the assets and liabilities of a Producer Company is transferred to another Producer Company by the provisions of sub-section (9), or where there is a merger under sub-section (2), the registration of the first mentioned Company or the merging company, as the case may be, shall stand canceled and that Company shall be deemed to have been dissolved and shall cease to exist forthwith as a corporate body.
  • Amalgamated into a new Producer Company under the provisions of sub-section (2) and the Producer Company so formed is duly registered by the Registrar, the registration of each of the amalgamating companies shall stand canceled forthwith on such registration and each of the Companies shall thereupon cease to exist as a corporate body.

Where a Producer Company divides itself into two or more Producer Companies under the provisions of clause (b) of sub-section (1) and the new Producer Companies are registered under the provisions of this Chapter, the registration of the erstwhile Producer Company shall stand canceled forthwith and that Company shall be deemed to have been dissolved and cease to exist as a corporate body.

  • The amalgamation, merger, or division of companies under the foregoing sub-sections shall not in any manner whatsoever affect the pre-existing rights or obligations and any legal proceedings that might have been continued or commenced by or against any erstwhile company before the amalgamation, merger, or division, may be continued or commenced by, or against, the concerned resulting company, or merged company, as the case may be.
  • The Registrar shall strike off the names of every Producer Company deemed to have been dissolved under sub-sections (11) to (14).
  • Any member creditor or employee aggrieved by the transfer of assets, division, amalgamation, or merger may, within thirty days of the passing of the resolution, prefer an appeal to the Tribunal.
  • The Tribunal shall, after giving a reasonable opportunity to the person concerned, pass such orders thereon as it may deem fit.
  • Where an appeal has been filed under sub-section (16), the transfer of assets, division, amalgamation, or merger of the Producer Company shall be subject to the decision of the Tribunal.

Disputes PartX

Resolution of Disputes

378Z-0:

Where any dispute relating to the formation, management, or business of a Producer Company arises—

  • Amongst Members, former Members or persons claiming to be Members or nominees of deceased Members; or
  • Between a Member, former Member, or a person claiming to be a Member, or nominee of deceased Member and the Producer 26 of 1996 Company,
  • Its Board of Directors, office-bearers, or liquidator, past or present; or (c) between the Producer Company or its Board, and any director,
  • Office-bearer or any former director, or the nominee, heir, or legal representative of any deceased director
  • The Producer Company, such dispute shall be settled by conciliation or by arbitration as provided under the Arbitration and Conciliation Act, 1996 as if the parties to the dispute have consented in writing for determination of such disputes by conciliation or by arbitration and the provisions of the said Act shall apply accordingly.
  • Dispute shall include
  • A claim for any debt or other amount due;
  • A claim by surety against the principal debtor, where the Producer Company has recovered from the surety amount in respect of any debtor or other amount due to it from the principal debtor as a result of the default of the principal debtor whether such debt or amount due be admitted or not;
  • A claim by Producer Company against Member for failure to supply produce as required of him;
  • A claim by a Member against the Producer Company for not taking goods supplied by him.
  • If any question arises whether the dispute relates to the formation, management, or business of the Producer Company, the question shall be referred to the arbitrator, whose decision thereon shall be final.

Strike off the name Of the Producer Company

Part XI

Miscellaneous Provisions

378ZP:

Where a Producer Company fails to commence business within one. year of its registration or ceases to transact business with the Members or if the Registrar is satisfied, after making such inquiry as he thinks fit, that the Producer Company is no longer carrying on any of its objects specified in section 378B, he shall make an order striking o the name of the Producer Company, which shall thereupon cease to exist forthwith:

  • Provided that no such order canceling the registration as aforesaid shall be passed until a notice to show cause has been given by the Registrar to the Producer Company with a copy to all its directors on the proposed action and reasonable opportunity to represent its case has been given.
  • Where the Registrar has reasonable cause to believe that a Producer Company is not maintaining any of the mutual assistance principles specified, he shall strike its name off the register by the provisions contained in section 248.
  • Any Member of a Producer Company, who is aggrieved by an order made under subsection (1), may appeal to the Tribunal within sixty days of the order.
    Where an appeal is filed under sub-section (3), the order of striking off the name shall not take effect until the appeal is disposed of.

Provisions of this Chapter to override other laws 378ZQ:

The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in this Act or any other law. for the time being in force or any instrument having effect under any such law, but the provisions of any such Act or law or instrument in so far as the same are not varied by, or are inconsistent with, the provisions of this Chapter shall apply to the Producer Company.

Application Of Provisions Relating To Private Companies:

378ZR: All the limitations, restrictions, and provisions of this Act, other than those specified in this Chapter, applicable to a private company, shall, as far as may be, apply to a Producer Company, as if it is a private limited company under this Act in so far as they are not in conflict with the provisions of this Chapter

Re-conversion of Producer Company to inter-State co-operative society:

378ZS:

Any Producer Company, being an erstwhile inter-State co-operative society, formed and registered under this Chapter, may make an
application—

  • After passing a resolution in the general I meeting by not less than two-thirds of its] Members present and voting; or
  • Request by its creditors representing] three-fourths value of its total creditors, to the Tribunal for its re-conversion to the inter-State co-operative society.
  • The Tribunal shall, on the application made under] sub-section (1), direct holding meeting of its Members or such creditors, as the case may be, to] be conducted in such manner as it may direct.
  • If a majority in number representing three-fourths in value of the creditors, or Members, as the case may be, present and voting in person at the meeting conducted in pursuance of the directions of the Tribunal under sub-section (2), agree for re-conversion, if sanctioned by the Tribunal, be binding on all the Members and all the creditors,’ as the case may be, and also on the company which is being converted:
  • Provided that no order sanctioning re-conversion shall be made by the Tribunal unless the Tribunal! is satisfied that the company or any other person! by whom an application has been made under sub-section (1) has disclosed to the Tribunal, by affidavit or otherwise, all material facts relating to the company, such as the latest financial position of the company, the latest report of the auditor on the accounts of the company, the pendency of any investigation proceedings about the company under and the like.
  • An order made by the Tribunal under sub-section
  • shall have no effect until a certified copy of the order has been filed with the Registrar.

A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed as aforesaid, or in the case of a company not having a memorandum, to every copy so issued of the instrument constituting or defining the constitution of the company.

  • If the default is made in compliance with sub-section (4), the company, and every officer of the company who is in default, shall be punishable with a fine which may extend to one hundred rupees, for each copy in respect of which default is made.
  • The Tribunal may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Tribunal thinks fit until the application is finally disposed of.
  • Every Producer Company, which has been sanctioned re-conversion by the Tribunal, shall make an application under the Multi-State Co-operative Societies Act, 2002, or any other law for the time being in force for its registration as a multi-State co-operative society or co-operative society, as the case may be, within six months of sanction by the Tribunal and file a report thereof to the Tribunal and the Registrar of Companies and to the Registrar of the Co-operative Societies under which it has been registered as a multi-State co-operative society or co-operative society, as the case may be.

Power to modify Act in its application to Producer Companies

378ZT: The Central Government may, by notification, direct that any of the provisions of this Act (other than those contained in this Chapter) specified in the said notification

Shall not apply to the Producer Companies or any class or category thereof; or

  • Shall apply to the Producer Companies or any class or category thereof with such exception or adaptation as may be specified in the notification.
  • A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised of one session or two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid both
  • Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses.

Power to make rules 378ZU: The Central Government may make rules for carrying out the purposes of this Chapter.

Amendment of section 379:  In section 379 of the principal Act, in sub-section (1), the proviso shall be omitted.

Amendment of section 392: In section 392 of the Principal Act,—

  • The words “with imprisonment for a term which may extend to six months or” shall be omitted;
  • For the words “five lakh rupees, or with both”, the words “five lakh rupees” shall be substituted.
  • Insertion of new section 393A Exemptions under this. Chapter 55. After section 393 of the principal Act, the following section shall be inserted, namely:—
  • “393A. The Central Government may, by notification, exempt any class of— Foreign companies”;
  • companies incorporated or to be incorporated outside India, whether the company has or has not been established, or when formed may or may not be established.

A place of business in India, as may be specified in the notification, from any of the provisions and a copy of every such notification shall, as soon as may be after it is made, be laid before both Houses of Parliament.

  • Amendment of section section 403 of the principal Act, in sub-section (1), for the third proviso, the following proviso shall be substituted, namely:—
  • “Provided also that where there is default on two or more occasions in submitting, filing, registering or recording of such document, fact or information, as may be prescribed, it may, without prejudice to any other legal action or liability under this Act, be. submitted, filed, registered or recorded, as the case may be, on payment of such higher additional fee, as may be prescribed.”

Amendment of section 405:  In section 405 of the principal Act, for sub-section (4), the following sub-section shall be substituted, namely:—

  • “If any company fails to comply with an order made under subsection (1) or sub-section (3), or furnishes any information or statistics which is incorrect or incomplete in any material respect,
  • The company and every officer of the company who is in default shall be liable to a penalty of twenty thousand rupees and in case of continuing failure, with a further penalty of one thousand rupees for each day after the first during which such failure continues, subject to a maximum of three lakh rupees.”

Amendment of section 410: In section 410 of the principal Act,— v (i) in the opening portion, the words “not exceeding eleven” shall be omitted;

  • In clause (b), for the word, figures, and letter “section 53N”, the word, figures, and letter “section 53A” shall be substituted.
  • insertion of new section 418A Benches of Appellate Tribunal 59. After section 418 of the Principal Act, the following section shall be inserted, namely:—
  • “418A. (1) The powers of the Appellate Tribunal may be exercised by the Benches thereof to be constituted by the Chairperson:”
  • Provided that a Bench of the Appellate Tribunal shall have at least one Judicial Member and one Technical Member 12 of 2003. 1 of 1956. 31 of 2016.
  • The Benches of the Appellate Tribunal shall ordinarily sit at New Delhi or such other places as the Central Government may, in consultation with the Chairperson, notify:

Provided that the Central Government may, by notification, after consultation with the Chairperson, establish such number of Benches of the Appellate Tribunal, as it may consider necessary, to hear appeals against any direction, decision, or order referred to in section 53A of the Competition Act, 2002 and under section 61 of the Insolvency and Bankruptcy Code, 2016.”.

Amendment of section 435: In section 435 of the principal Act, in sub-section (1), for the words “offenses under this Act, by notification”, the words and figures “offenses under this Act, except under section 452, by notification” shall be substituted.

Amendment of section 441: In section 441 of the principal Act, for sub-section (5), the following sub-section shall be substituted, namely:—

  • “If any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorized by the Central Government under sub-section (4),
  • The maximum amount of fine for the offense proposed to be compounded under this section shall be twice the amount provided in the corresponding section in which punishment for such offense is provided.”
  • Substitution of new section for section 446B Lesser penalties for certain companies:
  • For section 446B of the principal Act, the following section shall be substituted, namely:
  • ‘446B. Notwithstanding anything contained in this Act, if the penalty is payable for non-compliance with any of the provisions of this Act

One Person Company, small company, start-up company or Producer Company, or by any of its officers in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person.

Explanation: For this section,—

1 of 1956:

“Producer Company” means a company as defined in clause (I) of section 378A;

“start-up company” means a private company incorporated under this Act or the Companies Act, 1956 and recognized as a start-up under the notification issued by, the Central Government in the Department for Promotion of Industry and Internal Trade.”.

Amendment of section 450:

In section 450 of the principal Act, for the words “punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues”, the words “liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person” shall be substituted.

Amendment of section 452: In section 452 of the principle. Act, in sub-section (2), the following proviso shall be inserted, namely:—

  • “Provided that the imprisonment of such officer or employee, as the case may be, shall not be ordered for wrongful possession or withholding of  a dwelling unit, if the court is satisfied that the company has not paid to that officer or employee, as the case may be, any amount relating to—
  • Provident fund, pension fund, gratuity fund, or any other fund for the welfare of its officers or 19 of 1923 employees, maintained by the company;
  • Compensation or liability for compensation under the Workmen’s Compensation Act, .1923 in respect of death or disablement.”.

Amendment of section 454:

In section 454 of the principal Act, in sub-section (3), the following proviso shall be inserted, namely:-

“Provided that in case the default relates to non-compliance of sub-section (4) of section 92 or sub-section (1) or sub-section (2) of section 137 and such default has been rectified either before, or within thirty days of, the issue of the notice by the adjudicating officer, no penalty shall be imposed in this regard and all proceedings under this section in respect of such default shall be _ deemed to be concluded.”.

Amendment of section 465: In section 465 of the principal Act, in sub-section

  • The first proviso shall be omitted;
  • In the second proviso, for the words “Provided further that”, the words
  • “Provided that” shall be substituted;
  • In the third proviso, for the words “Provided also that”, the words “Provided further that” shall be substituted.

CMA Laws & Ethics Question and Answers

Commercial Laws

Industrial Laws

Corporate Law

Ethics

 

 

CMA Laws and Ethics Contract Basic Concepts Question and Answers

Contract Basic Concepts

Question 1. Meaning of Contract
Answer:

  • Sec.2(h) of the Indian Contract Act defines a contract as:

“An agreement enforceable by law.”

Contract = Agreement + enforceability by law

  • Contract is made by acceptance of one party of an offer made to him by the other party, to do or abstain from doing some act.

Contract = Agreement + Obligation

Question 2.Meaning of Agreement and Promise
Answer:

Sec.2(e) of the Indian Contract Act defines it as, “Every’ promise or every act of promises forming consideration for each other.”

It has two characteristics:

  1. Two or more persons are required to agree.
  2. Both parties must agree to the same thing in the same sense.(Consensus – ad- idem).

Sec. 2(b) of the Indian Contract defines a promise as “A proposal when accepted becomes a promise”.

Agreement = Promise

= Accepted Proposal

= Offer + Acceptance

Question 3. Essential elements of a valid contract
Answer:

Sec. 10 of the Indian Contract Act says, “All, agreements are contracts, if they are made-

  1. By free consent of patties, competent to contract,
  2. For a lawful consideration.
  3. With a lawful object, and
  4. Not at this moment expressly declared to be void.

Read and Learn More CMA Laws and Ethics Paper

It includes:

  1. Offer and Acceptance
  2. Intention to create a legal relationship
  3. Lawful consideration
  4. Capacity to contract
  5. Free consent
  6. Lawful object
  7. Agreement not expressly declared void.
  8. Consensus -ad-idem i.e. meeting of minds
  9. Certainty of meaning
  10. Possibility of performance
  11. Legal formalities

Question 4. Offer or Proposal
Answer:

  • It refers to a proposal by one party to another to enter into a legally binding agreement with him.
  • Sec. 2(a) of the Act defines it as-
  • ‘ When one person signifies to another his willingness to do or abstain from doing anything to obtaining the assent of that other to such act or abstinence, he is said to propose.”
  • Offeror or Promisor: The party making an offer.
  • Offeree or Promisee: The party to whom the offer is made.

Question 5.Rules relating to the offer
Answer:

  • Offer must be capable of creating legal relations
  • Offer must be certain, definite, and not vague
  • Offer may be expressed or implied
  • Offer must be distinguished from an invitation to Oiler
  • Offer may be specific or general
  • Offer must be communicated
  • Offer must be made to obtain the consent of the offeree
  • Offer may be conditional
  • Offer should contain the term noncompliance which would amount to acceptance

Question 6.Types of offer
Answer:

General; Specific, Cross, Counter, Open, etc.

  1. General and Specific Offer:
    • Offer made to the public at large with or without any time limit is a general offer.
    • An offer made to a particular and specified person/ persons that can be accepted by that specific person/ persons only is a specific offer.
  2. Cross offer:
    • it occurs when two persons make identical offers to each other, in ignorance of each other’s offer.
    • It leads to the termination of the original offer.
  3. Counteroffer:
    • Upon receipt of an offer from an offeror, if the offeree instead of accepting it straightaway, modifies or varies the offer, he is said to make a counteroffer.
    • It leads to rejection of the original offer.
  4. Standing, Continuing, Open Offer:
    • Offer is made to the public and kept open for public acceptance for a certain period.
    • It refers to a tender to supply goods as and when required.
    • Each successive order given creates a separate contract.
    • It does not bind either party unless and until such orders are given. Offer and Invitation to offer:
  5. Offer is made to get the consent of the other party.
    • An invitation to offer is made to initiate the offer according to the invitation.
    • Offer is made with an object to make a contract.
    • Invitation to offer does not result in any contract formation.

Question 7.Acceptance
Answer:

Acceptance means giving consent to the offer,

Sec. 2(b) of the Contract Act, defines it as “A proposal is said to be accepted when the person to whom the proposal is made signifies his assent to it.”

Question 8. Essentials of a valid acceptance
Answer:

  • Valid Acceptance must be absolute and unqualified.
  • Valid Acceptance  must be communicated to the offeror.
  • Valid Acceptance  must be in the mode prescribed.
  • Valid Acceptance must be given within a reasonable time.
  • Mere silence is not acceptance offeror can prescribe the mode of acceptance but not the mode of rejection.
  • Valid Acceptance must be given before the offer lapses or is revoked.
  •  Valid Acceptance must emanate from the offer.

Question 9. Rules of a valid Consideration
Answer:

  • Valid Consideration must move at the desire of the promisor.
  • Valid Consideration may be done by the promisee himself or by any other person.
  •  Valid Consideration may be past, present, or future.
  • Valid Consideration  must be real and not vague.
  • Valid Consideration must be legal. –
  • Valid Consideration need not be adequate. (But if not adequate then consent must be free)
  • Valid Consideration must be something more than the promisee is already bound to do for the promisor.

Question 10.Kinds of Consideration
Answer:

  • Past Consideration – It refers to something wholly done, forgone, or suffered before agreeing.
  • Under English law, “Past consideration is no consideration.”
  • The consideration that is completed or performed at the time of the contract is called present consideration.
  • But past consideration is a consideration as per the Indian Law.
  • Present or Executed Consideration – It moves simultaneously with promise. The consideration that is completed or performed at the time of the contract is called present consideration.
  • Future or Executory Consideration – It is to be moved at a future date i.e. promise is to be performed in the future.

Question 11. Exceptions to the Rules, “No consideration, No contract”
Answer:

  • An agreement made is valid if
    • expressed in writing and registered under the law,
    • made on account of natural love and affection,
    • between parties standing in near relation to each other.
  • A promise is valid if-
    • It is a promise to compensate wholly or in part, a person who has already voluntarily done something for the promisor.
    • Something which the promisor was legally compellable to do.
  • A promise to pay, wholly or in part, a debt, which is barred by law of limitation can be enforced if
    • it is in writing,
    • it is signed by the debtor or his authorized agent.
  • It does not apply to completed gifts i.e. gifts given and accepted.
  • Consideration is not required to effect a valid bailment of goods i.e. gratuitous bailment.
  • Not required to create an agency.
  • If a person promises to contribute anything to a charity and on his faith, the promisee undertakes a liability to that extent, the contract shall be valid.

Question 12. The Doctrine of Privity of Contract
Answer:

  • It means that only those persons, who are parties to a contract, can sue and be sued upon the contract.
  • It refers to the relationship between parties who have entered into the contracts.
  • The third party cannot sue upon it, even though the contract may be for his benefit.
  • Thus, “a stranger to the contract” cannot bring a valid suit under the contract.
  • It is different from “stranger to consideration”.

Question 13. Legal Agreement
Answer:

An agreement that can be enforced legally.

Illegal Agreements:

  • It goes beyond the basic public policy and, thus is not enforceable by law.
  • It is not only void between immediate parties but the collateral transactions also become illegal.

Its consequences:

  • Entirely void
  • No action can be brought by or against any party.
  • Money paid or property transferred under it cannot be recovered If its two parts legal and illegal are separable, only the legal part can be enforced by the courts Agreement collateral to it is also illegal.

Question 14. Void Agreement
Answer:

  • Agreements not enforceable by law are void.
  • They are not always illegal and their collateral transactions are legal.
  • It cannot give rise to any legal consequence
  • It is void -ab- initio (i.e- void from the very beginning)
  • For Example  minor’s contract

Question 15. Void Contracts
Answer:

  • It is not a contract at all as it is without any legal effect.
  • Section 2(j) of the Indian Contract Act, of 1872, defines it as “A contract which ceases to be enforceable by law becomes void when| it ceases to be enforceable.”

Question 16. Voidable Contracts.
Answer:

  • It is an agreement that is binding and enforceable but due to lack of one or more of the essentials of a valid contract, it may be repudiated.
  • Section 2(i) of the Indian Contract Act, of 1872 defines it as “ All agreements which are enforceable at the option of any one of the parties, and other party has no such option, are known as voidable contracts.”

Question 17. Competency, Capacity of Parties to Contract
Answer:

  • It means that parties to the agreement must have the capacity to enter into a valid contract.
  • People may be either natural or artificial.
  • Natural persons means human beings.
  • Artificial persons means corporations.

Question 18. Position of minor’s agreement
Answer:

  1. An agreement entered into by a minor is altogether void i.e. void ab initio
  2. Minor can be a promisee or a beneficiary
  3. Minor can always plead minority
  4. Minor’s agreement cannot be ratified by him
  5. Contract by guardian is enforceable if-
    • It is within his competence and authority,
    • For the benefit of the minor.
  6. Minor’s property is liable for necessaries.
  7. The court can never direct the specific performance of the contract
  8. Minor cannot be a partner in a partnership firm. He can however be admitted to the benefits of the partnership firm.
  9. Minor can act as an agent and bind his principal without incurring any personal liability.
  10. Minor can never be adjudicated as an insolvent.

Question 19. Lunatics Agreement
Answer:

  • As per Section 12 of the Indian Contract Act, “A person is said to be of sound mind to make a contract if, at the time when he makes it, he is capable of undertaking it and of forming a rational judgment as to its effects upon his interests.”
  • A person of unsound mind includes:
    • Lunatics
    • idiots
    • drunkards
  • Such an agreement is void.
  • The lunatic estate will be liable for any necessaries supplied to him or his family.
  • A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind and he will be bound by it.
  • A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

Question 20. Persons disqualified by law from entering into a contract
Answer:

Alien Enemy-

  • Alien is a person who is not an Indian citizen.
  • He becomes an alien enemy on the declaration of war between India and his country.
  • He cannot enter into a contract with an Indian subject.

Foreign Sovereigns and Ambassadors

  • They enjoy certain special privileges due to which they cannot be legally proceeded against in Indian Courts.
  • If contracts are entered into through agents, then agents become personally responsible for the performance.

Convicts:

  • Cannot enter into a valid contract while undergoing sentence, nor he can sue.

Question 21.Free Consent
Answer:

  • As per the Indian Contract Act,
  • “ Two or more persons are said to consent when they agree upon the same thing in the same sense.” (Consensus-ad-idem)
  • Free consent means consent given by parties out of their free will. their own without any fear, without any force, without any compulsion or threat from the other party.
  • As per Section14, consent is said to be free when it is not caused by
    1. Coercion
    2. Undue influence
    3. Fraud
    4. Misrepresentation
    5. Mistake
  • In the absence of free consent, the contract is usually voidable at the option of the party whose consent is not free.

Question 22.Coercion
Answer:

  • “It is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (IRC), or the unlawful detaining, or threatening to detain any property, to the prejudice of any person, whatever, to cause any person to agree.”

Exceptions of coercion:

The following threats are not coercion-

  1. Threat to file a suit,
  2. Consent is given based on legal obligations,
  3. Threat by workers,
  4. Threat to detain property by mortgager.

Relevant Case Law:

Ram Chandra Vs. Bank of Kolhapur

It may proceed from any person and may be directed against any person or goods.

