Law, Ethics and Communication (For CA - IPCC) 1259001792, 9781259001796

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Law, Ethics and Communication (For CA - IPCC)
 1259001792, 9781259001796

Table of contents :
Part I: Law
1. Nature of Contract
1.1 Applicability of the Indian Contract Act, 1872
1.2 Meaning of Agreement
1.3 Meaning of Contract
1.4 Essential Elements of a Valid Contract—Section 10
1.5 Types of Contract
1.6 Essentials of an Offer
1.7 Essentials of an Acceptance
1.8 Rules Regarding Communication of Offer and Acceptance
1.9 Revocation of Offer and Acceptance
1.10 Lapse of an Offer
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
2. Consideration and Other Essentials
2.1 Meaning of Consideration
2.2 Legal Rules Governing a Valid Consideration
2.3 Effect of Illegal Object or Consideration
2.4 Agreements Opposed to Public Policy
2.5 Stranger to a Contract
2.6 Agreements without Consideration
2.7 Parties Competent to Contract—Section 11
2.8 Agreements by a Minor
2.9 Agreements by Persons of Unsound Mind—Section 12
2.10 Agreements by Persons Disqualified by Law
2.11 Free Consent
2.12 Misrepresentation—Section 18
2.13 Mistake—Sections 20, 21, 22
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
3. Void, Contingent and Quasi-contracts
3.1 Void Agreements
3.2 Agreements by Way of Wager
3.3 Agreements to do Impossible Acts— Section 56
3.4 Contingent Contract
3.5 Quasi-contracts
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
4. Performance and Discharge
4.1 Discharge of Contract
4.2 Performance of Contract
4.3 Assignment & Succession of Contracts
4.4 Performance of Reciprocal Promises
4.5 Time and Place of Performance
4.6 Appropriation of Payments
4.7 Other Modes of Discharge of a Contract
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
5. Breach of Contract
5.1 Meaning of Breach of Contract
5.2 Remedies of Breach of Contract Under Indian Contract Act, 1872
5.3 Suit for Specific Performance
5.4 Suit for Injunction
5.5 Suit for ‘Quantum Meruit’
5.6 Assessment of Damages on Breach
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
6. Indemnity and Guarantee
6.1 Contract of Indemnity
6.2 Rights of Parties in a Contract of Indemnity
6.3 Contract of Guarantee
6.4 Types of Guarantee
6.5 Discharge of Surety
6.6 Rights of Surety
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
7. Bailment and Pledge
7.1 Contract of Bailment
7.2 Kinds of Bailment
7.3 Duties of Bailor = Rights of Bailee
7.4 Duties of Bailee = Rights of Bailor
7.5 Rights of Bailee
7.6 Rights of Bailor and Bailee Against Wrongdoer
7.7 Finder of Goods
7.8 Termination of Bailment
7.9 Pledge
7.10 Rights of Pawnee
7.11 Duties of Pawnee = Rights of Pawnor
7.12 Duties of Pawnor
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
8. Agency
8.1 Contract of Agency
8.2 Creation of Agency
8.3 Scope and Extent of Authority of Agent
8.4 Delegation of Authority by Agent (Sub-Agent)
8.5 Duties of an Agent = Rights of a Principal
8.6 Rights of an Agent = Duties of a Principal
8.7 Personal Liability of an Agent
8.8 Liability of Principal to Third Parties
8.9 Termination or Revocation of Agency—Sections 201–207
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
9. Negotiable Instruments Act, 1881
9.1 Applicability of the Negotiable Instruments Act, 1881
9.2 Negotiable Instrument
9.3 Promissory Note—Section 4
9.4 Bill of Exchange—Section 5
9.5 Cheque—Section 6
9.6 Classification of Negotiable Instruments
9.7 Maturity of Negotiable Instruments
9.8 Negotiation and Endorsement
9.9 Liability of Parties to Negotiable Instrument
9.10 Crossing of Cheque
9.11 Payment of Cheque
9.12 Dishonour of Cheques
9.13 Material Alteration
9.14 Dishonour and Discharge
9.15 International Law Relating to Negotiable Instrument
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
10. Payment of Bonus Act, 1965
10.1 Applicability of the Act