Question 23.Undue Influence
Answer:

  • A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
  • It has the following two elements:
    • A dominant position,
    • The use of it to obtain an unfair advantage.
  • A person is deemed to dominate the will of another if-
    • He holds a real or apparent authority over the other, or
    • He stands in a fiduciary relation to the other; or
    • He makes a contract with a person whose mental capacity is temporarily or permanently affected because of age, illness, or mental or bodily distress.
  • Relationships that are presumed to have undue influence include:
    • Parent and Child
    • Guardian and Ward
    • Religious, Spiritual Guru, and Discipline
    • Doctor and Patient
    • Solicitor and Client
    • Trustee and Beneficiary
    • Ranee and Rancee
  • A relationship where the dominant position is not presumed but has to be proved by the aggrieved party:
    • Creditor and Debtor
    • Landlord and Tenant
    • Husband and Wife.

Question 24.Fraud
Answer:

  • Also known as wilful misrepresentation.
  • Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent with intent to deceive another party thereto or his party, or to induce him to enter into the contract
    1. The suggestion, as to fact, of that which is not true by one who does not believe it is true,
    2. The active concealment of a fact by one having knowledge or belief of the fact,
    3. A promise made without any intention of performing it,
    4. Any other act fitted to deceive,
    5. Any such act or omission as to law is specially declared to be fraudulent.

Question 25.Misrepresentation
Answer:

  • Where a person asserts something that is not true, though he believes it to be true, his assertion amounts to misrepresentation.
  • Misrepresentation made by a person may be either
    1. Innocent, or
    2. Without any reasonable ground
  • The aggrieved party can avoid the contract, but cannot sue for damages in normal circumstances,
  • Its damages can be obtained in the following cases:
    1. From a director or promoter making an innocent misrepresentation in the company’s prospectus.
    2. From an agent committing a breach of warranty of authority
    3. A person who has made a certain statement in the Court, relying upon which a party has suffered damages, is stopped by the Court from denying it.
    4. Negligent representation made by one person to another between v/horn there exists a confidential relationship.

Question 26.Mistake
Answer:

  • It refers to miscalculation or judgmental error by both or either of the parties.
  • It must be a “vital operative mistake.”
  • When both parties to an agreement are under a mistake to a matter of fact essential to the agreement, the agreement is altogether void.
  • A unilateral mistake means a mistake on the part of only one party.
  • Unilateral Mistake is not void.

Question 27. Mistake as to the identity of a person operates if
Answer:

  • Identity is of material importance to the contracts, and
  • A mistake is known to the other person.
  • The following conditions need to be fulfilled, for the mistake to be void:
    • The fact is material to the agreement.
    • There is a mistake of fact.
    • Both parties are at mistake.

Question 28.Transaction with Pardanashin women
Answer:

  • It means complete seclusion.
  • Women fixing and collecting rent from tenants and communicating business matters with men other than their family members are not pardanashin women.
  • It is founded on equity and good conscience.
  • A person entering into a contract with pardanashin women has to prove that:
    1. no undue influence was used
    2. she had free and independent advice
    3. she fully understood the contents of the contract
    4. she exercised her free will
    5. She has been given a special cloak of protection by law

Question 29. Agreement Expressly Declared Void
Answer:

  • Certain agreements have been expressly declared void by the Contract Act.
  • They are void ab initio.
  • It includes:

1. Consideration up awful in part (Sec.24)

  • “If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.”
  • Where the legal part of a contract can be severed from the illegal part, the bad part may be rejected and the good one can be retained”
  • Where the illegal part cannot be severed, the contract is altogether void.

2. Agreement the meaning of which is uncertain (Sec. 29)

  • An agreement, the meaning of which is not certain, is void but where the meaning thereof is capable of being made certain, the agreement is valid.

3. Wagering Agreement (Sec. 30)

  • Wager means ‘bet’.
  • They are ordinary betting agreements.
  • It refers to an agreement between two parties by which one promises to pay money or money’s worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the event does not happen.
  • Such an agreement is void.
  • If one of the parties has control over the event, the agreement is not a wager.
  • Though wagering contracts are void, transactions incidental to wagering transactions are not void.

Contract Basic Concepts Short Note Question And Answers

Question 1. Write Short Notes on the Counteroffer;
Answer:

A counteroffer is a new offer Suppose A offers to make in response to an offer made earlier, s house to B for INR10.0 lacs, and B offers to buy B would be called a Counteroffer. In general, the offer is the same for the counteroffer as well.

Question 2. Write a short note on Lawful consideration
Answer:

Contract - Basic Concepts Lawful Consideration

Question 3. Write short notes on the following E – E-contracts
Answer:

E-Contracts:

Electronic contracts are paperless contracts. It is in electronic form. It is the change of technology and legal requirements that lead the contract to be in electronic form.

  • An E-contract is a contract modeled, specified, executed, and deployed by a software system.
  • They are conceptually very similar to traditional commercial contracts. E-contract also requires the basic elements of a contract.

The following are the ingredients of the e-contracts:

  • An offer is to be made;
  • Offer is to be accepted;
  • There shall be a lawful consideration;
  • There shall be an intention to create legal relations;
  • The parties must be competent to contract;
  • There must be free and genuine consent;
  • The object of the contract must be lawful;
  • There must be certainty and possibility of performance.

Question 4. Write a short note on out of the following term Undue Influence.
Answer:

Undue Influence :

  • When two parties enter into a contract with each other and one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other party, such contract is said to be induced by ‘undue influence’.
  • If a person has a dominant position over another person and enters into a contract with such person then the burden of proof that the contract was not done under undue influence, is on the person holding the dominant position.
  • A person is said to be having a dominant position if.
    • He makes contact with a person who is not of sound mind because of age, illness, mental instability bodily distress, etc.
    • He holds some control over the other person
    • He holds some monetary obligation over the other person.

Question 5. Write short notes on the Agreement without consideration
Answer:

Agreement without consideration:

Section 25 provides that an agreement made without consideration is void unless:

  1. It is in writing and registered: It is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other; or unless
  2. It is a promise to compensate for something done: It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless
  3. It is a promise to pay a debt, barred by limitation law: It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized on that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
  4. In any of these cases, such an agreement is a contract.

Question 6. Write a short note on the following term Misrepresentation
Answer:

Misrepresentation : (Section 18 of the Indian Contract Act, 1872) Where a person asserts something that is not true, though he believes it to be true, his assertion amounts to misrepresentation. Misrepresentation may be either innocent or without reasonable grounds.

Misrepresentation means and includes:

  1. The positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
  2. Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice or the prejudice of anyone claiming under him;
  3. Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

Question 7. Write Short Notes on Coercion
Answer:

Coercion: The term “Coercion” has been defined in Section 15 of the Indian Contact Act, 1872 as the committing or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, to cause any person to agree.

Explanation: It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed.

  • From the above definition of coercion given in section 15, consent is said to be caused by coercion, when it is obtained by any one of the following;
  • Committing or threatening to commit any act forbidden by the Indian Penal Code;
  • Unlawful detaining or threatening to detain the property of another person. Coercion may come from a person party to the contract or even a third person not connected with the contract directly.

Contract Basic Concepts Descriptive Question And Answers

Question 1. Comment on the following based on legal provisions: (b) Remaining silent concerning the known defects is fraudulent.
Answer: The statement is false. Silence is not a fraud. Silence may be treated as fraud if it leads to a breach of trust between the two parties.

Question 2. State the essentials of a valid contract.
Answer:

A legal relationship is an imperative (means important, basic, essential) component of the agreement. Some certain conditions and ingredients make an agreement enforceable by law and make this a valid contract as per the Law of Contract. These elements are described below:

Contract - Basic Concepts Essentials Of A Valid

Contract - Basic Concepts Essentials Of A Valid

Question 3. A deceit that does not deceive is not fraud. Comment.
Answer: Fraud should exist to take action against it. If no one is deceived, there is no case of fraud. A fraud attempt is not fraud unless the party is deceived.

Question 4. While discussing, Rajib told his friends that Contracts need not be performed under certain circumstances. Deepak objected to it. State the correct position.
Answer:

Yes, it is possible. Sections 62 to 67 of the Contract Act are listed under the heading “Contracts which need not be performed. The relevant provisions are as follows.

  1. If by mutual agreement there is Novation, Rescission, or Alteration, the original contract need not be performed (Sec. 62).
  2. Where the promisee waives or remits the performance of the promise made to him, wholly or in part, or extends the time of performance or accepts any other satisfaction for it (Sec. 63).
  3. When a voidable contract is rescinded, the other party need not perform his promise (Sec. 64).
  4. If the promisee neglects or refuses to afford the promisor reasonable facilities of the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby (Sec. 67).

Under the Law of Contract, the following agreements need not be performed.

  1. Unlawful consideration and object – Sec. 23.
  2. Where the performance is unlawful or illegal – Sec. 56.
  3. When performance becomes impossible.

Question 5. A patient in a lunatic asylum can also enter into a valid contract. State the position based on legal provision.
Answer: A person having a sound mind can enter into a valid contract. If a person is usually of unsound mind, who is at intervals of sound mind, may contract during those intervals when he is of sound mind

Question 6. Does silence amount to fraud?
Answer:

  • When a party to a contract maintains silence over some of the facts relating to the contract, such silence may or may not amount to fraud depending upon the circumstances and facts of each case.
  • Explanation to Section 17 of the Indian Contract Act, 1872, provides that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of the case are such that having regard to them it is the duty of the person keeping silence to speak or unless silence itself is equivalent to speech.
  • When the circumstances of a contract are such that a person should speak and he does not speak but keeps silent then such silence will be treated as fraud.

Exceptions to the General Rule:

The general rule that silence does not amount to fraud has the following exceptions:(In the following cases silence will amount to fraud)

  1. When the parties stand in the fiduciary relationship (i.e., relationship of faith and trust, parent and child, etc.)’
  2. Where silence is equivalent to speech.
  3. Half Truth – It is worse than a blatant lie. Partial truthful disclosures may easily deceive the other party

Question 7. X buys from Y a painting that both believe to be work of an old masterpiece and for which X pays a high price. The painting turns out to be only a modern copy. Discuss the validity of the contract.
Answer:

The Contract is void as there is a mutual mistake of both the parties as to the substance or quality of the subject matter going to be the very root of the contract. In case of a bilateral mistake of essential fact, the agreement is void ab initio, as per Section 20 of the Indian Contract Act,1872.

Question 8. What are the essential elements of a valid acceptance?
Answer:

Contract - Basic Concepts Essentials Of A Valid Acceptance

Contract - Basic Concepts Essentials Of A Valid Acceptance

Question 9. Does silence amount to fraud? Explain which exceptions and types of silence amount to fraud.
Answer:

Fraud: [Sec. 17]

Explanation to Section 17 of the Indian Contract Act provides that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of the case are such that having regard to them it is the duty of the person keeping silence to speak or unless silence itself is equivalent to speech.

Thus we can say that there is an exception to the rule that mere silence does not amount to fraud. These two exceptions are provided in explanation to Section 17 which we have already discussed above.

  1. When there is a duty to speak.
  2. Where silence is equivalent to speech.

However, in the following two types of cases, silence amounts to fraud, as held by the courts in various cases:

  1. Where there is a change in circumstances: A representation may be true when made but with the passage of time or changed circumstances it may become false. Accordingly, this must be communicated to the other party otherwise it amounts to fraud.
  2. When there is half-truth: Thus even when a person is not bound to disclose a fact he may be held guilty of fraud if he volunteers to disclose a state of fact partly. This is so when the undisclosed part renders the disclosed part false.

Question 10. What is the position of Minor’s agreement and the effect thereof?
Answer:

The position of Minor’s agreement and effect thereof is as under:

  1. An agreement with a minor is void ab initio.
  2. The law of estoppel does not apply against a minor. It means a minor can always plead his minority despite earlier misrepresenting to be a major.
  3. In other words, he cannot be held liable on an agreement on the ground that since earlier he had asserted that he had attained majority.
  4. The doctrine of Restitution does not apply against a minor. In India, the rules of restitution by minors are similar to those found in English laws.
  5. The scope of restitution of contract by a minor was examined by the Privy Council in the Mohiri Bibi case when it held that the restitution of money under section 64 of the Indian Contract Act cannot be granted under section 65 because a minor’s agreement is not voidable but void ab-initio.
  6. Similarly, no relief can be granted under section 65 as this section is applicable where the agreement is discovered to be void or the contract becomes void.
  7. No Ratification on Attaining Majority – Ratification means approval or confirmation. A minor cannot confirm an agreement made by him during minority on attaining majority. If he wants to ratify the agreement, a fresh agreement and fresh consideration for the new agreement are required.
  8. Contract beneficial to Minor – A minor is entitled to enforce a contract that is of some benefit to him.
  9. Minority is a personal privilege and a minor can take advantage of it and bind other parties.
  10. Minor as an agent – A minor can be appointed an agent, but he is not personally liable for any of his acts.
  11. Minor’s liability for necessities – If somebody has supplied a minor or his dependents with necessities, the minor’s property is liable but a minor cannot be held personally liable.
  12. A minor cannot be adjudged insolvent as he is incapable of entering into a contract.
  13. Where a minor and an adult jointly agree with another person the minor is not liable and the contract can be enforced against the major person.

Question 11. Discuss the different modes of terminating the contractual relationship between the parties.
Answer:

When the rights and obligations created by a contract come to an end, the contract is said to be discharged. Discharge of contract means termination of the contractual relationship between the parties. The following are the different methods by which a contract is discharged:

  1. Discharge by performance: Performance is the usual mode of discharge of a contract. Performance may be (i) actual performance or (ii) attempted performance. Actual performance is the fulfillment of the obligations arising from a contract by the parties to it, under the terms of the contract. Offer of performance is called attempted performance or tender of performance. A valid tender of performance is equivalent to performance.
  2. Discharge by agreement: The parties may agree to terminate the existence of the contract in any of the following ways:
    1. Novation: Substitution of a new contract in place of the existing contract is known as “Novation of Contract”. It discharges the original contract. The new contract may be between the same parties or between different parties. Novation can take place only with the consent of all the parties.
    2. Alteration: Alteration means a change in one or more of the terms of the contract. In case of novation there may be a change of the parties, while in the case of alteration, the parties remain the same.
    3. Rescission: Rescission means “cancellation”. All or some of the terms of a contract may be canceled. Rescission results in the discharge of the contract.
    4. Remission: Remission means acceptance of a lesser performance than what is due under the contract. There is no need for any consideration for remission.
    5. Waiver: Waiver means giving up or foregoing certain rights. When a party agrees to give up its rights, the contract is discharged.
    6. Discharge by lapse of time: Every contract must be performed within a fixed or reasonable period. A lapse of time discharges the contract. The Indian Limitation Act has prescribed the period within which the existing rights can be enforced in courts of law.
  3. Discharge by operation of law: A contract may be discharged by operation of law in the following cases:
    1. Death: In contracts involving personal skill or ability, death terminates the contracts. In other cases, the rights and liabilities of the deceased person will be passed on to his legal representatives.
    2. Insolvency: The insolvency of the promisor discharges the contract. The promisor is discharged from all liabilities incurred before his adjudication. ,
    3. Unauthorized material alteration: Material alteration in the terms of the contract without the consent of the other party discharges the contract. Changes in the amount of money to be paid, date of payment, place of payment, etc. are examples of material alteration.
    4. Merger: When the inferior rights of a person under a contract merge with superior rights under a new contract, the contract with inferior rights will come to an end.
  4. Discharge by the impossibility of performance: Impossibility of performance results in the discharge of the contract. An impossible agreement is void because the law does not compel us to do impossible things.
  5. Discharge by breach: Breach means failure of a party to perform his obligations under a contract. Breach brings an end to the obligations created by a contract.
    1. Instance: X and Y wanted to marry each other. Before the time is fixed for marriage, A goes mad. The contract becomes void.
    2. Termination of Contract: The proper way, in which the agreement could have been terminated is by issuing a notice to the plaintiff, calling upon them to complete the transaction within a particular time, failing which the contract will The treated as canceled.

The proper way of terminating the contract is cleared from what has been observed in “Narayana Swami Pillantiff. Dhanakodi Ammal”, that when the contract is for the sale of immovable property the vendor must give reasonable notice requiring the performance within a certain time.

Question 12. Discuss the remedies available the to buyer again the st seller for breach of contract.
Answer:

Remedies available the to buyer again the st seller for breach of contract (Section 57 to 60).

These are as under:

  1. Suit for Damages for Non-Delivery: When the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery.
  2. Suit for price: Where the buyer has paid the price and the goods are
    ‘ not delivered to him, he can recover the amount paid.
  3. Suit for specific performance: When the goods are specific or ascertained, a buyer may sue the seller for specific performance of the contract and compel him to deliver the same goods.
  4. Suit for Breach of Warranty: Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat the breach of condition as a breach of warranty; the buyer cannot reject the goods. The buyer may –
    • set up the breach of warranty in extinction or diminution of the price payable by him, or
    • sue the seller for the damages for breach of warranty.
  5. Repudiation the of contract before the due date: Section 60 provides that where either party to a contract of sale repudiates the contract before the date of delivery the other may either treat the contract as subsisting or wait till the date of delivery, or he may treat the contract as rescinded and sue for damages for the breach.
  6. Suit for Interest: The buyer may recover such interest or special damages, as may be recoverable by law. He may also recover the money paid where the consideration for the payment of it has failed.

Contract Basic Concepts Practical Question And Answers

Question 1. Arun seeing a watch in Barun’s shop marked for sale for INR 1,0entersred the shop, places INR 1000 on the coun,ter and asks for the watch. Barun refused. Can Barun refuse to sell the watch? Give reasons.
Answer:

  • No, Barun is not bound to sell the watch. Prilabelsbel’s article only amounts to an invitation to offer and not an offer.
  • Placing $ 1,000 by Arun amounts to an that may or may not be accepted by Barun. [Ref. Pharmaceutical Society of Great Britain-Vs-Boots Cash Chemists Ltd, (1953) 1 Q. B. 401].

Question 2. Comment on the following based on legal provisions: Mr. Menon offered on 1st December 2012 to sell his house to Mr. Poison at IThirty-Fiveive Lakhs. Mr. Poison accepted by email on 2nd December, 2012 at 8 A.M. At 10 A.M. Mr. Poison sent a Fax revoking the acceptance. Both email (therefore acceptance) and Fax (therefore revocation) reached Menon at the same time. Hence this was valid.
Answer:

  • When the letter of acceptance and letter of revocation of acceptance reaches the person at the same time, the effective letter will be that letter that the receiver opens first.
  • In the given case, if Menon opens the letter of acceptance first, the contract would be treated as accepted.
  • If Menon opens the letter of revocation (cancellation) first the contract would be treated as revoked (canceled).

Question 3. Comment on the following based on legal provisions: (a) Mr. A offers to buy Mr. B’s house on certain terms. Acceptance was to be sent by ‘B’ within 6 (six) weeks. B within one week sent a letter accepting the offer with an alteration of one term. A then withdrew his offer. B writes again within three weeks accepting the terms originally proposed by ‘A’. Hence this is a valid contract.
Answer:

  • The original proposal of A was altered by B. This amounts to the death of the original proposal. B’s proposal is a counter offer which is to be treated as a fresh proposal.
  • This is not a valid contract even if B agrees to accept the original terms because the original contract was dead when its terms were first altered.

Question 4. Referring to a quarrel and disagreement between husband and wife, the husband agreed to execute and register a document in favor of his wife to transfer one of his properties to his wife. Later, on husband refused. Whether wife can enjoy it?
Answer:

  • The wife will not succeed because the contract is without consideration.
  • If the transfer is without consideration but there is an existence of mutual love and affection, such transfer is valid in the eyes the of law.
  • In the present case, the transfer is due to quarrels and arguments and is without consideration, this does not fulfill the essentials of a valid contract.

Question 5. Arun, Va, run and Tarun are part of the software business and jointly promise to pay INR 60,000 to Karun. Sometimes, Varun becomes insolvent, but his assets are sufficient to pay one-fourth of his debts. Tarun is compelled to pay the whole. Decide whether Tarun is required to pay the whole amount to Karun in the discharge of the ng joint prom.se.
Answer:

  • According to Section 43 of Indian Contract A of ct,1872 when two or more persons make a joint promisee, the promisee may, in the absence of an express agreement to the contrary compel any one or more for such joint promisors to perform the whole of the promise.
  • Further, if any one of two or more joint promisors maka es default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares.
  • Therefore, in this case, Tarun is entitled to receive INR 500one-fourth of Varun’s share of debt) from Varun’s assets and a balance of INR 27500 from Arun.

Question 6 W offered to sell his house to M for? 40 lakhs. M replied purporting to accept the offer and enclosed a cheque or? 20 lakhs. He also promised to pay the balance amount in twenty equal installments. Examine the validity of. the contract.
Answer:

  • Conditional acceptance is no acceptance at all. Acceptance of an offer must be absolute and unqualified i.e., it must conform to the offer.
  • An acceptance to be binding must be absolute and unqualified [Sec. 7(1)] in respect of all terms of the offer, whether material or immaterial, major or minor.
  • In the case provided, the acceptance qualified; hence it would not result in a valid contract.

Question 7. W, the wife of H,’ who is a lunatic, purchases a diamond set of? 10 lacs from a jeweler on credit. Referring to the provisions of the Indian Contract Act, of 1872, decide whether the jeweler is entitled to claim the above amount from the property of H.
Answer:

  • The problem relates to the provisions of quasi-contract. It is to be noted that minors, persons of unsound mind or lunate, and other disqualified ’ persons are incompetent to contract.
  • But, under the provisions of Section 68 the of Indian Contract Act, 1872 “if  are supplied to a person, who is incompetent to contract, the supplier is entitled to claim the reimbursement from the estate of such person”,
  • A supplier would also be entitled to recover the price of necessary supplies to the wives or children of the incompetent person, as he is legally bound to support them.
  • Also, necessaries would mean ‘goods suitable to the condition in the life of such person’ and not luxuries.
  • Again personal liability is not accrued for minors and lunatics; it is only their estate that would be liable. If there is no property nothing would be realizable.
  • To establish his claim the supplier must prove not only that the goods were supplied to the person who was a minor or a lunatic, but also that they were suitable to his requirement at the time of sale and delivery.
  • It is also to be noted that a person of unsound mind, who has intervals of sound mind can enter into a contract during such period.
  • Thus the burden to prove that H is lunatic and he was of unsound mind when entered into the contract lies on the seller.
  • In the given problem, the jeweler would not be entitled to the claim, as a diamond set worth? 10 lakhs for the wife of H, is not a necessity and is surely a luxury.

Question 8.

1. Abhay, a UG degree student was induced by his lecturer to sell his brand new car to the latter at less than the purchase price to secure more marks in the University examination. Accordingly, the car was sold. However, the father of Abhay persuaded him to sue his lecturer. State whether Abhay can sue the lecturer.
Answer:

  • Yes, Abhay can sue his lecturer on the grounds of influence under the provisions of the Indian Contract Act, of 1872.
  • A contract brought as a result of coercion, undue influence, fraud, or misrepresentation would be voidable at the option of the person whose consent was caused.
  • As per Sec. 19-A when consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused.
  • Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit there-under, upon such terms and conditions as the Court may seem just.

2. Anita and Binita are friends, Binita treats Anita during Anita’s illness. Binita does not accept payment from Anita for treatment and Anita promises Binita’s son Sunit to pay him. 12,000. Anita being in poor circumstances is unable to pay. Sunit sues Anita for the money. Can Sunit recover?
Answer:

  • No, Sunit cannot recover the money from Anita. The agreement between Sunit and Anita is not a contract in the absence of consideration. In this case, Sunit’s mother, Binita, voluntarily treats Anita during her illness.
  • It is not a valid consideration because it is voluntary whereas consideration to be valid must be given at the desire of the promisor-void Section 2(d).
  • The question now is whether this case is covered by the exception given in Section 25(2) which inter-alia provides.
  • “If it is a promise to compensate a person who has already voluntarily done something for the promisor ”
  • Thus as per the exception, the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor.
  • As Binila’s son, Sunit to whom the promise was made, did nothing for Anita, So Anita’s promise is not enforceable even under the exception.

3. Arvinda took a bet of? 20,000 with Bannerjee that a certain horse would win the race. Arvinda and Bannerjee are both residents of Kolkata. Arvinda borrowed? 20,000 from his friend Chatterjee for this purpose. Arvinda lost the bet and paid. 20,000 to Bannerjee. Can Chatterjee recover the loan amount from Arvinda? Give reasons. What would have been the difference had the transaction taken place in Ahmedabad between the parties residing there?
Answer:

  • Yes, Chatterjee can recover the loan amount from Arvinda.
  • The transaction between Arvinda and Chatterjee is a collateral transaction which is valid, though the main transaction between Arvinda and Bannerjee is void, being a wager.
  • Had the transaction taken place in Ahmedabad, Chatterjee could not have recovered the loan as in Ahmedabad the wager transactions are illegal and a transaction collateral to it is also void on the grounds of illegality

Question 9. The father of a minor girl, Anu, agreed to her marriage with Vishal. Afterwards, Vishal refused to marry Anu. On attaining majority, Anu filed a suit against Vishal for damages for breach of promises to marry. Vishal contended that Anu could not enforce the contract as she was not a party to the agreement between him and Anu’s father. Is Vishal’s contention valid?
Answer:

  • An agreement is made in connection with marriage, partition, or other family arrangements, and a provision is made for the benefit of some person.
  • In such cases, a person, for whose benefit the provision is made in such family arrangements, can enforce the agreement even if he is not a party to it.
  • It may, however, be noted that provision must be made for the benefit of the person who wants to enforce such marriage arrangements.
  • No, Vishal’s consent is not valid.
  • The marriage agreement or other family arrangements where a provision is made for the benefit of some person can be enforced by the beneficiary even if he is not a party to the same.

Question 10. X Father promised to pay his son Y a sum of? One lakh if Y (son of X) passed the CMA examination on the first attempt. Y passed the CMA examination on his first attempt, but X failed to pay the amount as promised. Y files a suit for recovery of the said amount. State along with reasons whether Y can recover the amount under the Indian Contract Act, 1872.
Answer:

  • The problem asked in the question is based on the provisions of the Indian Contract Act, of 1872 as contained in Section 10.
  • According to the provisions, there should be an intention to create a legal relationship between the parties.
  • Agreements of a social nature or domestic nature do not contemplate legal relationships and as such are not contracts, that can be enforced.
  • This principle has been laid down in the case of Balfour Vs. Balfour.
  • Accordingly, applying the provisions and the ease decision, in the case Y cannot recover the amount of Rupees one lakh from X for the reasons explained above.

Question 11. A, aged 16 years, was studying in an engineering college. On 1 June 2015, he took a loan of ? 2 Lakhs from B for the payment of his college fees and agreed to pay by 31st July 2016. A possesses assets worth $ 20 Lakhs. On the due date, A fails to pay back the loan to B. B now wants to recover the loan from A out of his assets. Whether B would succeed? Decide, referring to the provisions of the Indian Contract Act, of 1872.
Answer:

  • The problem in question is covered under the exceptions. As per Section 68 of the Indian Contract Act, 1872 a minor is not personally liable to pay the price of necessaries supplied to him or money lent for the purpose.
  • This supplier or lender will be entitled to claim the money, price of goods, or services which are necessary suited to his condition of life provided that the minor has a property.
  • The liability of the minor is only to the extent of the minor’s property. This type of contract is called a Quasi-contract and the right of the supplier/tender is based on the principle of equity.
  • Hence, in the given case B will be entitled to recover the amount of loan given to A for payment of college fees from the property of A, the minor.

Question 12.A agreed to become an assistant for five years to B who was a doctor practicing at Chennai. It was also agreed that during the term of the agreement, A will not practice on his account in Chennai. At the end of one year, A left the assistantship of B and began to practice on his account. Referring to the provisions of the Indian Contract Act, of 1872, decide whether A could be restrained from doing so.
Answer:

According to the provisions of the Indian Contract Act, 1872, as contained – Section 27 any agreement through which a person is restrained from exercising a lawful profession or trade or business is void.

  • But an agreement of service by which a person binds himself during the term of the agreement not to take service with anyone else directly or indirectly to promote any business in direct competition with that of his employer is not in restraint of trade.
  • Therefore, ‘A’ cannot be restrained by an injunction from doing so.

Question 13. C is the wife of A. She purchased some sarees on credit from B. B demanded the amount from A. A refused. B filed a suit against A for the said amount. Decide in the light of provisions of the Indian Contract Act, of 1872, whether B would succeed.
Answer:

The agency may be created by a legal presumption; in a case of cohabitation by a married woman (therefore wife is considered as an implied married agent, of her husband).

If a wife lives with her husband, there is a legal presumption that a wife has the authority to pledge her husband’s credit for necessities.

  • But the legal presumption can be rebutted in the following cases:
    1. Where the goods purchased on credit are not necessary.
    2. Where the wife is given sufficient money for purchasing necessaries.
    3. Where the wife is forbidden from purchasing anything on credit or contracting debts.
    4. Where the trader has been expressly warned not to give credit to his wife.
  • If the wife lives apart for no fault on her part, the wife has the authority to pledge her husband’s credit for necessities.
  • This legal presumption can be rebutted only in cases (3) and (4).
  • In the Present Case: ‘B’ will succeed. He can recover the said amount from ‘A’ if sarees purchased by ‘C’ are necessary for her.

Question 14. Sunil, aged 16 years, was studying in a Medical College. On 1st March 2017, he took a loan of $ 3 lakhs from Anil for the payment of his college fees and agreed to pay by 31st May 2018. Sunil possesses assets worth $ 15 lakhs. On the due date, Sunil fails to pay back the loan to Anil. Anil now wants to recover the loan from Sunil out of his assets. Whether Anil would succeed? Decide, referring to the provisions of the Indian Contract Act, of 1872.
Answer:

  1. According to Section 11 of the Indian Contract Act, of 1872, a person who is of the age of majority to the law to which he is subject is competent to enter into any contract. A person who has completed the age of 18 years is a major and otherwise, he will be treated as a minor.
  2. Thus, Sunil who is a minor is incompetent to contract and any agreement with him is void [Mohori Bibi Vs Dharmodas Ghose 1903, 30 Cal, 539 (PC)].
  3. Section 68 of the Indian Contract Act, 1872 however, prescribes the liability of a minor for the supply of the things which are the necessaries of life to him.
  4. It says that though a minor is not personally liable to pay the price of necessaries supplied to him or money lent for the purpose, the supplier or lender will be entitled to claim the money/price of goods or services which are necessaries suited to his condition of life provided that the minor has a property.
  5. The liability of the minor is only to the extent of the minor’s property.
  6. This type of contract is called a Quasi-contract and the right of the supplier or lender is based on the principle of equity.
  7. Hence, according to the above provision, Anil will be entitled to recover the amount of the loan given to Sunil for payment of the college fees from the property of the minor.

Question 15. Essential elements of a contract of bailment:
Answer:

  1. Contract: The “first condition is that there must be a contract between the two parties for the delivery of goods. Such contract may be express or implied written or oral.
  2. Delivery of Goods: This contract is for the delivery of some movable goods from one person (bailor) to another person (bailee) or his authorized agent. If the goods are immovable the contract will not be a contract of bailment.
  3. Change of Possession: The possession of goods must be affected by such contract. Mere custody without possession is not a contract of bailment.
  4. Purpose of Delivery: The delivery of the goods is for temporary purposes. It may be for safe custody, repair, carriage, or gratuitous use by the bailee.
  5. Number of Parties: There are two parties tender such contract e.g., the bailor and bailee. The person delivering the goods is called the bailor and the person to whom the goods are bailed is called the bailee.
  6. Right of Ownership: In a contract of bailment, the right of ownership remains with an owner (bailor) and is not changed. If the ownership is transferred, the contract will be a contract of sale and ’ is not of bailment.
  7. Change of Form: If the goods bailed are altered in form by the bailee, such as cloth is converted into a shirt still, the contract is one of bailment.
  8. Goods in Possession of Bailee: The delivery of the goods is not essential if the goods are already in the possession of the person who enters into the contract as bailee.
  9. Redelivery of Goods: Under such contract, the goods are redelivered to the bailor or according to his directions upon the fulfillment of the purpose by the bailee.
  10. Right of Reward: In a contract of bailment, both the parties bailor ‘ and the bailee can get a reward but it depends on the nature of the transaction.

Question 16. Anita and Sonali are friends, Sonali treats Anita during Anita’s illness. Sonali does not accept payment from Anita for treatment and Anita promises Sonali’s daughter Tania to pay her. 75,000. Anita being in poor circumstances is unable to pay.
Or
Tania sues Anita for the money. Can Tania recover? Offer your views based on provisions of the Indian Contracts Act, of 1872.
Answer:

No, Tania cannot recover the money from Anita. The agreement between Tania and Anita is not a contract in the absence of consideration.

In this case, Tania’s mother Sonali, voluntarily treats Anita during her illness.

  • It is not a valid consideration because it is voluntary whereas consideration to be valid must be given at the desire of the promisor-void Section 2(d).
  • The question now is whether this case is covered by the exception given in Section 25(2) which inter-alia provides.
  • “If it is a promise to compensate a person who has already voluntarily done something for the promisor….”
  • Hence as per the exception, the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor.
  • As Sonalfs daughter, Tania to whom the promise was made, did nothing for Anita, therefore Anita’s promise is not enforceable even under the. exception.

CMA Laws and Ethics Indemnity And Guarantee Question and Answers

Indemnity And Guarantee

1. Contracts of Indemnity
Answer:

  • As per Sec. 124, A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or the conduct of any person is called a contract of indemnity.
  • Contracts of Indemnity are part of a general class of contingent contacts and,
    thus are conditional.
  • Parties of Indemnity Contract
    • Indemnifier – The person who promises to make good the loss.
    • Indemnified or Indemnity Holder – The person whose loss is to be made good.
  • It does not include events or accidents, which do not depend upon the conduct of any person.

Example  Contract of insurance etc. (except life insurance)

  • Modes
  1. Expressed
  2. Implied

2. Essential Elements of Contracts of Indemnity
Answer:

  1. All essential elements of a valid contract must be present.
  2. A loss should be incurred or a loss has become certain.
  3. Its purpose is to protect the indemnity holder against any loss.
  4. It must specify that the indemnity holder is protected from loss caused due to;
    1. The action of the promisor himself
    2. Action of any other person
    3. Any act, event, or accident that is not in the control of the parties.

Read and Learn More CMA Laws and Ethics Paper

3. Rights of Indemnity Holder (Sec. 125)
Answer:

  1. Right to recover damages
  2. Right to recover costs
  3. Right to recover sums paid

4. Contracts of Guarantee (Sec. 126) ‘
Answer:

  1. It is a contract to perform the promise or discharge the liability incurred by a third person in case of his default.
  2. Parties to the contract
    1. Surety- The person who gives the guarantee.
    2. Principle Debtor- The person in respect of whose default the guarantee is given.
    3. Creditbr – The person to whom the guarantee is given.

5. Essential Elements of Contracts of Guarantee
Answer:

Must have all the essentials of a valid contract

Exceptions:

Consideration received by the principal debtor is a sufficient consideration to the surety for giving the guarantee.

  • The principal debtor is primarily liable
  • Debt must be legally enforceable
  • Debt must be a time-barred debt
  • Liability of surety is secondary and conditional
  • The Creditor should disclose all the facts which are likely to affect the surety liability
  • The contract may be either oral or written

6. Nature and exploit of Suroty’a Liability (Soc. 120)
Answer:

  • Liability of surety In same as that of the principal debtor.
  • Whoro n dolor cannot be held liable on account of any defect In the document, The liability of the surety also Ceases.
  • Surety liability is continuous oven If the principal debtor has not been or omitted to be used. Thus, the surety’s liability lo separate from the guarantor.

7. Kinds of Guarantee
Answer:

  • Specific Guarantee
  • It In glvon for a olngto dobt
  • It comes to an end when the doubt guarantor no boon paid,
  • Continuing Gunrnntoo (Sec. 129),
  • It extends to the series of transactions.
  • Surety’n liability extends to nil tho transactions contemplated until the guarantee is provoked.

8. Rovocntlon of Continuing guarantee
Answer:

  • It may be revoked at any time by the surety as to the future transactions by giving notice to creditors (Soc. 130)
  • Upon the death of surety, It Is provoked for all future transactions in the absence of a contract to the contrary. (Soc. 131)

9. Rights of Suroty
Answer:

  1. Against the principal debtor
    1. Right of Indomnlty (Sec. 145): Suroty lo entitled to recover from the principal debtor all payments properly made.
    2. Right of Subrogation (Sec. 140): It means the substitution of one person for another. On payment of a doubt, the surety shall be entitled to all the rights to which the creditor can claim against the principal debtor.
  2. Against the creditor
    1. Right to claim securities (Sec. 141): Suroty Is entitled to the benefit of ivory security, which the creditor has against the tho principal debtor, whether surety knows of it or not. If the creditor loses or parts with security without the surety’s consent, the surety Is discharged to the extent of the security’s value.
    2. Right to sign off: Suroty can ask the creditor to set off or adjust any claim that the doctor has against the creditor.
    3. Right to share reduction: If the principal debtor becomes insolvent, the surety may claim a proportionate reduction In his liability.
  3. Against Co – Sureties.
    1. Right to contribution (Sec. 146): All the co-sureties contribute equally except in the following cases:
    2. Co-sureties may fix limits on their respective liabilities.
    3. The contract may provide co-sureties to contribute in some other proportion.’

10. Right to share the benefit of securities
Answer:

Discharge of a surety:

  • Sec. 130: By giving notice to the creditor for future transactions in case of continuing guarantee.
  • Sec. 131: In the absence of any contract to the contrary, continuing guarantee Is provoked on the death of surety.
  • Sec. 133: Whoro there Is any variance in the term of the contract between the principal debtor and creditor without surety’s consent) it would discharge tho surety in respect of all the transactions taking place after ouch variance.
  • Sec. 134: Tho surety is discharged, if the principal debtor is discharged by
  1. a contract
  2. any act or
  3. any omission, the result of which l3 tho discharge of principal debtor.
  • Sec. 135: If the creditor makes an arrangement with the principal debtor for composition, for giving time, or for not suing him without surety’s consent.
  • Sec. 139: If the creditor does any act or omission, thereby impairing sureties eventual remedy.
  • Sec. 141: If the creditor loses or parts with security without the surety’s consent, the surety is discharged to the extent of the security’s value

Indemnity And Guarantee Descriptive Question And Answers

1. In the event of the principal debtor being a minor, the creditor can not recover his money, from the surety-offer your views.
Answer:

  • The statement is true. As the liability of the minor is nil, the liability of the surety of the minor would also be nil.
  • There are contrary judgments about this matter. Some decisions of some courts say that the surety is liable to pay the creditor if the principal debtor who is a minor, fails to pay.
  • Some judgments state that as the liability of a minor is nil, the surety can not be forced to pay if the minor debtor fails to pay.

2. Comment on the following based on legal provisions: A surety is discharged from his liability where there is a failure of Consideration between the Creditor and the Principal Debtor in a Contract of Guarantee.
Answer:

  • According to the Indian Contract Act, of 1872, consideration is an essential element of any contract.
  • If there is no consideration there is no contract.
  • In the present case, there is a failure of consideration between the creditor and the principal debtor
  • Hence the surety has no responsibility towards such a contract because it is no contract at all. In such a case, the surety is discharged.

3. In a contract of Guarantee, A surety is discharged from his liability where there is a failure of consideration between the creditor and the principal debtors. Comment.
Answer:

  • According to the provisions of the Indian Contract Act, of 1872, the presence of a lawful consideration is an essential element for a valid contract.
  • Therefore, where in a contract of guarantee, there is a failure of consideration between the creditor and the Principal Debtor, the surety is discharged.

4. State the circumstances in which surety is not discharged.
Answer:

As per provisions of the Indian Contract Act, 1872 Surety is not discharged in the following circumstances

Indemnity And Guarantee The Circumstance

Indemnity And Guarantee Practical Question And Answers

1. Mr. A, Mr. B, And Mr. C are Sureties to Mr. D for the sum of INR 6000 lent to Mr E. Mr E failed to repay on the due date. Mr A one of the sureties, disagreed to Pay. Advise whether ‘A’ is right.
Answer :

All sureties are equally responsible for the debt. As the debt was INR 6000, and there are three sureties each surety will be responsible for one-third of the amount therefore INR 2000. Any surety cannot escape from this responsibility.

2. Mr. Mitra guarantees payment to Mr. Basu to the extent of INR 50,000 for a time-to-time supply of paper by Mr. Basu to Mr. Chandan. Basu supplies paper to Chandan more than the value of INR 50,000 and Mr. Chandan pays. Later on Mr. Basu, at the request of Chandan, supplies paper valued at INR 60,000. This time Chandan fails to pay. What action Basu can take against Mitra?
Answer:

In this case, the guarantee given by Mr. Mitra is a continuing guarantee (Sec.129), and accordingly, Mr. Mitra being the guarantor of INR 50,000, is liable to Mr. Basu to the extent of INR 50,000 only. Mr. Basu can recover the balance amount from Chandan.

3. ‘A’ contracts with ‘B1 for a fixed price to construct a house for ‘B’ within the stipulated time. ‘B’ would supply the necessary material to be used in the construction. ‘C’ guarantees A’s performance of the contract. ‘B’ does not supply the material as per the agreement. Is ‘C’ discharged from his liability?
Answer:

  • In this case, C is surety for A’s performance. The performance of A depends on the supply of material by B. B does not supply the required material which makes A unable to perform his part of the contract.
  • According to Section 134 of the Indian Contract Act, of 1872, the surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
  • In the given case, B omits to supply the necessary material.
  • Hence, C is discharged from his liability.

CMA Laws and Ethics Bailment Question and Answers

Bailment

Question 1. Contracts of Bailment
Answer:

  • As per Section. 148, Bailment is an act whereby the goods are delivered by one person to another for some purpose, on a contract, that the goods shall, when the purpose is accomplished be returned or otherwise disposed of according to the directions of the persons delivering them. It is a voluntary delivery of goods for a temporary purpose.
  • Ownership of goods remains with the bailor.
  • Goods should be movable goods.

Parties:

    • Bailor- The person delivering the goods.
    • Bailee- The person to whom the goods are delivered.

Question 2.Essential Elements of Contracts of Bailment Sec. 151: Duty to take reasonable care of goods.
Answer:

  1. There must be an expressed or implied contract between the parties.
  2. It can be made of goods only.
  3. There must be delivery of goods from one person to another.
  4. Goods must be delivered for some purpose express or implied.
  5. The delivery of goods must be conditional.
  6. The return of the goods may be in the original form or i.e. in an improved form as agreed between the bailor and bailee.

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Modes:

  1. Actual Delivery.
  2. Symbolic Delivery
  3. Constructive Delivery.
  • Bailment may be gratuitous (without any remuneration or reward) or for reward, (for consideration)

Question 3. Classification
Answer:

Duties of Bailor:

Section. 150: Bailor must disclose all defects Or faults in the goods bailed. He is responsible for defects in the goods hired to bailee whether the bailor was aware of such defects or not.

Section. 158:

  1. Where the bailment is gratuitous, he must reimburse the bailee for any expenditure incurred in keeping the goods.
  2. He should reimburse any expense that Bailey may incur by way of loss in the process of returning the goods or complying with other directions for returning the goods.
  3. He must compensate the bailee for any loss or damage suffered by the bailee more than the benefit received.
  4. He is bound to accept the goods after the purpose is accomplished.

Question 4. Rights of Bailor
Answer:

  • Right to enforce the duties of the bailee.
  • Right to terminate the contract if Bailey does anything inconsistent with the conditions of bailment.
  • In gratuitous bailment, he has a right to demand back goods even before the expiry of the bailment period.
  • Right to claim the increase or profit from the goods bailed which may have occurred from the value of goods.

Question 5.Duties of Bailee
Answer:

  • Section. 151: Duty to take reasonable care of goods.
  • Section. 152: If he takes care of goods as a man of ordinary prudence, he will not be liable for any loss or damage of goods bailed.
  • Section. 152: If he takes care of goods as a man of ordinary prudence, he will not be liable for any loss or damage of goods bailed.
  • Section. 153: Duty not to make unauthorized use of goods.
  • Section. 154: If he makes any unauthorized use of goods, he will be liable to make good the loss.
  • Section. 155-157:
    1. Duty not to mix the goods bailed with his goods without the bailor’s consent. If he does so he has to make good the loss.
    2. Duty not to set up an adverse title
  • Section. 160: Duty to return the goods on expiration of the bailment period. Section. 161: If he fails to return, he will be responsible to the bailor for any loss,
    destruction or deterioration of goods thereafter.
  • Section. 163:
    1. Duty to return any extra profit occurring from goods bailed.
    2. Duty not to do anything inconsistent with the bailment conditions.

Question 6.Rights of Bailee
Answer:

  1. Right to claim compensation for any loss arising from non-disclosure of known Or unknown defects in goods.
  2. Right to claim indemnification for any loss or damage as a result of defective title.
  3. Right to deliver back the goods to joint bailors as per the agreement.
  4. Right to deliver goods back to bailor whether has the right to the goods.
  5. Right to exercise his right of lien.
  6. Right to take action against third parties.

Question 7.Termination of Bailment
Answer:

  • Section. 153: Where bailee makes unauthorized use of the goods bailment becomes voidable at the bailors’ option.
  • Section. 159: At bailor’s will
    1. In non-gratuitous bailment, the bailor has a right to take back the goods, after the purpose is over.
    2. In gratuitous bailment, he can take back the goods any time, provided in case of loss more than benefit, the bailee must be compensated.
  • Section. 160:
    1. When the period or purpose of bailment is over.
    2. Where the subject matter is destroyed or becomes illegal.
  • Section. 162: A gratuitous bailment is terminated by the death of the bailor or bailee,

Question 8. Lion
Answer:

It refers to the right of one person to retain the possession of some goods, belonging to another person, until come debt or liability is discharged.

Question 9. Types of Lien
Answer:

Particular Lien:

  • It is available only against those goods in respect of which bailee has eroised skill and labor.
  • Bailees lien ic a particular lion
  • It is available to all.

Conditions for exercising Particular Lien

  • If Bailee has exercised his labor and skill on goods bailed.
  • When work has been completed on time.
  • If the payment is due.

General Lien

  • It refers to the right of one person to retain the possession of any goods, belonging to another person, until some debt or liability is discharged.
  • It Is available to bankers, factors, warfingers, attorneys of the High Court, and policy brokers.