10.2 Meaning of Bonus and Coverage
10.3 Definitions
10.4 Eligibility for Bonus
10.5 Payment of Bonus
10.6 Newly Set-up Establishments
10.7 Settlement of Disputes
10.8 Application of Act to Public Sector Establishments
10.9 Administration of Act
10.10 Amount Payable as Bonus
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
11. Employees Provident Fund and Miscellaneous Provisions Act, 1952
11.1 Objective and Applicability of the Act
11.2 Definitions
11.3 Employees Provident Funds Scheme
11.4 Employees’ Pension Scheme
11.5 Employees Deposit Linked Insurance (EDLI) Scheme
11.6 Protection of Amount Due
11.7 Penalties
11.8 Administration
11.9 Other Provisions
11.10 Duties of Employer as to Submission of Returns
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
12. Payment of Gratuity Act, 1972
12.1 Objective and Applicability of the Act
12.2 Definitions
12.3 Payment of Gratuity
12.4 Forfeiture of Gratuity
12.5 Administration
12.6 Penalties
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
13. Nature of a Company
13.1 Applicability of the Companies Act, 1956
13.2 Meaning of a Company
13.3 Classification of Companies
13.4 Features of a Company
13.5 Exceptions to Limited Liability
13.6 Corporate Veil—Rule of Separate Legal Identity
13.7 Lifting of Corporate Veil
13.8 Types of Companies
13.9 Conversion of Private Company to Public or Vice Versa
13.10 Miscellaneous
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
14. Incorporation of a Company
14.1 Promoters
14.2 Pre-incorporation or Preliminary Contracts
14.3 Procedure for Incorporation of a Company
14.4 Memorandum of Association
14.5 Changes in Memorandum of Association
14.6 Articles of Association
14.7 Alteration of Articles—Section 31
14.8 Doctrine of Ultra Vires
14.9 Effect of Memorandum and Articles
14.10 Doctrine of Constructive Notice
14.11 Doctrine of Indoor Management
14.12 Service of Documents
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
15. Prospectus
15.1 Meaning and Issue of Prospectus
15.2 Contents of Prospectus
15.3 Registration of Prospectus
15.4 Documents Deemed to be Prospectus
15.5 Liability for Misstatement in Prospectus
15.6 Other Penalties
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
16. Allotment and Membership in Company
16.1 Allotment of Shares
16.2 Application to Stock Exchange
16.3 Effect of Irregular Allotment
16.4 Return of Allotment
16.5 Underwriting and Brokerage Commission
16.6 Membership in Company
16.7 Capacity to Become a Member
16.8 Register and Index of Members
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
17. Share Capital
17.1 Overview of Shares
17.2 Issue of Share Certificates
17.3 Voting Rights of Shareholders
17.4 Issue of Shares at Premium
17.5 Issue of Shares at Discount
17.6 Issue of Sweat Equity Shares
17.7 Preference Share Capital
17.8 Further Issue of Capital
17.9 Buy-back of Shares
17.10 Bonus Issue, Calls, Alteration, Forfeiture & Surrender of Shares
17.11 Reduction of Share Capital
17.12 Transfer of Shares
17.13 Transmission of Shares
17.14 Refusal to Transfer of Shares
17.15 Miscellaneous
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
18. Public Deposits and Debentures
18.1 Power of Company to Borrow
18.2 Public Deposits
18.3 Small Investors
18.4 Offences Relating to Public Deposits
18.5 Issue of Debentures
18.6 Steps for Issue of Debentures
18.7 Registration of Charges
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
19. General Meetings
19.1 Meaning of Meeting
19.2 Authority to Call a General Meeting
19.3 Notice to Call a General Meeting
19.4 Quorum for a General Meeting
19.5 Conduct of a General Meeting
19.6 Resolutions
19.7 Minutes of Meeting
19.8 Statutory Meeting
19.9 Annual General Meeting
19.10 Extraordinary General Meeting
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
20. National Company Law and Appellate Tribunal