Question 10.Finder of Goods
Answer:

  • Refers to a person who finds the goods belonging to another person i.e. the goods lost by the true owner – he enjoys all the rights and carries all the responsibilities of a bailout.
  • Though the finder has no right to sell the goods found in the normal course, he may sell the goods if the real owner cannot be found with reasonable efforts or if the owner refuses to pay the lawful changes subject to the following conditions:
  • article b in danger of perishing and losing the greater part of the value,
  • lawful charges of the finder amount to two-thirds of the value of the article found.

Bailment Descriptive Question And Answers

Question 1. Goods seized by the Customs Authority is a case of bailment under the Indian Contract Act offer your views.
Answer:

When the goods are transferred to any person, the person having the possession is responsible for such goods as it is a case of bailment. In this case, the possession of goods is with the customs authority, therefore bailment exists as per the Indian Contract Act, of 1872.

Question 2. Deposit of money in a bank does not constitute bailment. Justify.
Answer:

Bailment is concerned with only moveable goods. Money is not included in the category of moveable goods. As such deposit of money is not a bailment

Question 3. What are the rights of a finder of goods under the Indian Contract Act, of 1872?
Answer:

A finder of goods has the following rights under the Indian Contract Act, of 1872:

Bailment Rights Under Indian Contract

Question 4. State the essential elements of a contract of bailment. Distinguish between the contract of bailment and the contract of pledge.
Answer:

Difference between the contract of bailment and contract of the pledge:

  1. Right of sale: In case of pledge, the pawnee (pledgee) can sell the goods and recover his debt, if the pawnor (pledger) does not pay while in bailment the bailee can retain the goods and sue for damages, but he has no authority to sell the goods.
  2. Purpose: Pledge is specifically for securing a debt, while bailment may be for any purpose example for repairs, safe custody, etc.,
  3. Right to use the goods: In the case of pledge, the pawnee cannot use the goods pledged but the bailee can use the bailed goods if the contract so provides.

Question 5. What do you moan by bailment? Mention the duties of a bailor In this respect.
Answer:

  • As per Section 148 of the Indian Contract Act the term ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a contract that they shall.
  • when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering the thorn.

Duties of the Bailor:

  1. The bailor must disclose to the boiler faults In tho goods bailed, of which the bailor is aware, and which materially interfere with the use of thorn, or expose tho bailee to extraordinary risks;
  2. If the bailor does not make such disclosure and some loss or damage results, he is responsible for so much of it as arises to the bailee directly from such faults;
  3. If the goods are bailed for hire, the bailor is responsible for damage arising to the bailee directly from such faults, whether he was or was not aware of the existence of such faults in the goods bailed.

Bailment Practical Question And Answers

Question 1. Comment on the following based on legal provisions: On 01.11.2012 Mr. Barun kept his cow under the custody of Mr. Tarun for one month and paid INR 1000 for maintenance. On 15.11.2012, the cow gave birth to a calf. On 30.11.12 Tarun returned the cow retaining the calf. .
Answer:

  • According to the Indian Contract Act, The goods given as bailment still belong to the giver (bailor), and any profit or income arising out of goods belongs to the bailor Barun.
  • Hence bailee (with whom the goods are kept) should not only give the cow but also the calf. He (Tarun) should not keep the calf with him.

Question 2. Arvind hires a carriage of Govind and agrees to pay INR 500 as hire charges. The carriage is unsafe though Govind is unaware of it. Arvind is injured and claims compensation for injuries suffered by him. Govind refuses to pay. Discuss the liability of Govind.
Answer:

The problem asked in the question is based on the provisions of the Indian Contract Act, of 1872, as contained in Section 150.

  • The section provides that if the goods are bailed for hire, the bailer is responsible for such damage, whether he was or was not aware of the existence of such faults in the goods bailed.
  • Accordingly, applying the above provisions in the given case Govind is responsible for compensating Arvind for the Injuries sustained even if he was not aware of the defects in the carriage.

Question 3. Mr Jatin found a wristwatch in a shopping mall. He made all efforts to trace the true owner of the wristwatch but could not find him. He sold the same to Nitin, who buys without any knowledge that Jatin is. merely a finder. Is the sale by Jatin to Nitin valid? Decide.
Answer:

When a thing which is commonly the subject of sale is lost, if the owner cannot with reasonable diligence be found, or if he refuses upon demand, to pay the lawful charges of the finder, the finder may sell it:

  • The finder of goods can sell the goods only in the circumstances permitted under section 169 of the Indian Contract Act, of 1872 which are as under:
  • If the goods are in danger of perishing or losing the greater part of their value, the finder can sell the goods.
  • If the lawful charges of the finder in respect of the goods amount to a minimum of two-thirds of the value then the finder can sell the goods.
  • In the present case, the sale by the finder will not be valid as it does not seem to fall in any of the above-stated circumstances. Hence, the sale by Jatin to Nitin is invalid.

CMA Laws and Ethics Pledge Question and Answers

Pledge

Question 1. Meaning of Pledge or Pawn
Answer:

  • As per Section. 172,
    • It refers “to the bailment of goods as security for payment of debt or performance of a promise.”
  • It refers to a contract where an article is deposited with a money lender as a security for the loan repayment or for the performance of the promise.

Parties:

  1. Pawnor – The person who pledges bailor in case of a pledge
  2. Pawnee- The bailee in case of pledge.

Question 2. Essential Elements of Pledge
Answer:

  1. There must be an expressed implied contract between the parties
  2. It can be of goods only
  3. There must be delivery of goods from one person to another
  4. It must be for some purpose.

Question 3. Duties of Pawner
Answer:

  • Repay the loan or perform the promise
  • Pay expenses in cases of default
  • Pay the deficit on sale
  • Pay extraordinary expenses incurred for preserving the goods.
  • Disclose faults in goods which are material for the use of goods or may put pawnee to extra-ordinary risks
  • Indemnify the pawnee if he suffers any loss due to the defective title of the pawner.

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Question 4. Rights of Pawner
Answer:

Section. 177: Redeem the goods pledged.

  • Right to sue in the event of the pawnee refusing to return the goods even after payment of debt etc.
  • Receive any increase in goods.
  • Receive notice of sale.

Question 5. Duties of Pawnee
Answer:

  • Not to use the goods unless authorised by the pawner
  • Return the goods to the pawnor on payment of debt etc.
  • Take reasonable care of the goods
  • Not to mix the goods with his goods
  • Return any increase in goods pledged with him
  • Return any surplus on sale.

Question 6. Rights of Pawnee
Answer:

  • Section. 173: Retain the goods pledged only for
    • The performance of the promise,
    • Payment of a debt,
    • And interest on the debt.
  • Section. 174: Right of particular lien.
  • Section. 175: Seek reimbursement of extraordinary expenses.
  • Section. 176: Right to sue the pawner in the event of the pawner failing to redeem the debt or perform the promise. He can sell the goods after giving a notice of Sale

Question 7. Pledge by non-owners
Answer:

A valid pledge can be created by the following non-owners:

1. Pledge by Estoppel.

2. Pledge by a mercantile agent. (Section. 178): Mercantile Agent means an agent of the seller who has been appointed to sell the goods belonging to the seller.

Conditions for pledging:

  • Goods came into his possession with the consent of the seller Or owner of goods.
  • The pledge is made by him in the ordinary course of business
  • Pawnee acts in good faith.

3. Pledge by a person in possession under a voidable contract. (Section. 178 A)

Conditions –

  • A person acquires goods under a voidable contract
  • A person who acquires the goods pledges such goods
  • At, the time of the creation of the pledge, the voidable contract should not have been rescinded
  • The pledge is made in good faith.

4. Sec. 179: Pledge by a person having limited interest in the goods.

If a person has a limited interest, he can make a valid pledge to the extent of that interest.

5. Pledge by a co-owner in possession: Consent of all joint owners is required, if the goods owned jointly are to be sold or pledged.

Conditions for exception –

  • Goods are in the sole possession of one joint owner. ,
  • Goods came into his possession with the consent of other joint owners
  • The pledge is made in good faith.

6. Pledge by a seller.in possession of goods after their sale Conditions-

  1. Ownership of goods has been passed to the buyer-seller
  2. “Goods be in their possession, even after their sale 
  3. The seller pledges the goods to some other person
  4. Pleduge is made in good faith without any notice of the prior sale

7. Pledge by a buyer who has obtained possession of goods under an agreement to sell.

Pledge Descriptive Question And Answers

Question 1. Comment on the following based on legal provisions: On expiry of the stipulated period, the pledgee can sell the pledged goods to any person.
Answer:

Pawnee or Pledgee cannot sell. Pawnee or Pledgee is to give notice to the pawner indicating his intention to sell.

  • Notice of sale is essential even where the agreement especially excludes it (Sec. 176).
  • Hence, this is void and unenforceable.

Pledge Practical Question And Answers

Question 1. Nishant lends a sum of $ 8,000 to Prashant on the security of ten shares of XYZ Ltd. on 1st Jan 2015. On 25th March 2015, XYZ Ltd. issued one Bonus share. Prashant returned the loan amount of $ 8,000 with interest to Nishant. But Nishant returned only ten shares which were pledged and refused to give one bonus share. Advise, Prashant in the light of the provisions of the Indian Contract Act, 1872.
Answer:

As per the provisions of Section 163(4) of the Indian Contract Act, 1872 “in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions any increase or profit which may have accrued from the goods bailed”.

  • Applying the provisions to the instant case, the bonus share is an increase on the shares pledged by Prashant to Nishant.
  • So Nishant is liable to return the shares along with the bonus share and hence Prashant the bailor, is entitled to receive the bonus share also from Nishant (Motilal Vs Bal Mani).

Question 2. Kavita falsely representing herself as the wife of a millionaire, takes a necklace from a jeweller’s shop for the approval of her husband. She pledges with a pawnbroker who is in good faith and without. notice of the fraud paying her $ 1,00,000. Can the jeweller recover the necklace from the pawnbroker? 
Answer:

  • The necklace cannot be recovered from the pawnbroker.
  • The jeweller intended to contract with the person present before him.
  • He was not mistaken about his identity but only about his attributes.
  • He intended to sell to the person present there was consent, but it was vitiated by fraud.
  • Hence the contract is voidable and not void.
  • In case of a voidable contract, before it is repudiated, one can pass a good title to the pledgee or purchaser in good faith.
  • Thus, in the instant case, the pledge is valid.
  • It may be noted that in the given case if Kavita had falsely represented herself as the wife of a certain well-known millionaire, it would have been a case of mistake as to the identity of the person contracted with, rendering the agreement void ab initio, thereby enabling the jeweller to recover the necklace from the pawn broker.

CMA Laws and Ethics Laws of Agency Question and Answers

Laws of Agency

Question 1.  Law of Agency
Answer:

  • As per Section. 182,

An agent is a person employed –

    • to do any act for another, or
    • to represent in dealing with third persons.”
  • Principal is a person for whom such an act is done, or who is so represented.
  • Agent s.cts as a mere connecting link between the principal and third party.
  • It is based on two rules:
    • A person can do through an agent, whatever he can do himself.
    • The act of the agent is the act of the principal.

Question 2. Essential elements
Answer:

  • Two parties are required
  • Agreement between parties is necessary
  • No consideration is required.

Question 3. Modes of Creation of Agency
Answer:

1. Section. 187: Express Agency

  • It la created either by words spoken or in writing
  • Example – Power of Attorney (it may be general or special)

2. Implied Agency – Agency created by the conduct of parties. It can be in the following terms:

Section. 237: Agency by Estoppel:

  • If a person by his conduct, words spoken or written leads another to believe that a certain person Is acting as his agent, he is estoppel later on from denying such facts.
  • For example, Wife as an agent, when a married woman lives with her husband, there is a presumption that she has the authority to pledge his credit for necessities.

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This Presumption is not held where the husband shows that :

  1. He had expressly warned the tradesman not to supply goods to his wife on his credit,
  2. He had expressly forbidden the wife to pledge his goods,
  3. His wife was already supplied with sufficient articles
  4. She was supplied with sufficient allowance Wife as an agent

3. Agency by Holding out:

  • Under this, the principal plays a positive role.
  • It occurs when anyone holds himself out as an agent of another
  • It happens through wilful conduct
  • Example In the case of partnerships.

Section. 189:

4. Agency by necessity: In case of emergency, the agents can exceed their powers and can take all the stops to minimize their principal’s loss.

5. Agency by ratification

  1. The principal is not bound by the act of the agent If the agent acts:
    • On behalf of another without his consent or knowledge
    • Exceeding his authority.
  2. Principals can create it by subsequent ratification.
  3. known as ex post facto agency therefore agency arising after the event.
  4. The principal becomes bound.

Question 4. Agency by ratification Is Possible If the following conditions are satisfied
Answer:

  1. The act must have been done on behalf of the named or identifiable principal.
  2. The principal must be in existence at the time of the contract.
  3. The principal must be competent to contract at the time of making the contract.
  4. The principal must have full knowledge of the facts.
  5. The contract can be ratified only as a whole.
  6. It can be done through a lawful contract.
  7. It must be done within a reasonable time.
  8. It should not cause any damage to a third party.

Question 5. Extent of Agent’s Authority 
Answer:

It is governed by two principles:

  • Section. 188: Agents’ authority in normal circumstances.

The agent has the power and authority to do all the acts lawful and necessary in the normal circumstances in the discharge of his functions.

  • Agent’s authority in an emergency.

The agent has the authority in an emergency to do all such acts as a man of ordinary prudence for protecting his principal from losses under similar circumstances. It includes:

  1. Actual or Real Authority.
  2. Ostensible or Apparent Authority.

Question 6. Special Agent.
Answer:

  • Appointed to do any specific act or function
  • Does not have unlimited authority
  • Act outside its authority
  • Does not bind the principal.

Question 7. General Agent
Answer:

  • Appointed to do all transactions given by the principal.
  • Can be assumed to have Unlimited authority

Question 8. Other Types of Agents
Answer:

1. Sub Agent

As per Section. 190, the Sub-agent’s appointment is not lawful as the agent is a delegate and a delegatee cannot further delegate.

  • As per Section. 191,
    • A sub-agent is a person-
  1. Employed by, and
  2. Acting under the control of the original agent in the business of the agency.

2. Substituted Agent

As per Section. 194,

When the principal appoints an agent, and if that agent identifies another person to carry out the acts ordered by the principal, then the second person is not to be treated as a sub-agent but only as an agent of the original principal.

3. Mercantile Agents

As per Section. 2 (9) of the Sales of Goods Act, 1930 “Mercantile Agent is an agent having in the ordinary course of business as such an authority either

  1. To sell goods, or
  2. Consign goods for sale, or
  3. To buy goods, or
  4. To raise money for the security of goods.

Question 9. Bankers
Answer:

  • Relationship of debtor and creditor with their customers.
  • Agent of the customer when he buys or sells securities, collects bills, etc. on| the customer’s behalf.
  • Has a general lien on all goods and securities in his possession.

Question 10. Duties of Agent
Answer:

  1. Section. 21: To conduct the principal’s business according to his directions.
  2. Section. 212: He must always act as a person with skill and diligence.
  3. Section. 213: He has to maintain and render proper accounts to the principal whenever demanded.
  4. Section. 214: To communicate and obtain instructions in case of difficulty.
  5. Section. 215: He must not deal on his account.
  6. Section. 216: Must not make any secret profit.
  7. Section. 217 And 218: To account for money received for the principal.

Not to use the information obtained in the course of agency against the principal.

An agent cannot delegate his authority to a subagent generally. The general rule for this is delegates protest delegate a delegatee cannot further delegate

Question 11. Rights of an Agent
Answer:

  • Section. 217: Rights of Retention.
  • Section. 219: Right to receive agreed remuneration.
  • Section. 221: Right of lien on principal’s property.
  • Section. 222: Right of indemnification for lawful acts.
  • Section. 223: Right of indemnification against acts done in good faith.
  • Section. 225: Right to be compensated for any injury caused due to the principal’s negligence.

Question 12. Principle’s liability for the agent’s act to Third Parties
Answer:

There are 3 circumstances in which an agent may contract namely

  1. The agent acts for the named principal (disclosed principal)
  2. The agent acts for an undisclosed principal
  3. The agent acts for a concealed principal
  • Section. 226: Acts within the scope of actual apparent authority., it bounds the principal.
  • Section. 227: Acts over the agent’s authority are separable, they bind the principal.
  • Section. 228: Acts over the agent’s authority are not separable, the principal is not bound by them.
  • Section. 229: The Principal is bound by notice given to the principal.
  • Section. 2-38: The principal is bound for any fraud or misrepresentation committed by the agent:
    • During the business hours
    • Within his authority
  • Admission made by an agent is deemed to be admission made by the principal.
  • Unnamed principal, the principal becomes liable for being discovered.

Question 13. Personal liability of the Agent
Answer:

  1. It is also known as the Doctrine of implied warranty of authority.
  2. It happens under the following circumstances:
    • where the agent signs the negotiable instrument without indicating that he is signing for the Principal.
    • where the contract expressly provides so.
    • where the agent works for a foreign principal.
    • where the agent acts for a Principal who cannot be sued.
    • where a Government servant enters into a contract on behalf of the Union of India.
    • where according to usage in trade in certain kinds of business, agents are personally liable.
    • where the agency is coupled with interest
    • If the agent is working for an undisclosed principal.
    • If the amount is received or paid by the agent under mistake or coercion.

Question 14. Termination of Agency
Answer:

  • Agreement between principal and agent- Performance of contract
  • Revocation of authority by the principal – Expiration of the period
  • Revocation of authority by agent.
  • Death/insanity of principal or agent
  • Insolvency of principal
  • Dissolution of company
  • Destruction of the subject-matter

Question 15. When Termination of Agency Takes Effect
Answer:

  1. Section. 208: As regards the agent, when it becomes known to him.
  2. As regards third parties, when it comes to their knowledge.

Section. 210: Termination of, the agent’s authority terminates the sub-agent authority

Section. 209: The agent must protect his principal’s interest when the principal dies or becomes of unsound mind.

Question 16.Irrevocable Agency
Answer:

Revocation of the agency is not possible in the following cases:

  • Section. 202: where the agency is coupled with an interest.
  • Section. 204: where the authority has been partly exercised.
  • where the agency has incurred personal liability.

Laws of Agency Descriptive Question And Answers

Question 1. State the circumstances when an agent is personally liable for the contracts entered into by him on behalf of the principal.
Answer:

  • The general rule of the Indian Contracts Act, of 1872 states that:
  • Only the principal can enforce and can be held liable for a contract entered into by an agent.
  • The agent is not personally liable for a contract entered into by him on behalf of the principal.

The following are the exceptions to the above rule:

  1. Foreign Principal: When an agent acts for the sale or purchase of goods for a principal resident abroad i.e., foreign principal.
  2. Personal liability by agreement: Where it is expressly provided in the contract that the agent shall be personally liable.
  3. Undisclosed principal: Where the agent does not disclose the name or identity of the principal.
  4. The principal cannot be sued: Where the principal is disclosed but cannot be sued, for example, foreign sovereigns, ambassadors, etc.
  5. Non-existence of Principal: When the principal is not in existence at the time when the act was done, therefore the agent acted for a non-existent principal.
  6. Agent’s liability: When the agent exceeds his authority or commits a breach of warranty of authority.
  7. Pretended Agent: When he acts as a pretended agent.
  8. Mistake or Fraud: When he receives or pays money by mistake or fraud.
  9. Agent signs an agreement without mentioning that he is an agent: Where an agent signs a negotiable instrument without ‘ mentioning that he is signing as an agent.
  10. Trade or customs: Where the usage of trade or customs makes an agent personally liable.

Laws of Agency Practical Question And Answers

Question 1. Comment on the following based on legal provisions: (g) Mr. A being an agent of Mr. P (who is the owner of the land) agrees for money, to obtain for Mr. B a lease of P’s land but without the knowledge of ‘P’. Discuss the validity of this agreement.
Answer:

  • When an act is done by one person on behalf of another but without his knowledge or authority, the latter may elect either to ratify or disown such Act (sec 196 of the Indian Contract Act, 1872).
  • In the instant case, if a lease is granted by “A” in favor of B on the fact ’ coming to the knowledge of the P, he may either decide to ratify the lease agreement or to disown it.
  • If the P decides to ratify the lease, then it would be a valid contract.

Question 2. Jayanta, the owner of the car handovers the car with a key to Partha (the mercantile agent) to sell the car at a price not below INR 1,00,000. Partha (the agent) sold at INR 90,000 to Amitava who bought in good faith and without notice of reserve price or any fraud. Partha misappropriated the money also. Jayanta filed a suit against Amitava to recover the car. Advise with reasons whether Jayanta can succeed.
Answer:

  • Amitava purchased the goods in good faith and he was not aware that the agent had not complied with the conditions of sale as set by the owner Jayanta.
  • In this case, the agent Partha has not fulfilled the condition that the sale should not be below INR 1,00,000 but this is not the fault of the buyer
  • Amitava was not aware of the agreement between the original owner Jayanta and his agent Partha.
  • Jayanta cannot recover the car from Amative as a sale by his agent is a valid sale. Jayanta can sue his agent Partha but cannot sue Amative.

Question 3. Bimal at Durgapur under instruction from Amal of Kolkata contracts with Kamal to deliver an electric oven to him. Amal does not send the oven to Bimal and Kamal sues Bimal for breach of contract. Bimal informs Amal of the suit and as per Amar’s advice, Bimal defends the suit. Bimal is compelled to pay damages, and costs and incurs expenses Amal refuses. Advise Bimal.
Answer:

  • As per Section 222 of the Indian Contract Act, of 1872, the principal is bound to indemnify an Agent against the consequences of all Lawful acts done by the agent in the exercise of the authority conferred upon him.
  • Sec. 223 further provides where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons.
  • Given the above, Amal is liable to Bimal for such damage, cost & expenses.

CMA Laws and Ethics Sales Of Good Act 1930 Question and Answers

Sales Of Goods Act 1930

Question 1. Introduction
Answer:

  • It is one of the special types of contract.
  • Initially, it was the part of Indian Contract Act.
  • Later it was deleted and a separate act was passed.
  • The basic provisions and requirements of the contract equally apply to the Sales of Goods Act.
  • It contains and deals with the law relating to the sale of goods and not with mortgage or pledge.
  • It received its assent on 15 March 1930.
  • It came into force in July 1930.
  • It extends to the whole of India except the State of Jammu And Kashmir.

2. Definition of Various Terms
Answer:

  • Buyer: A person who buys or agrees to buy the goods.
  • Seller: A person who sells or agrees to sell the goods.
  • Goods: As per Sec. 2(7), it means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to the contract of sale.
  • Money means current money and it includes rare and old coins.
  • Actionable claim means that a person cannot make a present use of or enjoy, but can recover it using a suit or an action.
  • Existing Goods: It means such goods that are in existence at the time of the contract of sale i.e. owned or possessed by the seller.
  • Specific Goods: It means goods identified and agreed upon at the time the contract of sale has been made.
  • Ascertained Goods: It means that the goods are identified by the agreement after the contract of sale has been| made.
  • Generic Or Unascertained Goods: It means the goods that are not specifically identified but are indicated by description.
  • Future Goods: As per Sec. 2(6), it means goods to be manufactured! or produced or acquired by the seller after making the contract of sale.
  • Contingent Goods: This means the goods acquired by the seller depend upon a contingency that may or may not happen. Agreement to sell can only be there in respect of future or contingent! goods.
  • Actual sales can take place only for specific goods.
  • Goods are said to be in a deliverable state, when they are in such a condition that the buyer would, under contract, be bound to take delivery of them.
  • Delivery: It means voluntary transfer of possession by one person to another.

Sale Of Goods Act, 1930 Delivery

  • Document of Title of Goods: It includes a bill of lading, dock-warrant, warehouse keeper’s certificate, wharfinger’s certificate, or any other document used in the ordinary course of business as proof ’of the possession or control of goods or authorizing or purporting to authorize either by endorsement or delivery, the possessor of the document to| transfer or receive goods thereby represented.
  • Property: It means the general property and not merely a special property.
  • Insolvent: A person is said to be insolvent when he ceases to pay his| debts in the ordinary course of business.

Read and Learn More CMA Laws and Ethics Paper

Question 3. Contract of Sale
Answer:

In this ownership is transferred immediately to the buyer even though possession of goods is with the seller.

As per Section 4(1) of the Sale of Goods Act, 1930, “Contract of sale of Goods is a contract whereby the seller transfers or agrees to transfers the property in goods to the buyer for a price”.

Question 4. Essential Elements
Answer:

  • There must be at least two parties. (Bilateral Contracts)
  • The subject matter of the contract must be goods.
  • A price in money should be paid or promised.
  • A property transfer of goods from the seller to the buyer must occur.
  • It must be absolute or conditional.
  • All other essentials of a valid contract must be present.

Question 5. Sale
Answer: As per Section 4(3) of the Act, “Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale”.

Question 6. Agreement to Sell
Answer:

As per Section 4 (3) of the Act, “Where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell’’.

Question 7. Formalities of Contract of Sale
Answer:

  • There may be immediate delivery of goods
  • There may be immediate payment of the price, but it may be agreed that the delivery will be made at some future date.
  • There may be immediate delivery of the goods and an immediate price payment.
  • It may be agreed that the delivery or payment or both are to be made in installments.
  • It may be agreed that the delivery or payment or both are to be made at some future date.

Question 8. Subject Matter of Sale
Answer:

  • As per Sec. 6
  • Subject matter must always be goods which may be existing or future goods.
  • Contract can also be made about the goods, the acquisition of which by the seller depends upon a contingency, which may or may not happen. Such contracts are contingent contracts.
  • When the seller purports by his contract to effect a sale of future goods, the contract will operate only as an agreement to sell the goods and not as a sale.

Question 9. Destruction of Subject Matter of Sale
Answer:

Goods Perishing before Making a Contract (Sec. 7):

  • The contract is void ab initio.
  • If the seller enters into the contract even on being aware of the destruction, he is estopped from disputing the contract.
  • It also includes the goods that have lost their commercial value.

Goods Perishing after Agreement to Sell (Sec. 8):

  • The agreement becomes void.
  • Provided the risk has not passed to the buyer.
  • It applies only to the sale of specific goods.

Question 10. Price
Answer:

  • Price means monetary consideration for the sale of goods.
  • Maybe money paid or promised to be paid.
  • No sale can take place without a price.

Question 11. Ascertainment Of Price.
Answer:

As per Sec. 9

  • Price may be:
    1. Fixed by a contract.
    2. Agreed to be fixed in a manner provided by the contract, or
    3. Determined by the course of dealings between the parties.
  • When it cannot be fixed in any of the above ways, the buyer is bound to pay a reasonable price to the seller.
  • Generally Market Price would be Reasonable. Price:

As per Sec. 10

  • Price is to be determined by a third party.
  • Where there is an agreement to sell goods on the terms that the price is to be fixed by a third party, and he either does not or cannot make such a valuation, the agreement will be void.
  • If the third party is prevented by the default of either party from fixing the price, the party at fault will be liable for the damages to the other party who is not at fault.

Question 12. stipulation
Answer:

  • Before concluding a contract of sale, certain statements are made by the contracting parties.
  • The statement may be a stipulation by the seller on the reliance on which the buyer makes the contract.
  • The statement may not be a stipulation if it is a mere recommendation by the seller thus, does not give rise to any action.
  • A stipulation or a representation in a contract of sale concerning goods which are the subject thereof may be a condition or warranty.”

Question 13. Warranty.
Answer:

  • A warranty is a stipulation collateral to the main purpose of contract, the breach of which gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated.”

As per Sec.11

  • Stipulation as to the time of payment is not the condition unless such an intention appears in the contract.

Question 14. Circumstances when Condition may be Deemed as Warranty
Answer:

  • Where the buyer waives the performance of the condition altogether, the party may for his benefit, waive a stipulation.
  • Where the buyer himself opts to treat the breach of condition as a warranty.
  • Where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof.
  • Where the fulfillment of any condition or warranty is excused by law because of impossibility or Otherwise

Question 15. Types of Conditions
Answer:

Express Condition:

  • Condition is expressed when the terms of the contract expressly state them.
  • They are agreed upon between the parties at the time of the contract and are expressly provided in the contract.
  • It does not negativate an implied condition.

Implied Condition:

  • Condition is implied when the terms are not expressly provided for.
  • They are presumed by law to be present in the contract.
  • They may be neglected or waived by an express agreement.

It Includes:

  • Condition as to title.
  • Condition as to sale by description.
  • Condition as to sale by sample as well as description.
  • Condition as to quality and fitness.
  • Condition as to merchantability.
  • Condition as to sale by sample.
  • Condition as to wholesomeness.

Question 16. Condition as to title [Sec. 14(a)]
Answer:

  • It presumes that the seller has a valid title to the goods.
  • The seller has a right to sell the goods in case of sale.
  • In case of an agreement to sell, he will have the right to sell the goods at the time when the property is to pass unless there is a contract to the contrary.
  • If the seller’s title turns out to be defective, the buyer may return the goods to the true owner and recover the price from the seller.

Question 17. Condition as to Sale by Description (Sec. 15)
Answer:

  • Here, the implied condition is that the goods must correspond with the description.
  • The buyer is not bound to accept and pay for goods that are not by the description of the goods.
  • The buyer relies for his information on the description of the goods given by the seller.

18. Condition as to Sale by Sample as well as Description (Sec. 15)
Answer: Here, the implied condition is that the bulk of goods supplied must correspond with both the sample and the description.

Question 19. Condition as to Quality and Fitness [Sec. 16(1)]
Answer:

Here the implied condition operates on the fulfillment of the following conditions:

  • The buyer requires the goods for a particular purpose which he has made known to the seller.
  • The buyer relies on the skill and judgment of the seller.
  • The seller sells such types of goods.
  • If the goods are bought under a patent or trade name, there is no such condition.

Question 20. Condition as to Merchantability [Sec. 16 (2)]
Answer:

  • It means that when the goods are bought by description from a seller who deals in such goods, it is implied that the goods will be of merchantable quality.
  • It is immaterial, whether the seller is a manufacturer or producer or not.
  • It does not operate where the buyer examines the goods before the sale and examination ought to have revealed the defects.

21. Condition as to Wholesomeness
Answer: In the case of eatables and other provisions, there is an implied condition of wholesomeness i.e. fit for consumption, other than merchantability.

Question 22. Condition as to Sale by Sample (Sac. 17)
Answer:

There is an implied condition that:

  • The bulk shall correspond with the sample in quality,
  • The buyer shall have a reasonable opportunity to compare the bulk with the sample.
  • The goods shall be free from any defect rendering them unmerchantable, which would not be apparent on a reasonable examination of the sample.

Question 23. Doctrine of Caveat Emptor
Answer:

  • It means, let the buyer beware’ i.e. buyer purchases the goods at his risk.
  • When the seller displays the goods in the open market, it is for the buyers to make a proper selection of goods.
  • If the goods turn out to be defective, he cannot hold the seller liable.

As per Sce. 16,

Subject to the provisions. of this Act or any other law for the time being tightness or any particular purpose of, goods supplied under a contract of sale”.

Question 24. Transfer of Title by Non-Owner
Answer:

Sec. 27:

  • The general rule is where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than that the seller had.”
  • This rule is expressed in the Latin maxim “Nemo dat quod nonhabit” which means that no one can give what he has not got no one can! pass a better title than he has
  • Even a bonafide buyer gets no valid title.

Exceptions to the above rule:

  1. Effect of estoppel.
  2. Sale by a mercantile agent.
  3. Sale by joint owner.
  4. Sale by a person in possession under a voidable contract.
  5. Sale by seller in possession after sale.
  6. Sale by the buyer in possession after sale.
  7. Sale by an unpaid seller.
  8. Sale by a person under other laws.

Question 25. Mode of Delivery
Answer:

  • Actual Or Physical: Goods are physically handed over to the buyer or his authorized agent
  • Constructive: Possession of goods is changed without any actual change in their custody
  • Symbolic: Goods are not delivered physically but some symbol carrying real possession or control is handed over.

Question 26. Unpaid Seller
Answer:

  • As per Sec. 45,

Seller Is deemed to be an unpaid collar, when:

  1. The whole of the price has not been paid or tendered and the seller had an Immediate right of action for the price.
  2. A bill of exchange or other negotiable Instrument was given as payment, but the same has been dishonored unless this payment v/as an absolute and not a conditional payment.

Rights of Unpaid Seller Against Goods:

  • Right of lien or retention.
  • Right of stoppage in transit.
  • Right of resale.
  • Right to withhold delivery.

Question 27. Auction Sales (Sec. 64)
Answer:

  • It Is a model of selling property by inviting bids publically and the property is sold to the highest bidder.
  • It is a public sale where goods are offered to be taken by bidders.
  • The auctioneer is only an agent of the seller.
  • The following rules apply
    1. When goods are put up for sale in lots, each lot is treated to be the subject of a separate contract of sale.
    2. Salo is complete when the auctioneer announces its completion by the fall of Hamrnor or in another customary manner.
    3. Right, to bid may be reserved expressly by or on behalf of the seller.
    4. If such right is not reserved, it is not lawful for the auctioneer knowingly to take any bid from the seller.
    5. Salo may be notified to be subject to a reserve or upset price.
    6. If the collar makes use of protended bidding to raise the price, the sale is voidable at the buyer’s option.

Sales Of Good Act 1930 Short Note Question And Answers

Question 1. Write a short note on Future Goods
Answer:

Future Goods:

  • According to the Sale of Goods Act, It is an implied condition of sale that only owns or can sell the goods.
  • It is expressed in the Latin phrase’ Memo dat quod non habit.’ which means that “none can give who does not himself possess.”
  • There is one exception to this rule in the case of future goods,
  • Future goods mean goods to be manufactured produced or acquired by the seller after the making of the contract of sale.
  • As a rule, any person may sell or offer for sale goods of which he is not the owner at present, but which he expects to acquire in due course of time.
  • A contract to sell oil not yet extracted from the refineries of him or not yet obtained from the pressing of seeds in his possession is a contract for the sale of future goods.
  • Any contract for the present sale of future goods constitutes an agreement to sell.

Specific Goods:

  • These are the goods that are specifically identified and agreed upon at the time when the contract of sale is drawn and executed.
  • The goods must be identified and separated from the other goods at the time when the contract of sale is made.
  • Merely an identification of goods does not make them specific goods.
  • For example, in the case of the sale of one horse out of a lot of 25 horses, goods shall be specific if the horse is selected before the contract of sale is made.
  • Here it is important to note that all horses are horses but they cannot be exactly similar to each other.
  • Therefore, it is imperative to select the horse out of the lot as specific goods.

Question 2. Write a short note on the Termination of the lien of unpaid Seller.
Answer:

Termination of Lien: Lien has not been specified in the question. It is taken „ as the lien of unpaid seller.

The unpaid seller loses his lien on the following conditions :

  • when he agrees to terminate or waive his lien for example when he extends the period of credit;
  • When the buyer or his agent lawfully obtains possession of goods
  • when the seller unconditionally delivers the goods as per directions of the buyer. It should be noted that if the seller has obtained a decree for the price of goods, it does not mean that his lien is lost.

Question 3. Write a short note on Damping (Sale of Goods Act)
Answer:

Damping: Some bidders may do something to discourage the other bidders from bidding.

  • Damping is an illegal practice because it is intended to reduce the bidding price.
  • The seller or the auctioneer can withdraw goods from an auction if he smells of damping in the auction sale.

Sales Of Good Act 1930 Descriptive Question And Answers

Question 1. A seller may deliver goods to a carrier with a right of disposal. Comment.
Answer: Yes. the seller may do so. In such case, he does not lose the right of lien u/s 46(1 )(1) of The Sale of Goods Act, 1930, even though the seller has parted with the possession of goods.

Question 2. In an auction sale, a bid once given cannot be withdrawn. Do you agree?
Answer:

  • Any bid once made can be withdrawn at any time before the completion of the auction.
  • When the auction is completed and finished, the final bid which is accepted cannot be withdrawn.

Question 3. A nonowner cannot make a valid Transfer of Goods. Answer with Rule position.
Answer:

  • According to the Sale of Goods Act, It is an implied condition of sale that only the owner can sell the goods.
  • It is expressed in the Latin phrase ‘Nemo dat quod qui nonhabit.’ which means that “none can give who does not himself possess.”
  • There is one exception to this rule in the case of future goods.
  • Future goods means goods to be manufactured produced or acquired by the seller after the making of the contract of sale.
  • As a rule, any person may sell or offer for sale goods of which he is not the owner at present, but which he expects to acquire in due course of time.
  • A contract to sell oil not yet extracted from the refineries owned by him or not yet obtained from pressing seeds in his possession is a contract for the sale of future goods.
  • Any contract for the present sale of future goods constitutes an agreement to sell.

There are many examples, some of which are given below:

  1. Sale by mercantile agent : (mercantile means commercial or trade). The commercial agent of the owner can sell the goods on behalf of the owner though the commercial agent is not the owner of the goods. The buyer gets a valid title on goods purchased from the agent.
  2. Sale by one of the joint owners: The goods can be sold by any of the joint owners provided that the joint owners permit in this regard.
  3. Sale by a seller who has goods after sale.
  4. Sale by unpaid seller, sale by finder of goods, sale by official receiver or liquidator.
  5. Sale by pawnee.

Question 4. Comment on the following based on legal provisions: Parties to a contract of sale can get the price of goods fixed by third parties.
Answer:

Agreement to sell at valuation:

  • Sometimes the goods to be sold are such that either the seller or the buyer is not able to determine and decide its price.
  • In such cases, both parties make a contract that the value of goods will be determined or valued by a third party who is an expert in such field.
  • Thus there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party.
  • The third party should have no interest in the contract except for the fixation of price.
  • If that third party does not fix the price because of any reason of its own, the contract becomes void for the non-fixation of price consideration.
  • If the buyer has taken or used any part of goods or the whole goods, the buyer should pay a reasonable price, what is a reasonable price will depend on the facts and figures of each case.

Question 5. Transfer of Title to goods takes place when it is intended. Whether it is correct?
Answer:

  • It should be noted that the transfer of property in goods is distinct and different from the delivery or possession of goods.
  • The property may pass from the seller to the buyer even without delivery of goods.
  • It is elementary (basic) law of contract that parties may fix the time when the property (ownership) in goods shall be deemed to have passed.
  • It may be at the time of delivery of goods, or it may be at the time of making final payment, or even at the time of making of goods.
  • The seller can sue for price only when the property in goods has passed to the buyer.

Question 6. In the case of auction sales, auctioneers have some implied obligations. State such obligations.
Answer:

  • Yes, obligations are:
  • He. has the authority to sell goods.
  • He warrants that he does not know any defects in the title of the principal.
  • He undertakes to give possession of the goods against the price paid.
  • He guarantees quiet possession of goods by the purchases.

Question 7. A nonowner can convey a better title to the bona fide purchaser of goods for value in certain cases. List out those cases.
Answer:

Sale by person, not the owner:

  • Where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by conduct precluded the seller’s authority from denying the seller’s authority to sell.
  • Generally, the owner alone can transfer property in goods “Nemo dat
    quod nonhabit” which means that no one can give what he does not have.
  • It means a nonowner cannot make a valid transfer of property in goods.
  • If the title of the seller is defective, the buyer’s title will also be subject to the same defect.
  • If the seller has no title, the buyer does not acquire any title although he might have acted honestly and might have acquired the goods after due payment.
  • This rule is to protect the real owner of the goods.
  • Though this doctrine seeks to protect the interest of real owners, in the interest of trade and commerce there must be some safeguard available to a person who acquired such goods in good faith for value

Sale Of Goods Act , 1930 Sale by Person not The Owner

Sale Of Goods Act , 1930 Sale by Person not The Owner

Question 8. Under what circumstance breach of condition is treated as a breach of warranty under the provisions of The Sale of Goods Act, 1930?
Answer:

According to Section 13 of the Sale of the Goods Act,1930  A breach of condition may be treated as a breach of warranty

In the following circumstances:

  • Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition.
  • Where the buyer elects to treat the breach of condition as a breach of a warranty.
  • Where the contract of sale is non-severable and the buyer has. accepted the whole goods or any part thereof.
  • Where the fulfillment of any condition or warranty is excused by law, because of impossibility or otherwise.

Question 9. Abhishek contracts to sell Bhusan, by showing a sample, a certain quantity of tea described as ‘Best quality Darjeeling tea. The tea when delivered matches with the sample, but it is not Darjeeling tea. Referring to the provisions of the Sale of Goods Act, 1930 advise the remedy, if any, available to Bhusan.
Answer:

Sale by sample is described in Sec. 17 of the Sale of Goods Act, of 1930. A contract of sale is a contract for sale by sample where there is a term in the contract Express or implied, to that effect. 

In the case of a contract for sale by sample there is an implied condition-

  • The bulk shall correspond with the sample in quality.
  • They shall have a reasonable opportunity to compare the bulk with the sample.
  • That the goods shall be free from any defect, rendering them un-merchantable, which would not be apparent on a reasonable examination of the goods.
  • In a contract for the sale of the brand by sample, Bhusan is entitled to return the tea and claim a refund of money as there is a breach of condition.

Question 11. State your views on the following: Consideration for the sale of goods must be in terms of money. In an auction sale, a bid once made can not be withdrawn by the bidder.
Answer:

  • Correct: It is one of the essentials of the contract of sale, that price must be paid in terms of money.
  • Incorrect: The bidder can withdraw his bid any time before the fall of the hammer i.e., completion of the sale.

Question 12. What are the consequences of ‘destruction of goods’ under the Sale of Goods Act, 1930, where the goods have been destroyed after the agreement to sell but before the sale is affected?
Answer:

Destruction of Goods-Consequences:

  • As per Section 7, a contract for the sale of specific goods is void if at the time when the contract was made; the goods without the knowledge of the seller, perished or become so damaged as no longer to answer to their description in the contract. The rule is based on the grounds of mutual mistake or impossibility of performance, which is one of the essentials of a valid contract.
  • Section 8 provides that an agreement to sell specific goods becomes void if subsequently the goods, without any fault on the part of the se:’er or buyer, perish or become so damaged as no longer to answer to their description in agreement before the risk passes to the buyer. This rule is also based on the grounds of impossibility of performance as stated above.
  • It may, however, be noted that Sections 7 and 8 apply only to specific goods and not to unascertained goods. If the agreement is to sell a certain quantity of unascertained goods, the perishing of even the whole quantity of such “goods” in the possession of the seller will not relieve him of his obligation to deliver the goods.

Question 13. What do you understand by “Caveat-Emptor” under the Sale of Goods Act, 1S30? What are the exceptions to this rule?
Answer:

  • As per Sec, 16 of the Sale of Goods Act, the buyer is supposed to satisfy himself about the quality of the goods he purchased and is also charged with the responsibility of seeing that the goods suit the purpose for which they were purchased by him.
  • Later on, if the goods do not turn out to be as per his purpose, the seller cannot be asked to compensate him.
  • This is based on the famous doctrine of Caveat Emptor which means ‘let the buyer beware’.

However, there are some exceptions to this which are as under:

  1. Where the buyer, expressly or by implication, makes it known to the seller the particular purpose for which the goods are required, to show that the buyer relies on the seller’s skill or judgment, and the goods are of a description which is in the course of the seller’s business to supply (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall reasonably be fit for such purpose. However, in the case of a contract for the sale of a specified article under its patent or other trade name, there are no implied conditions as to its fitness for any particular purpose.
  2. Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality. However, if the buyer has examined the goods, there shall be no implied conditions as regards defects that such examination ought to have revealed.
    • To apply the implied condition as to merchantability the following requirements must be satisfied.
    • The seller should be a dealer in goods of that description;
    • The buyer must have no opportunity to examine the goods or there must be some latent defect in the goods which would not be apparent on reasonable examination of the same.
  3. It may be noted the term merchantability has not been defined in the Act. As per the English Sale of Goods Act, goods of any kind are merchantable quality if they are as fit for the purpose or purposes for which goods of that kind are commonly brought as it is reasonable to expect having regard to any description applied to them, the price and all other relevant circumstances.
  4. An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. In some cases, the purpose for which the goods are required may be ascertained from the acts and conducts of the parties to the sale or from the nature of the description of the article purchased.
  5. For example, if a hot water bottle is purchased, the purpose for which it is purchased is implied in the thing itself. In such a case the buyer need not tell the seller the purpose for which the bottle is purchased.
  6. Similarly, if a thermometer is purchased in common usage, the purpose of the thermometer is well known, the buyer need not tell the seller.
  7. An express warranty or conditions does not negate a warranty or condition implied by this Act unless inconsistent therewith.

Sales Of Good Act 1930 Practical Question And Answers

Question 1. As per the order, Mr. Malhotra sent some goods to Mr. Paul at Kolkata through Rail. The Station Superintendent of Howrah Station informed Mr. Paul that goods are held at the Station at Paul’s risk and cost. In the meantime, Mr. Paul became insolvent. Mr. Malhotra wants to enforce his right as an unpaid seller Advise.
Answer:

The goods have reached their destination and the seller Malhotra has no right of stoppage in transit as the transit is over at Kolkata. Paul has become insolvent hence he cannot make any payments. Malhotra cannot act as an unpaid seller because the buyer is not capable of making any payment.

Question 2. Ashim Sells 1600 kgs. of wheat out of large quantity lying in his godown forwarded to Bablu. Out of these, Babiu sells 600 kgs. to Chandan (wheat yet to be ascertained). Then Chandan the delivery order signed by Bablu to Ashim who confirmed that wheat would be despatched in due course. Bablu then becomes insolvent. Ashim refused to deliver to Chandan. Advice Chandan based on rules.
Answer:

Ashim can not refuse to deliver 600 kgs. of wheat to Chandan. Sec. 53 of The Sale of Goods Act, 1930 provides that the seller (i.e. Ashim) loses his right of lien if he has assented to the sale to a subsequent buyer. By giving assent to Chandan, Ashim has lost his right of lien.

Question 3. Mr. Batliboi bought 50 kgs. of potato against cash payment from Mr. Joshi under a Contract of Sale but half of the consignment was rotten and Mr. Joshi refused to change the rotten potato nor refund the value. Advise Mr. Batliboi.
Answer:

  • The seller should deliver the potatoes in good condition which he has not done The buyer has the right to ask for good quality and correct quantity of Cotton potatoes. As per the Sale of good Act 1930, the seller should pay for the rotten potatoes
  • The quantity indicates that the foodstuff was not for personal consumption or commercial purposes. Hence Mr. Joshi cannot take the plea of “implied condition of fitness”. The doctrine of ‘Caveat Emptor’ would apply and Mr. Joshi does not have a case.

Question 4. Comment on the following based on legal provision.‘A’ The buyer ordered a patent smoke-consuming furnace by its Patent name for his brewery on ‘B’. The furnace received was however found to be unsuitable for the purpose. Hence seller is responsible.
Answer:

The seller is not responsible because he has supplied the goods as per the orders and specifications of the buyer. If the buyer could not use the goods for his purpose, it is not the failure of the seller. Buyer should have been careful while giving the order for the goods, whether such goods would serve his purpose or not.