20.1 Constitution of National Company Law Tribunal
20.2 Constitution of National Company Law Appellate Tribunal
21. Company Law in Computerized Environment
21.1 MCA-21 PROJECT
21.2 E-Forms and E-Filing
21.3 DIN and Digital Signatures
Self-Review Questions (Including Previous Years’ Examination Questions)
Hints and Answers
Part II: Ethics
Part 2 Ethics
22. Business Ethics
22.1 Introduction to Ethics
22.2 Ethical Dilemma
22.3 Morals Vs Ethics
22.4 Ethical Influence on Business Strategy
Self-Review Questions (Including Previous Years’ Examination Questions)
23. Corporate Governance
23.1 Corporate Governance
23.2 Corporate Social Responsibility
23.3 Global Reporting Initiatives (GRI)
23.4 International Developments in CSR
Self-Review Questions (Including Previous Years’ Examination Questions)
24. Workplace Ethics
24.1 Workplace Ethics
24.2 Ethical Issues at Workplace
24.3 Discrimination and Harassment
Self-Review Questions (Including Previous Years’ Examination Questions)
25. Environment Ethics
25.1 Environment Ethics
25.2 Sustainable Development
25.3 Pollution and Resource Depletion
25.4 Conservation of Natural Resources
25.5 Benefits of Eco-Friendly Practices
25.6 Green Accounting
25.7 Developments in Environment Protection in India
Self-Review Questions (Including Previous Years’ Examination Questions)
26. Ethics in Marketing
26.1 Need for Ethics in Marketing
26.2 Healthy Competition
26.3 Consumer Welfare
26.4 Consumer Protection in India
Self-Review Questions (Including Previous Years’ Examination Questions)
27. Ethics in Accounting and Finance
27.1 Importance of Ethics in Accounting and Finance
27.2 Fundamental Principles Relating to Ethics in Finance and Accounting
27.3 Ethical Threats in Accounting and Finance
27.4 Safeguards to Reduce or Eliminate Ethical Threats
27.5 Ethical Conflict Resolution
Self-Review Questions (Including Previous Years’ Examination Questions)
Part III: Communication
Part 3 Communication
28. Essentials of Communication
28.1 Communication and Its Importance
28.2 Formal Communication
28.3 Informal Communication or Grapevine
28.4 Interdepartmental Communication
28.5 Communication Medium
28.6 Effective Communication
28.7 Business Communication
28.8 Planning Business Messages
Self-Review Questions (Including Previous Years’ Examination Questions)
29. Interpersonal Skills
29.1 Interpersonal Communication
29.2 Active Listening and Critical Thinking
29.3 Emotional Intelligence
Self-Review Questions (Including Previous Years’ Examination Questions)
30. Group Dynamics
30.1 Groups
30.2 Team Roles
30.3 Group Conflicts
30.4 Consensus Building
30.5 Negotiating and Bargaining
Self-Review Questions (Including Previous Years’ Examination Questions)
31. Communication Ethics
31.1 Ethical Communication
31.2 Ethical Dilemmas in Communication
31.3 Advantages of Ethical Communication
Self-Review Questions (Including Previous Years’ Examination Questions)
32. Corporate Culture
32.1 Meaning of Corporate Culture
32.2 Change Management
32.3 Innovation
Self-Review Questions (Including Previous Years’ Examination Questions)
33. Communication in Business Environment
33.1 Notice of an Annual General Meeting
33.2 Minutes of the Annual General Meeting
33.3 Notice of Statutory Meeting
33.4 Minutes of Statutory Meeting
33.5 Notice of First Board Meeting
33.6 Notice of any Subsequent Board Meeting
33.7 Minutes of First Board Meeting
33.8 Chairman’s Speech
33.9 Corporate Press Release
33.10 Corporate Announcement at Stock Exchanges
Self-Review Questions (Including Previous Years’ Examination Questions)
34. Legal Deeds and Documents
34.1 Meaning of Document, Instrument and Deed
34.2 Partnership Deed
34.3 Power of Attorney
34.4 Lease Deed
34.5 Affidavit
34.6 Indemnity Bond
34.7 Gift Deed
34.8 Annual Report
Self-Review Questions (Including Previous Years’ Examination Questions)
Appendix
Appendix
Model Test Paper I
Model Test Paper II