Question 5. Mr. Barun tells Mr. Tarun in the presence of Mr. Arun that he is the Agent of Arun who maintains silence instead of denying Barun’s statement. Later on, Barun sells Arun’s Goods to Mr. Tarun. Arun now disputed Barun’s title to the goods, as Barun was not an Agent of Arun. Explain whether Arun is right. 
Answer:

In this case, Arun cannot dispute Tarun’s ownership title to the goods. Sec. 27 of the Sale of Goods Act provides that where the owner by his conduct or omission, leads the buyer to believe that the seller has the right and or authority to sell, he is stopped from denying the fact afterward. The buyer t us gets a better title than the seller. This is a case of sale by estoppels.

Question 6. Comment on the following based on legal provision: Mr. ‘A’ purchased a Refrigerator from Mr. ‘B’ on a “hire purchase agreement” expiring on 31.12.15. Mr. ‘A’ sold on 01.05.13 that Refrigerator to ‘C’ who purchased it against adequate consideration. ‘A’ has the right to give a good title to Mr. C.
Answer:

Under the Hire Purchase Agreement, the ownership passes to the buyer only on payment of the last installment. The hirer under the hire purchase system, has no title to the refrigerator therefore Mr. A cannot give a good title to Mr. C. This is because Mr. C. does not get a better title than Mr. A had.

Question 7.M/s. wholesaler agreed to supply 1000 Pcs. of Cotton Shirt to M/s. Retailer at INR 300 per shirt by 31.05.2013. On 01.02.2013 M/s. The wholesaler informs the Retailer that he is not willing to supply the shirt. the price of the shirt increased to INR 350 each. Examine the right of M/s. Retailer.
Answer:

On 01.02.2013 M/s Wholesaler indicated his unwillingness to supply cotton shirts 300/- per shirt although there is time up to 31.05.2013 for the performance of the contract.

It is therefore called anticipating breach of contract. In such cases M/s. Retailers can claim damages. M/s Wholesaler may treat the contract as subsisting and wait till the date of delivery or he may treat the contract as rescinded and claim damages for breach.

Question 8. Mr. Malhotra sold 1000 kgs. of rice to Mr. Basu who delayed in taking the rice from Mr. Malhotra. In the meantime, Mr. Malhotra sold those rice to Mr. Roy who took the delivery for value & without notice of prior sale. Hence Mr. Roy has no good title of ownership to goods Comment.
Answer:

Where Mr. Malhotra having sold goods continues in possession thereof or documents of title to the goods, the delivery by such seller I e Mr. Malhotra will pass a good title to Mr. Roy, since Mr. Roy acted in good faith and Without notice of the Previous sale by paying the value(Sec 30).

  • Where however Mr. Malhotra keeps the goods as Mr. Basu’s bailee, this section shall not apply (Sec. 30)
  • In these circumstances, Mr. Roy can sue Mr. Malhotra

Question 9. Raman instructed Soman, a transporter, to send a consignment of apples to Mumbai. After covering half a distance, Soman ’ found that the apples would perish before reaching Mumbai. Hence, he sold the same at half the market price. Raman sued against Soman. Will he succeed?
Answer:

Agent’s Authority in an emergency:

  • As per Section 189 of the Indian Contract Act, of 1872.
  • An agent has the authority in an emergency to do all such acts as a man of ordinary prudence (means carefulness, wisdom)would. do to protect his principal from losses which the principal would have done under similar circumstances.
  • A typical case is where the agent handling perishable goods like ‘apples’ can decide the time, date, and place of sale, not necessarily as per instructions of the principal, to protect the principal from losses.
  • Here the agent acts in an emergency and acts as a man of ordinary prudence.
  • In the given case, Soman had acted in an emergency and Raman did not succeed against him.

Question 10. Mr. Z bought a refrigerator from a dealer’s shop. But he did not mention the required purpose, whether it is fit to make ice. After using the same, Mr. Z came to know that the refrigerator was unfit for the purpose. State giving reasons as per the provisions of The Sale of Goods Act, 1930, is the dealer liable to refund the price?
Answer:

As per the Rule of Implied Condition, [Sec. 16 (1)]: There is no implied condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale. In other words, the buyer must satisfy himself about the quality as well as the suitability of the goods. This is expressed by the maxim caveat emptor (let the buyer beware). But there is an exception to this rule of Condition as to Quality or Fitness: There is an implied condition that the good shall be reasonably fit for a particular purpose described if the three conditions are satisfied:

  • The particular purpose for which goods are required must have been disclosed (expressly or impliedly) by the buyer to the seller.
  • The buyer must have relied upon the seller’s skill or judgment.
  • The seller’s business must be to sell such goods.
  • This condition cannot be invoked against a casual seller. In the given case, Mr. ‘Z‘ bought a refrigerator from a dealer’s shop.
  • But he did. not mention the required purpose i.e. whether it is fit to make ice.
  • After using the same Mr. ‘Z’ came to know that the refrigerator was unfit for the purpose.
  • The dealer is liable to refund the price because the refrigerator was unfit for the purpose for which it was meant and the buyer was not required to disclose this particular purpose.

Question 11. Makhan, seeing a mobile phone in a showcase of a shop that was marked for sale at $ 2,000, enters the shop, places $ 2,000  on the cash counter, and is told to give him the displayed mobile. The shop owner refused. Can the shop owner refuse to sell the displayed mobile?
Answer:

  • Price quotations and price tags do not amount to an offer but are only an invitation to an offer.
  • Therefore, Makhan’s picking up the mobile with a price tag of 2,000/- amounts to an offer by Makhan to purchase the same at that price.
  • It remains to be accepted by the seller- the salesman at the cash counter of the mobile store, to result in a concluded contract.
  • The salesman has every right to accept or refuse the offer.
  • Thus, Makhan shall have no remedies.

Question 12. Lalit delivered sarees valuing $ 50,000 to Rohit on ‘Sale or Return. Basis’. Rohit further delivered these sarees to Sumit and Sumit to Mohit on the same terms and conditions. Subsequently, these sarees were burnt by fire while in the custody of Mohit. Lalit filed a suit against Mohit for the recovery of the price, concerning provisions of the Sale of Goods Act, 1930, to examine whether Lalit’s suit for the price shall be maintainable.
Answer:

In case of the sale of goods on a ‘sale or return’ basis, the property in goods passes from the seller to the buyer in any of the following circumstances as  per provisions given under Section 24 of the Sale of Goods Act, 1930:

  • When he (the buyer) signifies his approval or acceptance to the seller;
  • Where he does any act adopting the transaction, i.e., sells or pledges the goods to a third party and,
  • Where he retains the goods, without giving notice of rejection, beyond * the time fixed for the return of goods or beyond a reasonable time (where no time is fixed).

Thus, in the given problem, Rohit is deemed to have accepted the sarees by further transaction to Sumit, and Sumit is deemed to have accepted the sarees by further transaction to Mohit.

  • The ownership is thus vested in Sumit till Mohit approves or does any act adopting the transaction.
  • In the meantime, the sarees are burnt from the custody of Mohit, and it is assumed that Mohit has handled the sarees with due care.
  • Hence the loss should fall on Sumit because at present he is the owner and risks being associated with ownership unless otherwise agreed between the parties.

Question 13. RK sells 200 bales of clothes to SK and sends 100 bales by lorry and 100 bales by Railway. SK receives delivery of 100 bales sent by lorry, but before he receives the delivery of the bales sent by railway, he becomes bankrupt. RK being still unpaid, stops the goods in transit. The official receiver, on SK’s insolvency, claims the goods. Decide the case concerning the provisions of the Sale of Goods Act, of 1930.
Answer:

Section 50, of the Sale of Goods Act, states that, subject to the provisions of this Act, when the buyer of goods becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right to stop them in transit, that is to say, he may resume possession of the goods as long as they are in course of transit and retain them until payment of tender of the price. Hence the major rules applicable would be:

  • The seller must be unpaid
  • He must have parted with the possession of goods
  • The goods must be in transit.
  • The buyer must have become insolvent

Applying the above provisions in the given case, we may conclude that RK being unpaid, can stop the 100 bales of cloth sent by railway as these goods are still in transit and SK has become insolvent.

Question 14. To boost sales, Ms ABC Ltd. sells a new machine to Mr. B on a trial basis for three days with the condition that if Mr. B is not satisfied with the performance of the new machine, he can return the new machine. However, the machine was destroyed in a fire accident at the place of Mr. B before the expiry of three days. Decide whether Mr. B is liable for the loss suffered under the Sale of Goods Act, of 1930.
Answer:

The problem as asked in the question is based on the provisions of the Sale of Goods Act, of 1930 as contained in Section 8.

  • Where there is an agreement to sell specific goods and subsequently the goods without any fault on the part of the seller or buyer perish or become so damaged as no longer to answer to their description in the agreement before the risk passes to the buyer, the agreement is thereby avoided.
  • In the given case the subject matter of the contract the new machine was destroyed before the transfer of property from the seller to the buyer. Thus the risk passes only when the ownership is transferred to the buyer.
  • Therefore, in the present case, Mr. B is not liable for the loss suffered due to the fire accident over which B has no control.
  • Thus M/s. ABC Ltd. will have to bear whatever loss that has taken place due to the fire accident.

Question 15. To make uniforms for the employees, Amit bought dark blue colored cloth from Bhagat but did not disclose to the seller the purpose of said purchase. When uniforms were prepared and used by the employees, the clothes were found unfit. However, there was evidence that the cloth was fit for caps, boots, and carriages. lining. Advise Amit whether he is entitled to have any remedy under the Sale of Goods Act, of 1930.
Answer:

As per the provision of Section 16(1) of the Sale of Goods Act, 1930, an implied condition in a contract of sale that an article is fit for a particular purpose only arises when the purpose for which the goods are supplied is known to the seller, the buyer relied on the seller’s skills or judgment and seller deals in the goods in his usual course of business.

  • In this case, the cloth supplied is capable of being applied to a variety of purposes, the buyer should have told the seller the specific purpose for which he required the goods. But he did not do so.
  • Therefore, the implied condition as to the fitness for the purpose does not apply.
  • Hence, the buyer will not succeed in getting any remedy from the seller under the Sale of Goods Act [Jones v. Padgett. 14 Q.B.D. 650].

Question 16. Mahendra made a hire-purchase agreement with Narendra for a car of which Narendra was described as the owner. Mahendra paid four of the twelve monthly installments and then learned that Jitendra claimed to be the owner of the car. He nevertheless paid the balance of the installment and exercised his option to purchase. Jitendra then demanded the car and Mahendra gave it up to him. Mahendra then sued Narendra to recover the full price and Narendra counterclaimed for a reasonable sum as hiring charges for the car during the period it was with Mahendra. Decide.
Answer:

The “Nemo dat quod non-habit’’ rule protects the true owner (Jitendra) and the buyer (Mahendra) who was aware of Narendra’s defective rights after paying the fourth installment, would not get any right or title out of his ineffective hire purchase agreement with Narendra.

  • Because Narendra was neither the owner nor an authorized person to put the car on hire purchase for the same reason, he is not entitled to receive any money under the agreement.
  • However, Mahendra may be asked by Jitendra to pay a reasonable rent for the use of the car and Mahendra can recover the amount paid by him to Narendra.

Question 17. Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by Railway. Shyam receives delivery of 100 bales sent by lorry, but before he receives the delivery of the bales sent by railway, he becomes bankrupt. Ram being still unpaid, stops the goods in transit. The official receiver, on Shyam’s insolvency, claims the goods. Decide the case concerning the provisions of the Sale of Goods Act, of 1930.
Answer:

Section 50 of the Sale of Goods Act, states that, subject to the provisions of this Act, when the buyer of goods becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right to stop them in transit, that is to say, he may resume possession of the goods as long as they are in course of transit and retain them until payment of tender of the price.

Hence the major rules applicable would be:

  • The seller must be unpaid
  • He must have parted with the possession of goods
  • The goods must be in transit
  • The buyer must have become insolvent

Applying the above provisions in the given case, we may conclude that Ram being unpaid, can stop the 100 bales of cloth sent by railway as these goods are still in transit.

Question 18. A delivered some diamonds to B on a sale or return basis. B delivered the diamonds to C and C to D on similar terms. The diamonds were stolen while in the custody of D. Who shall suffer the loss?
Answer:

In this case, B has adopted the transaction by delivering the diamonds to C and thus is liable to pay the price to A. Similarly, C has adopted the transaction by further delivery to D and thus is liable to pay the price to B. As between C and D, the transaction was still of sale or return which was not adopted by D, either expressly or impliedly, and thus the ownership had not passed to D at the time of loss. Therefore, C shall suffer the loss of diamonds.

Question 19. X buys synthetic pearls for a high price thinking that they are natural pearls. The seller though understood X’s intention, kept silent. Examine the remedies X has against the seller as per the Sale of Goods Act, of 1930. (3 marks)
Answer:

X has no remedy against the seller as the doctrine of Caveat Emptor will apply:

  • “Caveat emptor” means “let the buyer beware”, i.e. in the sale of goods the seller is under no duty to reveal unflattering truths about the goods sold.
  • Therefore, when a person buys some goods, he must examine them thoroughly.
  • If the goods turn out to be defective or do not suit his purpose, or if he depends upon his skill and judgment and makes a bad selection, he cannot blame anybody except himself.
  • The rule is enunciated in the opening words of Section 16 of the Sale of Goods Act, 1930 which runs thus, “Subject to the provisions of this Act and of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale”.

Question 20. Ms. Tea Enterprises agreed to supply 2,200 Kgsl of Tea to Ms. Gopal Enterprises at $ 1200/- per Kg. by 30,h April 2018. On 1st March 2018, Ms. Tea Enterprises informed Gopal Enterprises that they were not willing to supply the Tea as the price of Tea increased to $ 1400/- per Kg. Examine the rights of Ms. Gopal Enterprises.
Answer:

In terms of the provisions of Sections 32 and 33 of the Sale of Goods Act, 1930; unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods.

Rights of the Buyer according to the Sale of Goods Act, 1930 include:

  • To have delivery of the goods as per contract. (Sections 31 and 32);
  • To sue the seller for recovery of the price, if already paid, when the seller fails to deliver the goods;
  • To sue the seller for damages if the seller wrongfully neglects or refuses to deliver the goods to the buyer (Sec. 57);
  • To sue the seller for specific performance;
  • To sue the seller for damages for breach of a warranty or breach of a condition treated as a breach of a warranty (Sec. 59);
  • To sue the seller the damages for anticipatory breach of contract (Sec. 60)
  • In the instant case, Ms. Gopal Enterprises can exercise any of the rights discussed above.

Question 21. Himadri sells 400 Kg. of tea to Rahul and sends 200 Kg. by lorry and 200 Kg. by Railway. Rahul receives delivery of 200 Kgs. sent by lorry, but before he receives the delivery of the tea sent by railway, he becomes bankrupt. Himadri being still unpaid, stops the goods in transit. The official receiver, on Rahul’s insolvency, claims the goods. Decide the case concerning the provisions of the Sale of Goods Act, of 1930.
Answer:

Section 50, of the Sale of Goods Act, states that, subject to the provisions of this Act, when the buyer of goods becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right to stop them in transit, that is to say, he may resume possession of the goods as long as they are in course of transit and retain them until payment of tender of the price.

Stoppage in transit (Sections 50-52):

  • The right of stoppage in transit is the right to stop the goods while they are in transit, resume possession of them, and retain possession until payment or tender of the price.
  • The right to stop goods is available to an unpaid seller
  • when the buyer becomes insolvent; and
  • the goods are in transit.
  • The buyer is insolvent if he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due. He doesn’t need to be declared insolvent by the court.
  • The goods are in transit from the time they are delivered to a carrier or other bailee like a wharfinger or warehouse keeper for transmission to the buyer and until the buyer takes delivery of them.

The transit comes to an end in the following cases:

  • If the buyer obtains delivery before the arrival of the goods at their destination
  • If, after the arrival of the goods at their destination, the carrier acknowledges to the buyer that he holds the goods on his behalf, even if the further destination of the goods is indicated by the buyer
  • If the carrier wrongfully refuses to deliver the goods to the buyer.
  • Applying the above provisions in the given case, we may conclude that Himadri being unpaid, can stop the 200 Kgs of tea sent by railway as these goods are still in transit and Rahul has become insolvent.

CMA Laws and Ethics Negotiable Instruments Act, 1881 Question and Answers

Negotiable Instruments Act 1881

Question 1. Negotiable Instruments
Answer:

  • It is an “instrument which is transferable, by delivery, like cash and can also be sued upon by the person holding for the time being.
  • As per Section 13(1) of the Act, “A negotiable instrument means a promissory note, bills of exchange, or cheque payable either to order or to bearer.”

Question 2. Conditions of Negotiability
Answer:

  • It should be freely transferable.
  • The defective title of the transferor affects the title of the person taking it for value and in good faith.
  • The transferee can sue upon the instrument in his name.

Question 3. Negotiability Involves two Elements
Answer:

  • Transferability free from equities.
  • Transferability by delivery or endorsement.

Read and Learn More CMA Laws and Ethics Paper

Question 4. Effects of Negotiability
Answer:

The general principle of law says:

  • “Nemo Dat Quad Non-Habet” therefore no one can pass a better title than he has.
  • A negotiable instrument is an exception to the above rule.
  • Thus, a bonafide transferee of the negotiable instrument without notice of any defect of title acquires a better title than that of the transferor.

Question 5. Characteristics
Answer:

  • The holder is presumed to be the owner of the property contained therein.
  • It is a written document.
  • It should be signed.
  • Payable to bearer or order.
  • It is unconditional.
  • It may be transferred by endorsement and delivery.
  • The transferee obtains a good title.

These are freely transferable but can be transferred only till maturity and in the case of a cheque till it becomes stale (Therefore Three months from the date of issue)

Question 6. Classification
Answer:

  • Bearer
  • Order
  • Inland
  • Foreign
  • Demand
  • Time
  • Ambiguous
  • Inchoate or Incomplete.

Question 7. Promissory Note
Answer:

  • As per Sec. 4 of the Act, A promissory note is, “an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument”.

Parties:

  1. A maker is the person making or executing it.
  2. Payee person to whom the note is payable.
  3. Holder person to whom it is endorsed.
  4. Endorser.
  5. Endorsee.

Question 8. Essentials of Promissory Note
Answer:

  1. It must be in writing.
  2. The promise to pay must be unconditional.
  3. The amount promised must be certain and a definite sum of money.
  4. The instrument must be signed by the maker.
  5. The person to whom the promise is made must be definite.
  6. It must contain an express promise or a clear undertaking to pay.
  7. Payment must be in the legal money of the country.
  8. It must be properly stamped as per the provisions of the Indian Stamp Act.
  9. The name of the place, member and date on which it is made must be contained in it.
  10. Should contain the sum payable which is certain and must not be capable of contingent additions or deletions.

Question 9. Bill of Exchange
Answer:

  • As per Sec. 5 of the Act, A Bill of Exchange is, “an instrument in writing containing an unconditional order signed by a maker.
  • Directing a certain person to pay a certain sum of money only to or to the order of a certain person or to the bearer of an instrument.”

Parties:

  1. Drawer: The party who draws a bill.
  2. Drawee: The party on whom such bill is drawn.
  3. Acceptor: The drawee of the bill who has signified his assent to the drawer’s order.
  4. Payee: The party to whom or to whose order, the amount of bill is payable.
  5. Endorser: The party who endorses the bill.
  6. Endorsee: The party to whom it is endorsed.
  7. Holder: Person entitled in his name to the possession of the bill and to receive or recover the amount due thereon from the parties.
  8. Drawee in Case of a Need: When in the bill, the person whose name is entered, in addition to the drawee, is to be resorted to in case of need.
  9. Acceptor for Honour: A person who offers better security for safeguarding the honour of the drawer or any endorser, accepts the bill.

Question 10. Essentials of Bill of Exchange
Answer:

  1. It must be in writing.
  2. There must be an order to pay.
  3. The order must be unconditional.
  4. The drawee must sign the instrument.
  5. The drawer, drawee and payee must be specified in the instrument.
  6. The sum must be certain.
  7. The medium of payment must be money and money only.

Question 11. Types of Bills
Answer:

  1. Inland bills: Bills drawn in India for any person.
  2. Foreign bills: Bills which are not inland. Foreign Bill is drawn in sets of three copies.
  3. Trade bills: Bills issued for trade settlements
  4. Accommodation bills: Also known as kite bills, these are used for mutual help.
  5. An accommodation bill is a bill which is drawn, accepted or endorsed without any consideration.

Question 12. Cheque
Answer:

  • As per Sec. 6 of the Act, “Cheque is a special type of bill of exchange which is always –
    1. Drawn upon a specified bank and
    2. Payable on demand.

It also includes an electronic image of truncated cheque or cheque in an electronic form.”

  • “A Cheque in the Electronic form” means a cheque which contains the exact mirror image of a paper cheque and is generated, written and signed in a secure system ensuring the minimum safety, and standards with the use of digital signatures and asymmetric cryptosystem.
  • “A Truncated Cheque” means a cheque which is truncated during the clearing cycle, either by the clearing house or by the bank, preventing the further physical movement of the cheque.
  • “Clearing House” refers to the clearing house managed or recognised by RBI.
  • It is a kind of bill of exchange, thus must satisfy all requirements of a bill.

Note: No bill of exchange or hundi except a cheque can be made payable to the bearer on demand.

Parties: All are the same as that of B or E, except drawee who is a banker.

Question 13. Essentials of Cheque
Answer:

  1. It is always paid on demand.
  2. It is drawn on a specified banker.
  3. It does not require acceptance.
  4. It may be payable to the drawer himself or the bearer on demand.
  5. It is usually valid for 3 months.
  6. It can be drawn on a bank where the drawer has an account.
  7. No stamp is required.
  8. The banker is only liable to the drawer.

Question 14. Banker
Answer:

  • The person doing the banking work.
  • As per Sec. 5(b) of the Banking Regulation Act, 1949.

Banking refers to, “Accepting for lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft or otherwise.”

Question 15. Customer
Answer: A person who has an account with them or who utilises the bank services

Question 16. Rights and Obligations of Banker
Answer:

  • Honour customer’s cheques.
  • Collect cheques and drafts on the customer’s behalf.
  • Keep proper records of transactions with customers.
  • Not to disclose customer’s account status with anyone, etc.
  • Give reasonable notice to the customer before closing his account.
  • Right, to claim incidental charges as per the rules of the bank.

Question 17. Liabilities of Banker
Answer:

  • Liable to the customer to the extent of the amount of the account opened.
  • Liable to honour customer’s cheques to the extent of the amount in his account.
  • Liable to compensate the drawer for any loss or damage suffered if he fails to honour cheques without justification.
  • Liable to maintain proper and accurate accounts of credits and debits.
  • Liable to honour cheque presented in due course.

Question 18. Cases when the Banker must refuse Payment
Answer:

  • Banker receives notice of customer’s insolvency or lunacy.
  • When the customer countermands payment.
  • If a legal order from the Court attaching or otherwise dealing with money in the banker’s hand is served on the banker.
  • Banker receives notice of customer’s death.
  • The customer gives notice to the banker to close the account.
  • ” Customer gives notice of assignment of his credit balance.

Question 19. Cases when the Banker may refuse Payment
Answer:

  • The cheque is undated.
  • It is stale and, therefore not presented for payment within a reasonable period. (3 months)
  • It is inchoate or not free from reasonable doubt.
  • It is post-dated and presented before its ostensible period.
  • If the customer’s funds in the banker’s hand are not properly applicable to the payment of the cheque drawn by the former. ,
  • Where the cheque is presented at a branch other than the one where the customer has the account.
  • It is not duly presented.
  • It is mutilated.
  • It is irregular or materially altered.
  • The customer’s signature does not agree with his specimen signatures:

Question 20. Crossing of Cheque
Answer:

The cheque is either open or crossed.

Open Cheque: This can be presented by the payee to the paying banker and is paid over the counter.

Crossed Cheque: It is not paid over the counter but has to be collected through a banker.

  • When two parallel lines are drawn on the upper left corner of the cheque, it is known as the crossing of the cheque.
  • It is a direction to the paying banker that the cheque should be paid only to a banker or a specified banker.
  • It is done as a measure of safety.

Question 21. Modes of Crossing
Answer:

  1. General Crossing:
    • When two parallel lines are drawn nothing is specified in between them.
    • The amount will be directly credited to the account of the payee.
    • Payees cannot get money over the counter.
    • It prevents the money from going into the wrong hands.
  2. Restrictive Crossing:
    • When the words ‘A/c Payee’ are specified within the crossing. The cheque cannot be further negotiated.
    • The collecting banker will be guilty of negligence if he credits the proceeds to an account other than that of the A/c payee. It does not affect the paying banker.
  3. Special Crossing:
    • When the name of a particular bank is specified between the crossed lines.
    • Amount can be collected only by the bank whose name is specified.
  4. Not – Negotiable Crossing:
    • When the words ‘not – -negotiable’ are specified between the crossed lines.
    • It enhances safety as it ensures protection from any misappropriation. ,
    • As per Sec. 130,
    • “A person taking a cheque crossed generally or specially bearing in either case, with the words ‘not – negotiable’ shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had.”
    • It does not mean non – non-transferable.
    • It protects the drawer or holder of a cheque who wants to transfer it against dishonesty or actual miscarriage in the course of transmission.

Question 22. Holder (Sec. 8)
Answer:

  • A person must be named in the instrument.
  • It implies a ‘dejure’ holder in law and not a ‘defactor’ holder.
  • It alters the party’s liabilities.
  • It renders the instrument

Question 23. Holder in Due Course (HDC) (Sec. 9)
Answer:

It means any person who obtains the instrument-

  • Before maturity.
  • For some consideration.
  • In good faith.

Question 24. Privileges of HDC
Answer:

  • An inchoate instrument, if properly stamped, is valid, if it subsequently comes into the hands of HDC.
  • In the case of an inchoate instrument, HDC has a right to recover that much amount which is sufficiently covered by the stamp.
  • The acceptor of a bill of exchange cannot plead against an HDC that the bill is drawn in a fictitious name.
  • The person liable for an instrument cannot plead against HDC that the instrument has been lost or was obtained using fraud or unlawful means.
  • No one can deny the original validity of the instrument.
  • No one can deny against a HDC, the capacity of the payee to endorse.
  • HDC can recover from all prior parties.
  • No effect of conditional delivery.

Question 25. Bank Draft
Answer:

It is an order drawn by an office of a bank upon another office of the same bank.

It is different from a cheque in the following 3 ways:

    1. It cannot be easily counter-manned.
    2. It cannot be made payable to the bearer.
    3. It can be drawn only by one branch of the bank upon another branch.

Question 26. Material Alteration (Sec. 87)
Answer:

  • Any alteration made in the instrument which causes it to speak a different language from what it originally intended or which changes the legal identity of the instrument in its terms or relation or parties thereto is a material alteration.
  • It renders the instrument void.
  • Persons taking the altered instrument after its alteration have no right to complain.
  • However, as per Sec. 88, an acceptor or endorser remains bound by his acceptance or endorsement.
  • Example Sum payable, interest rate, date of payment etc.
  • The following cases do not result in material alteration:
    1. Alteration made with the consent of parties before issue.
    2. Crossing of the cheque.
    3. Adding words “on demand”.
    4. Correction of any mistake.
    5. Carrying out common intention of parties. ,

Question 27. Liability of Endorser (Sec. 35) 
Answer:

  • By accepting and delivering it before maturity, he undertakes the responsibility that on the presentment it shall be accepted and paid.
  • If it is dishonour by the drawee, acceptor or maker, he will identify the holder or subsequent endorser who is compelled to pay, provided due notice of dishonour is received by him.
  • However, he may make his liability conditional.

Question 28. Negotiation (Sec. 14)
Answer:

When a negotiable instrument is transferred to a person, to make the person the holder of the instrument, the instrument is said to be negotiated. It may be by

    1. Mere Delivery.
    2. Endorsement and Delivery.

Question 29. Assignment
Answer: It is a mode of transferring the instrument which requires a written document. Under this, the instrument is transferred like goods, by deed that is under a contract.

Question 30. Endorsement (Sec. 15)
Answer:

  • It refers to “signing one’s name on the negotiable instrument to transfer it to another person.”
  • if there is no space on the instrument, it may be made on a slip of paper attached to it known as “Allonge.”
  • An endorser is the person to whom the instrument is endorsed.
  • Endorsement therefore means writing something on the back of an instrument to transfer the rights, title and interest to some other person.

Question 31. Kinds of Endorsement
Answer:

  • Blank or General
  • Special or Full
  • Restrictive
  • Partial.
  • Conditional or Qualified.

Question 32. Hundis
Answer:

  • It is an instrument drawn in an oriental language i.e. local language.
  • Known as a native bill of exchange.
  • They were also called ‘Teep’

Question 33. Types of Hundis
Answer:

  1. Shah Jog Hundi
  2. Jokhmi Hundi
  3. Jawabee Hundi
  4. Nam Jog Hundi
  5. Darshani Hundi
  6. Miadi Hundi
  7. Dhani Jog Hundi

Negotiable Instruments Act 1881 Short Note Question And Answers

Question 1. Write Short Notes on Endorsement under Negotiable Instruments Act, 1881
Answer:

Endorsement:

Section 15 of the Negotiable Instrument Act states that when the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for negation on the back or face thereof or a slip of paper annexed thereto, or so signs for. the same purpose a stamped paper intended to be completed as a negotiable instrument he is said to endorse the same and is called the ‘endorsed.

  • Hence, endorsement (endorsement) means writing of a person’s name (other than the maker) on the face or back of an instrument or on a slip of paper attached thereto for negotiation.
  • The person signing the instrument is known as the endorser and the person in whose favour it is endorsed is known as the endorsee.

Question 2. How would you differentiate between negotiation and assignment?
Answer:

Differences Between Negotiation and Assignment are as under:

Negotiable instruments Act , 1881 Difference Between Negotiation And Assignment

Negotiable Instruments Act 1881 Descriptive Question And Answers

Question 1. Comment on the following based on legal provisions: There are in total two parties to a promissory Note.
Answer:

The Statement Is False: There are five Parties to a promissory note viz.

  1. The Marker: The person who makes the Note promising to pay the amount stated therein.
  2. The payee: The person to whom the amount of the ‘note’ is payable
  3. The Holder: i.e. either the original payee or other persons in whose favour the ‘note’ has been endorsed.
  4. The endorser: The person who endorses the Note in favour of another person.
  5. The endorsee: The person in whose favour the “Note” is negotiated by endorsement.

Question 2. What is ‘Noting Comment on the following based on legal provisions: There are in total two parties to a Promissory Note.
Answer:

“Noting” means recording the fact of dishonour by Notary Public upon the instrument.“Noting” must contain the following :

  1. The fact of dishonour.
  2. Date of. dishonour.
  3. Reasons if any, assigned for dishonor.
  4. If the Instrument is not expressly dishonoured, reasons why the holder thinks so.
  5. Notary Charges.

Question 3. What will be the fate of a “Holder” of the negotiable instrument if he fails to give notice of dishonour to prior parties?
Answer:

If the Holder does not give notice of dishonour of the bill, instrument or cheque (except when the notice of dishonour is excused,) all the parties liable thereon are discharged of their liability.)

Question 4. State the circumstances under which the drawer of a cheque will be liable for an offence relating to dishonour of the cheque under the Negotiable Instrument Act, of 1881. Examine, whether there is an offence under the Negotiable Instrument Act,1881, if a Drawer not to a cheque after having issued the informs the drawee not to present the cheque as well as informs the bank to stop the payment.
Answer:

On dishonour of a cheque, the drawer is punishable with imprisonment for a term not exceeding two years or with a fine not exceeding twice the amount of a cheque or with both of the following conditions fulfilled:

  • if the cheque is returned by the bank unpaid due to insufficiency of funds in the account of drawer.
  • If the cheque was drawn to discharge a legally enforceable debt or other liability in whole or part of it.
  • If the cheque has been presented to the bank within three months from the date on which it is drawn or within the period of its validity, whichever is earlier.
  • If the payee or the holder in due course of the cheque has given a written notice demanding payment within 30 days from the drawer on receipt of information of dishonour of cheque from the bank.
  • If the drawer has failed to make payment within 15 days of the receipt of the said notice. (Section 135) .
  • If the payee or a holder in due course has made a complaint within one month of the cause of action arising under Section 138 (Section 142)

Case Laws: The Supreme Court held in Modi Cements Ltd. Vs. Kuchil Kumar Nandi held that once a cheque is issued by the drawer, a presumption

  • under Section 139 follows (the cheque has been issued for the discharge of any debt or other liability) and merely because the drawer issued a notice thereafter to the drawee as to the bank for stoppage of payment, it will not preclude an action under Section 138.
  • Hence, the drawer of the cheque will be liable for the offence under Section 138 for the dishonour of the cheque.

Question 5. A Bill of exchange dated 1st February 2014 payable two months after the date was presented to the maker for payment 10 days after maturity. What is the date of maturity? Explain concerning the relevant provisions of the Negotiable Instruments Act, 1881 whether the endorser and the maker will be discharged by reasons of such delay.
Answer:

  • The due date of maturity is 4th April (3rd day after two months) Promissory notes, bills of exchange and cheques must be presented for payment at the due date of maturity to the maker, acceptor or drawee thereof respectively, by or on behalf of the holder.
  • In default of such presentment, the other parties to the instrument (therefore parties other than the parties primarily liable) are not liable thereon to such holder.
  • If authorized by agreement or usage, a presentation through the post office using a registered letter is sufficient (Section 64).
  • So, the Endorser is discharged due to delayed presentment for payment, and the primary party (Maker of the instrument) continues to be liable.

Question 6. ‘A partial endorsement does not operate as a negotiation of the instrument’. Explain.
Answer:

  • Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount appearing to be due on the instrument.
  • In other words, a partial endorsement which transfers the right to receive only a part payment of the amount due on the instrument is invalid.
  • Moreover, it would also interfere with the free circulation of negotiable instruments.
  • It may be noted that an endorsement which purports to transfer the instrument to two or more endorsees separately and not jointly is also treated as a partial endorsement and hence would be invalid.
  • Thus, where A holds a bill of $ 2,000 and endorses it in favour of B for $ 1,000 and in favour of C for the remaining $ 1,000, the endorsement is partial and invalid.
  • Section 56, however further provides that where an instrument has been paid in part, a note to that effect may be endorsed on the instrument and it may then be negotiated for the balance. Thus, if in the above illustration, the acceptor has already paid $ 1,000 to A, the holder of the bill, A can then make an endorsement saying “Pay B or order $ 1,000 being the unpaid residue of the bill”. Such an endorsement would be valid.

Question 7. Amrut draws a cheque payable to ‘self or order1. Before he could encash the cheque, one of his creditors, Bihari approached him for payment. Amrut endorses the same cheque in Bihari’s favour. The. banker refuses payment to Bihari on account of insufficiency of funds in the account. Can Amrut be made liable to penalties for the dishonour of cheques due to insufficiency of funds in the account under Section 138?
Answer:

  • Section 138 of the Negotiable Instrument Act, of 1881, creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker.
  • Section 138 of the Act can be said to be falling either in the acts which are not a criminal offence in a real sense but are acts in the public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are only a summary mode of enforcing a civil right.
  • Normally in criminal law existence of guilty intent is an essential ingredient of a crime.
  • However, the Legislature can always create an offence of absolute liability or strict liability where ‘mens reel is not at all necessary.
  • No, Amrut cannot be made liable to penalties for dishonour of cheques due to insufficiency of funds in the account since the cheque was not originally drawn payable to another person.
  • A cheque drawn payable to self and later endorsed in favour of another person does not seem to fall within the purview of the provisions of Section 138 which lay down that the cheque should have been drawn for payment to another person.

Question 8. “A cheque is a specie of a bill of exchange with two additional qualifications.” Explain.
Answer:

  • According to Sec. 6 of the Negotiable Instrument Act, “A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.”
  • A cheque is a bill of exchange with the following two distinctive features which are additional qualifications viz:
  • A cheque is always on a specified banker.
  • A cheque is always payable on demand.
  • Thus, a cheque is a bill of exchange drawn on a bank payable on demand. All cheques are bills of exchange, but all bills of exchange are not cheques. A cheque must have all the essential requisites of a bill of exchange.

Question 9. State the circumstances under which a banker is bound to refuse the payment of a cheque.
Answer:

Circumstances when the banker must refuse the payment:

Following are the circumstances in which the banker is bound to refuse the payment of a cheque:

Negotiable instruments Act , 1881 Circumstances When The Banker

Question 10. What are the essential elements of a valid acceptance of a Bill of Exchange? An acceptor accepts a ‘Bill of Exchange’ but writes on it ’Accepted but payment will be made when goods delivered to me is sold. Decide the validity.
Answer:

Essentials of a Valid Acceptance of a Bill of Exchange:

The essentials of a valid acceptance are as follows:

Negotiable instruments Act , 1881 Essential Of A Valid Of A Bill Of Exchange

Question 11. Anil draws a bill of exchange payable to himself on Sushil, who accepts the bill without consideration just to accommodate Anil. Anil transfers the bill to Ajay for good consideration. State the rights of Anil and Ajay. Would your answer be different if Anil transferred the bill to Ajay after maturity?
Answer: .

Section 43 of the Negotiable Instrument Act, of 1881 states the following:

  1. Liability of parties if there is no consideration – A negotiable instrument made, drawn, accepted, endorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction.
  2. Rights. of the holder for consideration – but if any such party has transferred the instrument to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
  3. No right of accommodating party to recover from accommodating party – No party for whose accommodation a negotiable instrument has been made, drawn, accepted, endorsed can, if he has paid the amount thereof, recover thereon such amount from any person who became a party to such instrument for his accommodation.
    • In the given case, Anil is not entitled to sue Sushil, since there is no consideration between Anil and Sushil and hence there is no obligation to pay.
    • Again Ajay is entitled to sue Anil and Sushil since Ajay is a holder for consideration. Ajay is entitled to sue the transferor for consideration and every other party before him.
    • According to Section 59, in the case of accommodation bills, a defect in the title of the transferor does not affect the title of the holder acquiring after maturity. Hence, even if Ajay has acquired the bill for. consideration after maturity, he is entitled to sue.

Question 12. Rahul draws a cheque payable to ‘sell or order’. Before he could encash the cheque, one of his creditors, Samrat approaches him for payment. Rahul endorses the same cheque in Samrat’s favour. The banker refuses payment to Samrat on account of insufficiency of funds in the account. Can Rahul be made liable to penalties for dishonour of cheques due to insufficiency of funds in the account under section 138 of the Negotiable Instruments Act, 1881?
Answer: .

  • Section 138 of the Negotiable Instrument Act, of 1881, creates statutory offence in the matter of dishonour of cheques on the ground of insufficiency of funds in the account maintained by a person with the banker.
  • Section 138 of the Act can be said to be falling either in the acts which are not a criminal offence in a real sense but are acts which in public interest are prohibited under the penalty or those where although the proceeding may be in criminal form, they are only a summary mode of enforcing a civil right.
  • Normally in criminal law existence of guilty intent is an essential ingredient of a crime.
  • Although, the Legislature can always create an offence of absolute liability or strict v/here ‘mens rea’ is not at all necessary.
  • No, Rahul cannot be made liable to penalties for dishonour of cheques due to insufficiency of funds in the account since the cheque was not originally drawn payable to another person.
  • A cheque drawn payable to self and later endorsed in favour of another person does not seem to fall within the purview of the provisions of Section 133 which lay down that the cheque should have been drawn for payment to another person.

Negotiable Instruments Act 1881 Practical Question And Answers

Question 1. ‘Anil’ drav/s a bill on ‘Susheel’ for INR 10,000 payable to his order. ‘Susheel’ accepts the bill but subsequently dishonours it by non-payment. ‘Anil’ sues ‘Susheel’ on the bill. ‘Susheel’ proves that it was accepted for value as INR 8,000 and as an accommodation to ‘Anil’ for INR 2,000. How much can ‘Anil’ recover from ‘Susheel’? Decide in the light of the provisions of the Negotiable Instruments Act, of 1881.
Answer:

  • According to the provisions of Section 44 of the Negotiable Instruments Act, of 1881, when there is a partial absence or failure of money
  • consideration for which a person signed a bill of exchange, the same rules applicable for total absence or failure of consideration will apply.
  • Thus, the parties standing in immediate relation to each other cannot recover more than the actual consideration. Accordingly, Anil can recover only INR 8000.

Question 2. ‘A’ issues an open ‘bearer’ cheque for $ 10,000 in favour of ‘B’ who strikes out the word ‘bearer’ and puts a crossing across the cheque. The cheque is thereafter negotiated to ‘C’ and ‘D’. When it is finally presented by D’s banker, it is returned with remarks ‘payment countermanded’ by the drawer. In response to this legal notice from ‘D’, A pleads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable Instruments Act, of 1881, discuss whether A’s argument is valid or not.
Answer:

  • Effects of striking off the word bearer. It amounts to a material alteration.
  • However, such material alteration is authorized by the Act.
  • Therefore, the cheque is not discharged; it remains valid.
  • Effects of crossing the cheque. It amounts to a material alteration.
  • However, such material alteration is authorized by the Act.
  • Therefore, the cheque is not discharged; it remains valid. A’s argument is not valid.
  • Since the reason for the dishonour of the cheque is not ‘material alteration ‘but ‘payment countermanded by drawer1.
  • Therefore, A is liable for the payment of the cheque and he shall also be liable for dishonour of the cheque by the provisions of Section 138.

Question 3. On a Bill of Exchange for Rupees one lakh, X’s acceptance of the Bill is forged. ‘A’ takes the Bill from the customer for value and in good faith before the bill becomes payable. State with reasons whether ‘A’ can be considered as a “Holder in due course” and whether he can receive the amount of the Bill from ‘X’.
Answer:

  • According to Section 9 of the Negotiable Instruments Act, 1881 “holder in due course” means any person who for consideration becomes the possessor of a promissory note, bill of exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order, before the amount in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
  • As ‘A’ in this case, prima facie became a possessor of the bill for value and in good faith before the bill became payable, he can be considered as a holder in due course.
  • But where a signature on the Negotiable Instruments is forged the instrument is not at all an instrument in itself.
  • The holder of a forged instrument cannot enforce payment thereon. In
    the event of the holder being able to obtain payment despite forgery, he cannot retain the money.
  • The true owner may sue on tort (tort means a wrongful act, misdeed, or offence)the person who had received it.
  • The principle is universal; by reason that even a holder in due course is not exempt from it.
  • ‘ A holder in due course is protected when there is a defect in the title.
  • But he derives no title when there is an entire absence of title as in the case of forgery. Hence, “A” cannot receive the amount on the bill.

Question 4. Mr. Punit obtains fraudulently from Rohan a crossed cheque “Not Negotiable”. He transfers the cheque to Sunit, who gets the cheque encashed from ABC Bank Limited which is not the drawee bank.
Or
Rohan on coming to know about the fraudulent act of Mr. Punit sues ABC Bank for the recovery of the money. Examine concerning the relevant provisions of the Negotiable Instruments Act, of 1881, whether Rohan will succeed in his claim. Would your answer be still the same in case Mr Punit does not transfer the cheque and gets the cheque encashed from ABC Bank himself? 
Answer:

  • According to Section 130 of the Negotiable Instruments Act 1881, a person taking a cheque crossed generally or especially bearing, in either case, the words, not negotiable shall not have or shall not be able to give a better title to the cheque than the title the person from whom he had.
  • In consequence, if the title of the transferor is defective, the title of the transferee would be vitiated by the defect.
  • Thus, based on the above provisions, it can be concluded that if the holder has a good title, he can still transfer it with a good title but if the transferor has a defective title, the transferee is affected by such defects and he cannot claim the right of a holder in due course by proving that he purchased the instrument in good faith and for value.
  • As Mr. Punit in the given case had obtained the cheque fraudulently, he had no title to it and could not give to the bank any title to the cheque or money and the bank would be liable for the amount of the cheque for encashment. (Great Western Railway Co. Ltd. Vs. London and County Banking Co.)
  • The answer in the second case would not change and shall remain the same for the reasons given above. Thus, Rohan in both cases shall succeed in his claim from ABC Bank.

Question 5. Amit signs, as a maker, a blank stamped paper and gives it to Sumit and authorizes him to fill it as a note for $ 500, to secure an advance which Namit is to make to Sumit. Sumit fraudulently fills it up as a note for $ 2,000, payable to Namit who has in good faith advanced. 2,000. Decide, with reasons, whether Namit is entitled to recover the amount, and if so, up to what extent.
Answer:

  • A duly signed blank-stamped instrument is called an inchoate instrument. According to Section 20 of the Negotiable Instruments Act, an inchoate instrument is an incomplete Instrument in some respect.
  • When a person signs and delivers blank or incomplete stamped paper to another, such other is authorized to complete it for any amount not exceeding the amount covered by the stamp.
  • The person so signing is liable upon such instrument, to any holder in due course for any amount.
  • But any other person can’t claim more than the amount intended by the drawer of the instrument.
  • Thus, for Namit’s claim to be valid and enforceable, two things are important:
    1. That Namit is a holder in due course, i.e., there should be valid consideration and he would have obtained it in good faith and before maturity.
    2. The amount filled in $ 2,000 is covered by the stamp amount. In the Negotiable Instruments Act, every holder is deemed to be a holder in due i course. Thus, the other party has to establish that Namit is not a holder in due course.

Question 6. Parag issues an open ‘bearer1 cheque for? 10,000 in favour of Qadir who strikes out the word ‘bearer1 and crosses the cheque. The cheque is thereafter negotiated to Raman and Suman. When it is finally presented by Suman’s banker, it is returned with remarks ‘payment countermanded’ by the drawer. In response to a legal notice from Suman, Parag pleads that the cheque was altered after it had been issued and therefore he is not bound to pay the cheque. Referring to the provisions of the Negotiable Instruments Act, of 1881, decide, whether Parag’s argument is valid or not.
Answer:

  • The cheque bears two alterations when it is presented to the paying banker. One, the word ‘born has been struck off and two, the cheque has been crossed.
  • Although both the alterations amount to material alterations such alterations are authorized by the Act.
  • So, it can be said that both of these alterations do not amount to material alteration under the provisions of the Act and hence the liability of any including the drawer is not at all affected.
  • Parag is liable to pay the amount of the cheque to the holder.