Citation preview

Contents

Law, Ethics and Communication (For CA–IPCC)

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Contents

ABOUT THE AUTHOR BS Jolly is a Chartered Accountant and a Company Secretary. He also has a MBA in Finance to his credit. Having done his graduation from Punjab University, Chandigarh with first position in his department, he completed his chartered accountancy and company secretaryship courses in the first attempt. He completed his CA in 1988 just at the age of 20, securing 39th merit position in the intermediate examinations, getting thereby the distinction of being one of the youngest aspirants to qualify the CA examination. Mr. Jolly has more than 23 years of professional experience at senior positions in the industry in financial planning, accounting, auditing, taxation, legal and corporate law matters, among others. Now based in Chandigarh, he is at the forefront of developing e-learning solutions for students of professional courses such as CA, CS, CWA and Law. His venture “coursemateonline” (http://www. coursemateonline.com) offers digital content for self-paced learning over internet and also offline learning solutions.

Contents

Law, Ethics and Communication (For CA–IPCC) B S Jolly Chartered Accountant and Educational Consultant Chandigarh

Tata McGraw Hill Education Private Limited NEW DELHI McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto

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Tata McGraw-Hill Published by the Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Law, Ethics and Communication Copyright © 2012 by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited. ISBN (13 digit): 978-1-25-900179-6 ISBN (10 digit): 1-25-900179-2 Vice President and Managing Director: Ajay Shukla Head—Higher Education Publishing and Marketing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Associate Sponsoring Editor: Hemant K Jha Editorial Researcher: Silvi Dua Executive (Editorial Services): Yogesh Kumar Senior Production Manager: Manohar Lal Senior Production Executive: Atul Gupta Marketing Manager—Higher Education: Vijay Sarathi Assistant Product Manager: Daisy Sachdeva Graphic Designer (Cover Design): Meenu Raghav General Manager—Production: Rajender P Ghansela Manager—Production: Reji Kumar Information contained in this work has been obtained by Tata McGraw-Hill, from sources believed to be reliable. However, neither Tata McGraw-Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw-Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw-Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Tej Composers, WZ 391, Madipur, New Delhi 110 063 and printed at Gopal Jee Enterprises, 190/5 Main Road, Maujpur, Delhi 110 053 Cover Printer: SDR RCXCRRXHRYCDR

To My Parents

PREFACE All of us belong to the civil society, which is bound and regulated by certain rules, called as laws, which suit various needs and value systems. There are several branches of law, such as civil law, criminal law, international law, constitutional law, etc. Every law regulates and controls a particular field of activity. Mercantile law is that part of civil law that regulates trading and commercial activities of the people in the society. It groups together laws that are considered important for men in business, and includes laws relating to various contracts, partnerships, companies, negotiable instruments, insurance, carriage of goods, arbitration, etc. Similarly, certain laws have been created for the welfare of employees and workers in factories, shops and other commercial establishments. Then there are laws regulating creation, operation and management of companies. All these laws, grouped together, are referred to in common parlance as ‘business laws’. In addition to the laws, ethics and morals govern our working culture and lie at the foundation of any profession. For the students of chartered accountancy, understanding ethics is perhaps the first and most important part of curriculum, since the responsibility of finance and accounts professionals extend beyond any particular organization, and the nature of their profession demands acting in public interest. Besides this, corporate governance, corporate social responsibility, sensitivity to environment and consumer interest are some issues which a Chartered Accountant is expected to encounter and resolve, irrespective of whether he is employed in any organization or practices the profession independently. Finally, good communication skills and sound knowledge of legal deeds and documents used in routine business matters are imperative for a professional and is not a matter of choice. As such, each student of chartered accountancy course is expected to have working knowledge of the prevalent ‘Law, Ethics and Communication’ and their practical application in commercial situations. The present work covering the syllabus prescribed by Institute of Chartered Accountants of India for the students of Integrated Professional Competency Course (IPCC), has been divided into 3 parts as follows:

Part I Section A: The Indian Contract Act, 1872 Section B: Other Business Laws 1. The Negotiable Instruments Act, 1881 2. The Payment of Bonus Act, 1965 3. The Employees Provident Fund & Miscellaneous Provisions Act, 1952 4. The Payment of Gratuity Act, 1972 Section C: Companies Act, 1956

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Preface

Part II Business Ethics

Part III Business Communication In order to facilitate easy understanding for the benefit of the students, the book incorporates the following features: Chapters arranged in a logical sequence Easy and simple language, avoiding technical or legal jargons Concise yet comprehensive coverage of the syllabus Numerous examples for understanding application of concepts in practical situations Self-review questions (including up-to-date previous years’ examination questions) with hints and answers Model Test Paper at the end of the book (with answers) Although every effort has been made to make this work free from any mistakes and deficiencies, still the author shall be grateful to the readers for pointing out anything that might have crept in inadvertently. Feedback, comments and suggestions for further improvement in the book are always welcome. I would like to acknowledge the support of team at Tata McGraw-Hill for the painstaking work and continuous engagement in bringing out the present work. Also, I humbly acknowledge the support and patience of my wife and children, the tips to improve the work given by my brother and professional partner, and all other well-wishers who understood me and provided the encouragement to complete the present project. BS Jolly

Preface

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SYLLABUS CA-IPCC Examination PAPER 2: LAW, ETHICS AND COMMUNICATION (One paper: Three hours — 100 Marks) Level of knowledge: Working knowledge

PART I: LAW (60 MARKS) Objective: To test working knowledge of business laws and company law and their practical application in commercial situations.

Business Laws (30 Marks) 1. 2. 3. 4. 5.

The Indian Contract Act, 1872 The Negotiable Instruments Act, 1881 The Payment of Bonus Act, 1965 The Employees Provident Fund and Miscellaneous Provisions Act, 1952 The Payment of Gratuity Act, 1972

Company Law (30 Marks) Companies Act, 1956 – Sections 1 to 197 (a) Preliminary (b) Board of company law administration National Company Law Tribunal; Appellate Tribunal (c) Incorporation of company and matters incidental thereto (d) Prospectus and allotment, and other matters relating to use of shares or debentures (e) Share capital and debentures (f) Registration of charges (g) Management and administration – general provisions – registered office and name, restrictions on commencement of business, registers of members and debentures holders, foreign registers of members

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Syllabus

or debenture holders, annual returns, general provisions regarding registers and returns, meetings and proceedings. (h) Company law in a computerized environment – e-filing.

Part II: ETHICS (20 Marks) Objective: To have an understanding of ethical issues in business. 1. Introduction to Business Ethics The nature, purpose of ethics and morals for organizational interests; ethics and conflict of interests; ethical and social implications of business policies and decisions; corporate social responsibility; ethical issues in corporate governance. 2. Environment Issues Protecting the natural environment – prevention of pollution and depletion of natural resources; conservation of natural resources. 3. Ethics in Workplace Individual in the organization, discrimination, harassment, gender equality. 4. Ethics in Marketing and Consumer Protection Healthy competition and protecting consumer’s interest. 5. Ethics in Accounting and Finance Importance, issues and common problems.

Part III: COMMUNICATION (20 Marks) Objective: To nurture and develop the communication and behavioural skills relating to business. 1. Elements of Communication (a) Forms of communication: formal and informal, interdepartmental, verbal and nonverbal; active listening and critical thinking (b) Presentation skills, including conducting meeting, press conference (c) Planning and composing business messages (d) Communication channels (e) Communicating corporate culture, change, innovative spirits (f) Communication breakdowns (g) Communication ethics (h) Groups dynamics; handling group conflicts, consensus building; influencing and persuasion skills; negotiating and bargaining (i) Emotional intelligence - emotional quotient (j) Soft skills - personality traits; interpersonal skills; leadership 2. Communication in Business Environment (a) Business meetings – notice, agenda, minutes, chairperson’s speech (b) Press releases (c) Corporate announcements by stock exchanges (d) Reporting of proceedings of a meeting 3. Basic Understanding of Legal Deeds and Documents

Syllabus

(a) (b) (c) (d) (e) (f) (g) (h)