Question 7. A cheque payable to the bearer is crossed generally and is marked ‘not negotiable’. The cheque is lost and comes into the possession of Baldev, who takes it in good faith and for value. Baldev deposits the cheque into his account and his banker collects the same. Discuss the liability of collecting bankers and paying bankers. Can Baldev be compelled to refund the money to the true owner of the cheque?
Answer:

  • Neither the collecting banker nor the paying banker incurs any liability to anyone because of special protection granted to the bankers under the Act.
  • Yes, the true owner can compel Baldev to refund the money because the cheque bears a ‘not negotiable’ crossing as a result of which the transferee cannot get a better title than that of the transferor.

Question 8. A draws a bill on B. B accepts the bill without any consideration. The bill is transferred to C without consideration. C transferred it to D for value, Decide – 1. Whether D can sue the prior parties of the bill, 2. Whether the prior parties other than D have any right of action? Give your answer about the Provisions of Negotiable Instruments Act, of 1881.
Answer:

Section 43 of the Negotiable Instruments Act, of 1881 provides that an instrument made, drawn, accepted, endorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction. But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.

  1. In the problem, as asked in the question, A has drawn a bill on B and B accepted the bill without consideration and transferred it to C without consideration. Later on in the next transfer by C to D is for value.
  2. According to provisions of the aforesaid Section 43, the bill ultimately has been transferred to D with consideration. Therefore, D can sue any of the parties A, B or C, as D arrived at a good title on it being taken into consideration.

As regards to the second part of the. the problem, the prior parties before D, A, B and C have no right of action intense because the first part of Section 43 laid down that a negotiable instrument, made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction before the parties who receive it on consideration.

Question 9. X, by inducing Y, obtains a Bill of Exchange from him fraudulently in his (X) favour. Later, he enters into a commercial deal and endorses the bill to Z towards consideration to him (Z) for the deal. Z takes the Bill as a holder in due course. Z subsequently endorses the bill to X for value, as consideration to X for some other deal. On maturity, the bill is dishonoured. X sues Y for recovery of money. Concerning the provisions of the Negotiable Instruments Act, decide whether X will succeed in the case.
Answer:

Section 58 of the Negotiable Instruments Act provides that when an instrument is obtained by fraud, offence or for unlawful consideration, the possessor or endorsee cannot receive the amount of the instrument. Hence, normally X would not be entitled to sue Y as X has obtained the instrument through fraud.

  • However, as per section 53, a holder who derives title from the holder in due course has all rights of a holder in due course.
  • Since X derives his title from Z (who is a holder in due course), X has all the rights of Z.
  • The second part of section 58 also makes it clear that even if a negotiable instrument is obtained using an offence or fraud or for unlawful consideration, the possessor or endorsee is entitled to receive the amount from the maker, if he is a holder in due course or claims through a person who was a holder in due course.
  • Hence, X can sue Y as he is deriving his right from Z, who is holder in due course. Hence, X will succeed.

Question 10. Ajay draws a bill on Anoop. Anoop accepts the bill without any consideration. The bill is transferred to Udit without consideration. Udit transferred it to Vicky for value.
Decide –

  1. Vicky can sue the prior parties of the bill?
  2. Whether the prior parties other than Vicky have any right of action?

Answer:

Section 43 of the Negotiable Instrument Act, of 1881, Provides that an instrument made, drawn, accepted, indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction.

  1. But if any such party has transferred the instrument with or without endorsement to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transferor for consideration or any prior party thereto.
  2. In the given case, as asked in the question, Ajay has drawn a bill on Anoop and Anoop accepted the bill without consideration and transferred it to Udit without consideration. Later on in the next transfer by Udit to Vicky is for value. According to provisions of the aforesaid Section 43, the bill ultimately has been transferred to Vicky with consideration.
    • Hence, Vicky can use any of the parties i.e. Ajay, Anoop or Udit, as Vicky arrived at a good title on it being taken into consideration.
  3. As regards the second part of the problem, the prior parties before Vicky therefore Ajay, Anoop and Udit have no right of action inter se because the first part of Section 43 has laid down that a negotiable instrument, made, drawn, and accepted, indorsed transferred without consideration, or for a consideration which fails, creates no obligation of payment between the parties to the transaction before the parties who receive it on consideration.

Question 11. Mr. S. K drew a cheque in favour of Mr. P. K who was * seventeen years old. Mr. P. K settled his rental due by endorsing the cheque in favour of Mrs. R. K the owner of the house in which he stayed. The cheque was dishonoured when Mrs. R. K presented it for payment on the grounds of inadequacy of funds. Advice to Mrs. R. K. on how she can proceed to collect her dues.
Answer:

  • Section 26 of the Negotiable Instrument Act 1881, states that every person capable of contracting may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
  • But, A minor may draw, endorse, deliver and negotiate such instrument to bind all parties except himself.
  • As per the facts given in the question, Mr S.K. drew a cheque in favour of Mr P.K. a minor. Mr. P. K endorses the same in favour of Mrs. R. K. to settle his rental dues.
  • The cheque was dishonoured when Mrs. R. K. presented it to the bank on the grounds of inadequacy of funds.
  • In the above. It’ Mr‘ P’ K’ being 3 minors may draw- endorse, deliver and negotiate the instrument to bind all parties except himself Hence Mr P K is not liable.
  • Mrs. R. K can thus, proceed against Mr. S. K to collect the”

CMA Laws and Ethics Indian Partnership Act 1932 Question and Answers

Indian Partnership Act 1932

Question 1. Introduction
Answer:

  • The law relating to partnership in India was first contained in the Indian Contract Act, of 1872.
  • Later, on 1st October 1932 Indian Partnership Act, of 1932 came into force.
  • This Act deals partly with the rights and duties of partners between themselves and partly with the legal relations between partners and third persons.
  • It can be regarded as a branch of law relating to principal and agent.

Question 2.Partnership
Answer:

As per Sec. 4, “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

Question 3. Essentials of Partnership
Answer:

  • It must be a result of an agreement between two or more persons.
  • It is voluntary.
  • The agreement must be to share the profits of the business.
  • Business must be carried on by all or any of them acting for all.
  • All the above essentials must co-exist before any partnership comes into existence.
  • The relation of partnership arises from contract and not from status.
  • Agreement may be express or implied.
  • As per Sec. 2 (b),
  • “Business includes every trade, occupation, and profession.”
  • Profit means the excess of return over advances.
  • Sharing of profits includes the sharing of losses.

Read and Learn More CMA Laws and Ethics Paper

Question 4. True Test of Partnership
Answer:

  • Mutual agency is the basic and most essential thing for partnership.
  • The sharing of profit also involves the sharing of loss.
  • Sharing of profits is not a conclusive test of the existence of a partnership.
  • Every partner is a principal and agent for himself and others.
  • An agency relationship is the most important test of partnership.

Question 5. Partnership deed
Answer:

  • It constitutes the mutual rights and obligations of partners in a written form.
  • It is also known as a partnership agreement, constitution of partnership articles of partnership, etc.
  • It must be drafted and stamped as per the provisions of the Indian Stamp Act

Question 6. Types of Partners
Answer:

  1. Active Or Actual Ostensible Or Working Or Managing Partner:
    • He is not only contributing capital but also taking an active part in the conduct of the firm’s business.
    • He shares its profits and losses.
    • As per Sec. 12 (a),
    • Subject to the contract to the contrary, every partner is entitled to take part in the conduct of the business of the firm.”
    • He has to give public notice of his retirement if he has to free himself from all liabilities.
  2. Sleeping Or Dormant Partner:
    • He only contributes capital and shares profit or loss without taking an active part in the firm’s business.
    • He has unlimited liability.
    • He can retire from the firm without giving any public notice.
    • He is entitled to access books and accounts of the firm, even though he performs no duty.
  3. Sub Partner:
    • Me is the third person with whom a partner shares his profit.
    • He has no rights or duties towards the firm.
  4. Nominal or Quasi Partner:
    • He only lends his name and reputation for the firm’s benefit without sharing any profit or loss.
    • He is known to outsiders as a partner but actually, he is not.
    • He is liable to a third party for all his acts.
    • He is required to give public notice of retirement.
  5. From a duration point of view partnership may be:
    • Particular Partnership – i.e. for a particular purpose or a particular undertaking or single venture.
    • Partnership at will – No fixed duration or period of partnership. It is dissolved by the partner by giving notice in writing.
  6. Partner in profits only:
    • He gets a share in profits but does not share any losses of the firm. He has to bear all the liabilities to a third party.
  7. Partner by estoppel:
    • He is not a partner of the firm but conducts himself in such a way that leads third parties to believe that he is a partner.
    • He is liable for all the debts to such third party.
  8. Partner by holding out:
    • He is declared by others as a partner of the firm but does not contradict it immediately and remains silent.
    • He is liable to a third party who is entering into contracts with the firm on the belief that he is the partner.
    • Holding out means ‘to represent’
    • It is based on the doctrine of the Estoppel of Indian Evidence Act.

Question 7. Minor’s Position in Partnership
Answer:

  • Minor is a person who has not completed 18 years of age, and thus cannot become a partner as he is not competent to contract.
  • As per Sec. 30, He can, however, be admitted to the benefits of partnership with the mutual consent of all partners.’
  • No partnership firm can be formed only with minors.
  • A minor’s agreement is altogether void.
  • If a minor has to be. admitted into the benefits of partnership, there must be at least 2 major partners.

Question 8. Rights of Minor
Answer:

  • Sec. 30(2): Share profits of the firm.
  • Sec. 30(2): Inspect and copy the book of accounts of the firm.
  • Sec. 30(4): Can file a suit for accounts and his share in the firm but only when severing his connection with the firm.
  • Sec. 30(5): On attaining majority, he may within 6 months either.

Question 9. Rights of Partners
Answer:

  • To take part in management.
  • To Express Opinion.
  • To Inspect and take out copies of Books of Accounts.
  • To Share Profits.
  • To have an Interest in capital.
  • To have an Interest in Advances.
  • Right to be indemnified.
  • To have a joint share in the partnership property.
  • To enforce the proper use of property.
  • Right of Retirement.
  • To prevent the introduction of a new partner.
  • Implied Authority.
  • Right to Dissolve.
  • Profits after retirement or death.

Question 10.Duties and Liabilities of Partner
Answer:

  • To carry on the business of the firm to the Greatest Common Advantage.
  • Being diligent and honest.
  • Being just and faithful.
  • To render accounts and information.
  • To indemnify the firm.
  • Not to make any secret profits.
  • Not to hold and use the property of the firm.
  • Not to start a business in competition with the firm.
  • Not to receive any remuneration.
  • Not to transfer his interest.
  • To act within the scope of his authority.
  • To share losses.

Question 11. Goodwill
Answer:

Goodwill is defined as the value of the reputation of a business house concerning profits expected in the future over and above normal profits.

  • It is a partnership property.
  • In case of dissolution of the firm, every partner has a right according to the deed in the absence of any agreement, to have a share in the goodwill on it being sold.
  • It can be sold separately, or along with other properties of the firm.

Question 12. Effects of non-registration
Answer: The Indian Partnership Act does not make registration of partnerships compulsory nor does it impose any penalty.

1. However, non-registration gives rise to certain disabilities U/S 69:

  • The firm or any person on its behalf cannot bring action against a third party for breach of contract unless the firm is registered and persons suing are shown in the register of firms.
  • Neither the firm nor any partner can claim set off if any suit is brought by the third party against the firm.
  • Partner of an unregistered firm cannot bring any action against the firm or any partner of such firm.
  • An unregistered firm however can bring a suit for enforcing the right arising otherwise than out of contract.

2. Suits allowed by Act:

  • Dissolution of a firm.
  • Rendering accounts of a dissolved firm.
  • Realization of property of a dissolved firm.
  • Set off of values not exceeding $ 100.
  • Proceeding arising incidentally of value not exceeding $ 100.
  • The firm does not have a business place in territories to which the Indian Partnership extends.
  • Realization of property of insolvent partner.
  • Firms having business places in areas exempted from the Partnership Act.

Relevant Case Laws:

  • Prithvi Singh Vs. Hasan Ali
  • Kashav Lai Vs. Chunni Lai

Question 13. Dissolution of Partnership Firm (Sec. 39)
Answer:

It takes place when the relationship between all the partners of the firm is so broken to close the business of the firm.

As a result, the firm’s assets are sold and its liabilities are paid off.

Question 14. Modes of Dissolution of Partnership
Answer:

  • Sec. 42 (a): By the expiry of the fixed term for which the partnership was formed.
  • Sec. 42 (b): By the completion of the venture.
  • Sec. 42 (c): By the death of a partner.
  • Sec. 42 (d): By insolvency of a partner.
  • Sec. 42 (e): By retirement of a partner.

Question 15. Modes of Dissolution of Firm
Answer:

  • Sec. 40: Result of an agreement between all partners.
  • Sec. 41 (a): By adjudication of all partners, or declaration of all partners as insolvent except one.
  • Sec. 41 (b): By firm’s business becoming unlawful.
  • Subject to agreement between parties, on the happening of certain contingent events.
  • Sec. 43: In case of partnership at will, by a partner giving notice of the intention to dissolve the firm.
  • The firm dissolves from the date mentioned in the notice. If no date is mentioned, then from the date of communication of the notice.
  • See. 44: By Court Intervention in the case of:
    1. A partner becoming unsound mind.
    2. Permanent incapacity of partners to perform their duties.
    3. Misconduct of partners affecting the business.
    4. Willful or persistent breaches of agreement by a partner.
    5. Transfer or sale of the whole interest of a partner.
    6. The improbability of business being carried on except at a loss.
    7. Court being satisfied on other just and equitable grounds.

Question 16. Consequences of Dissolution
Answer:

  • Continuing liability until public notice: Partners continue to be liable for any act done by them, done on behalf of the firm until public notice of dissolution is given.
  • Sec. 46: Rights to enforce winding up:
    1. Partner or his representative have a right against others, on dissolution.
    2. Apply the firm’s property in payment of the firm’s debt. Distribute surplus amongst all partners.

Sec. 47: Continuing authority of partners:

The authority of partners continue

    1. So far as necessary to wind up the firm,
    2. To complete the pending transactions till the dissolution date.

Indian Partnership Act 1932 Distinguish Between Question And Answers

Question 1. Briefly explain the difference between Partnership and Co-ownership.
Answer:

Difference between Partnership and Co-ownership:

Indian Partnership Act, 1932 Difference Between Partnership And Co- Ownership

Indian Partnership Act 1932 Descriptive Question And Answers

Question 1. Who is a Partner by “Holding Out” or “Estoppels”?
Answer:

  • If any person behaves and or poses or presents in such a way that others consider him to be a partner, he will be held liable to those persons who have been misled, suffered, or lent finance to the firm on the assumption that he is a partner.
  • Such a person is known as a “Partner by Holding out or Estoppels.”
  • He is not a true partner and he is not entitled to any share in the profit of the firm.

Question 2. What tests would apply to determining the existence of a partnership? Discuss.
Answer:

  • As must be clear from the discussion of various elements of partnership, there is no single test of partnership.
  • For example, in one case there may be a sharing of profits but may not be any business, in the other case there may be business but there may not be a sharing of profits,
  • In yet another case there may be both business and sharing of profits but the relationship between persons sharing the proms may not be that of principal and agent.
  • And in either case, therefore, there is no partnership.
  • Thus, all the essential elements of a partnership must coexist to constitute a partnership.
  • To emphasize this fact, Section 6 expressly provides that “in determining whether a group of persons is or is not a firm or whether a person is or is not a partner in a firm, regard shall be given to the real largeon between the parties, as shown by all relevant facts taken together.
  • Thus, the existence of a partnership has to be determined by the real intention of the parties, which must be gathered from all the facts of the case and the surrounding circumstances.

Question 3. State your views on the following: A partner is not an agent of other partners in a partnership firm.
Answer:

Incorrect: The basis of the partnership is mutual agency, hence a partner is an agent of all other partners.

Question 4. What are the rights of outgoing partners?
Answer:

Rights of Outgoing Partners Section 36 provides that an outgoing partner may carry on a business competing with that of the firm. He may advertise such business, but, subject to contract to the contrary, he may not:

  • use the firm name
  • represent himself as carrying on the business of the firm; or
  • solicit the custom of persons who were dealing with the firm before he ceased to be a partner.

Section 37 provides that in a case where a partner has died or ceased to be a partner, the surviving and continuing partners may carry on the business of the firm with the property of the firm without any final settlement of accounts between them and the outgoing partner or the estate of the deceased partner.

In the absence of a contract to the contrary, the outgoing partner of the representative of the deceased partner is entitled to the option:

  • To such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm; or
  • To interest at 6% per annum on the amount of his share in the property of the firm.
  • Where an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner and the same is duly exercised, the estate of the deceased partner or the outgoing partner is not entitled to any further or other share of profits.
  • But if any partner, assuming to act in the exercise of the option, does not, in all material respects comply with the terms, he is liable to account under the provisions of this section.

Indian Partnership Act 1932 Practical Question And Answers

Question 1. A, B, and C were partners in a firm of drapers. The partnership deed authorized the expulsion of a partner when he was found guilty of a flagrant breach of duty. A was convicted of traveling without a ticket. On this ground, he was expelled by the other partners B and C. Is the expulsion justified?
Answer:

Yes, the expulsion is justified. In this case, the partnership deed authorized expulsion on the ground of flagrant breach of duty. Doing an act that brings a partner within the penalties of criminal law is a flagrant breach of duty. Also, the expulsion decision was taken by a majority of partners (Carmichel Vs. Evans (1904) 90 LT573).

Question 2. A, B, C are partners in a firm. As per terms of the partnership deed, A is entitled to 20% of the partnership property and profits. Retires from the firm and dies after 15 days. B and C continue the business of the firm without settling accounts. What are the rights of A’s legal representatives against the firm under the Indian Partnership Act, of 1932?
Answer:

Section 37 of the Indian Partnership Act, 1932 provides that where a partner dies or otherwise ceases to be a partner and there is no final settlement of account between the legal representatives of the deceased partner or the firms with the property of the firm, then in the absence of a contract to the contrary, the legal representatives of the deceased partner or the retired partner entitled to claim either.

  1. such shares of the profits earned after the death or retirement of the partner which is attributed to the use of his share in the property of the firm; or
  2. Interest at the rate of 6 percent per annum on the amount of his share in the property.

Based on the aforesaid provisions of Section 37 of the Indian Partnership Act, 1932 in the given problem, A’s representative, at his option, can claim:

  1. The 20% shares of profits (as per the partnership deed); or
  2. Interest at the rate of 6 percent per annum on the amount of A’s share in the property.

Question 3. Rohit and Anurag are partners in a firm. Did they borrow a sum of $ 10,000 from Parul? Later on, Rohit becomes insolvent but his assets are sufficient to pay back the loan. Parul compels Anurag for the payment of an entire loan. Referring to the provisions of the Indian Partnership Act, 1932, examine the validity of Parul’s claim and decide as to who may be held liable for the above loan.
Answer:

The present problem is concerned with the contractual liability of the Partners. As stated in Section 25 of the Indian Partnership Act, 1932, in partnership the liability of the partners is unlimited.

  • The share of each partner in the partnership property along with his private property is liable for the discharge of partnership liabilities.
  • The liability of the partners is not only unlimited but is also stated that a partner is both jointly and severally liable to third parties.
  • However, every partner is liable jointly with other partners and also severally for the acts of the firm done while he is a partner.
  • Based on the above provisions, Parul can compel Anurag for the payment of an entire loan. Anurag must pay the said loan and then he can recover the share of Rohit’s loan from his property.

Question 4. Arun, Varun, and Tarun started a Kirana business in Chennai on 1st January 2012 for five years. The business resulted in a loss of $ 20,000 in the first year, $ 25,000 in the second year, and $ 35,000 in the third year, Varun and Tarun wish to dissolve the firm while Arun wants to continue the business. Advise Varun and Tarun.
Answer:

  • As per provisions of Sec. 44(f) of the Indian Partnership Act, 1932, Varun and Tarun are advised to make a petition to the Court for the dissolution of the firm on the ground that the firm cannot be carried on except at a loss.
  • Since the firm was constituted for a fixed term of five years it cannot be dissolved without the consent of all the partners and as such Varun and Tarun cannot compel Arun to dissolve the firm.

Question 5. Akash, Ashish, and Anil were partners in a firm. By his willful neglect and misconduct, Anil caused serious loss to the business of the firm. After several warnings to Anil, Akash and Ashish passed a resolution expelling Anil from the firm. By another resolution, they admitted Abhishek as a partner in place of Anil. Anil objects to his expulsion as also to the admission of Abhishek. Is he justified in his objections?
Answer:

  • A partner may be expelled from a firm by the majority of the partners only if,
  • The power to expel has been conferred by contract between the partners, and
  • Such a power has been exercised in good faith for the benefit of the firm.
  • The partner who is being expelled must be given reasonable notice and opportunity to explain his position and to remove the cause of his expulsion.
  • Yes, Anil is justified in his objections.
  • In the absence of an express agreement authorizing expulsion, the expulsion of a partner is not proper and is without any legal effect.

[Section 33(1)] Anil’s objection to the admission of Abhishek is also justified as a new partner can be admitted only with the consent of all the partners.[Section 31 (1)]

Question 6. Mayur and Nupur purchased a taxi to ply it in partnership. They had done business for about a year when Mayur, without the consent of Nupur, disposed of the taxi. Nupur brought an action to recover his share in the sale proceeds. Mayur’s only defense was that the firm was not registered. Will Nupur succeed in her suit?
Answer:

  • As per Section 69(3) of the Indian Partnership Act, the term set-off may be defined as the adjustment of debts by one party due to him from the other party who files a suit against him.
  • It is another disability of the partners and of an unregistered firm that it cannot claim a set-off when a suit is filed against it.
  • Yes, Nupur will succeed in her suit. As the business had been closed on the sale of the taxi, the suit in question is for claiming a share of the assets of ’ a dissolved firm.
  • Section 69(3) especially protects the right of a partner of an unregistered firm to sue for the realization of the property of a dissolved firm.

Question 7. ABC & Co., a firm consisting of three partners A, Band C having one-third share each in the firm. According to A and B, the activities of C are not in the interest of the partnership, and thus want to expel C from the firm. Advise A and B whether they can do so quoting the relevant provisions of the Indian Partnership Act.
Answer:

Expulsion of a partner (Sec. 33):

  • The expulsion of a partner is another event necessitating the reconstitution of a firm.
  • A partner may be expelled from a firm if the following conditions are satisfied:
    1. expulsion should be as per the express provisions in the agreement;
    2. power of expulsion should be exercised by a majority of partners;
    3. expulsion should be in good faith.
  • Only when all the above three conditions are satisfied a partner can be expelled from a firm.
  • As stated above expulsion should be in good faith. The test of good faith may be:
  1. expulsion is in the interest of the firm
  2. expelled partner has been given notice

Question 8. X and Y were partners carrying on a banking business. X had committed adultery on several women in the city and his wife had left on this ground. Y applied to the court for dissolution of the firm on this ground. Will he succeed? )
Answer:

  • As per Section 44(c) of the Indian Partnership Act, 1932 sometimes, a partner is guilty of misconduct. When the Court is satisfied that the misconduct adversely affects the partnership business the Court may allow the dissolution of the firm.
  • Y will not succeed. In this case, though X is guilty of misconduct his misconduct does not have any adverse effect on their business as bankers [Snow Milform. (1868) 18 LT142].
  • In the above case, the Court observed that how can it be said that a man’s money is less safe because one of the partners commits adultery?
  • It was further observed that in those cases where the moral conduct of a partner would affect the firm business, it can be a ground for dissolution of the firm, an example where a medical man had entered into a partnership with another and it was found that his conduct was very immoral towards some of his patients, the firm can be dissolved on the ground of misconduct by the partner.