Partnership deed Power-of-Attorney Lease deed Affidavit Indemnity bond Gift deed Memorandum and articles of association of a company Annual Report of a company

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CONTENTS Preface Syllabus

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Part I: Law

1

1. Nature of Contract 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10

3

Applicability of the Indian Contract Act, 1872 3 Meaning of Agreement 3 Meaning of Contract 4 Essential Elements of a Valid Contract—Section 10 5 Types of Contract 6 Essentials of an Offer 9 Essentials of an Acceptance 13 Rules Regarding Communication of Offer and Acceptance 15 Revocation of Offer and Acceptance 16 Lapse of an Offer 17 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 19

2. Consideration and Other Essentials 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10

Meaning of Consideration 21 Legal Rules Governing a Valid Consideration 22 Effect of Illegal Object or Consideration 24 Agreements Opposed to Public Policy 25 Stranger to a Contract 26 Agreements without Consideration 26 Parties Competent to Contract—Section 11 27 Agreements by a Minor 28 Agreements by Persons of Unsound Mind—Section 12 Agreements by Persons Disqualified by Law 30

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21

29

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2.11 Free Consent 30 2.12 Misrepresentation—Section 18 35 2.13 Mistake—Sections 20, 21, 22 36 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 40

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3. Void, Contingent and Quasi-contracts 3.1 3.2 3.3 3.4 3.5

Void Agreements 41 Agreements by Way of Wager 41 Agreements to do Impossible Acts— Section 56 42 Contingent Contract 44 Quasi-contracts 46 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 50

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4. Performance and Discharge 4.1 4.2 4.3 4.4 4.5 4.6 4.7

Discharge of Contract 51 Performance of Contract 51 Assignment & Succession of Contracts 55 Performance of Reciprocal Promises 55 Time and Place of Performance 57 Appropriation of Payments 58 Other Modes of Discharge of a Contract 59 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 61

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5. Breach of Contract 5.1 Meaning of Breach of Contract 63 5.2 Remedies of Breach of Contract Under Indian Contract Act, 1872 64 5.3 Suit for Specific Performance 65 5.4 Suit for Injunction 65 5.5 Suit for ‘Quantum Meruit’ 66 5.6 Assessment of Damages on Breach 67 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 70

6. Indemnity and Guarantee 6.1 Contract of Indemnity 71

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Contents

6.2 6.3 6.4 6.5 6.6

Rights of Parties in a Contract of Indemnity 72 Contract of Guarantee 72 Types of Guarantee 75 Discharge of Surety 75 Rights of Surety 77 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 80

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7. Bailment and Pledge 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12

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Contract of Bailment 82 Kinds of Bailment 83 Duties of Bailor = Rights of Bailee 84 Duties of Bailee = Rights of Bailor 84 Rights of Bailee 85 Rights of Bailor and Bailee Against Wrongdoer 87 Finder of Goods 87 Termination of Bailment 88 Pledge 88 Rights of Pawnee 89 Duties of Pawnee = Rights of Pawnor 89 Duties of Pawnor 90 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 91

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8. Agency 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9

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Contract of Agency 92 Creation of Agency 93 Scope and Extent of Authority of Agent 96 Delegation of Authority by Agent (Sub-Agent) 97 Duties of an Agent = Rights of a Principal 98 Rights of an Agent = Duties of a Principal 99 Personal Liability of an Agent 100 Liability of Principal to Third Parties 100 Termination or Revocation of Agency—Sections 201–207 101 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 104

9. Negotiable Instruments Act, 1881 9.1 Applicability of the Negotiable Instruments Act, 1881

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105 105

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9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 9.13 9.14 9.15

Negotiable Instrument 106 Promissory Note—Section 4 110 Bill of Exchange—Section 5 112 Cheque—Section 6 114 Classification of Negotiable Instruments 115 Maturity of Negotiable Instruments 118 Negotiation and Endorsement 119 Liability of Parties to Negotiable Instrument 122 Crossing of Cheque 125 Payment of Cheque 128 Dishonour of Cheques 130 Material Alteration 132 Dishonour and Discharge 133 International Law Relating to Negotiable Instrument 137 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 143

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10. Payment of Bonus Act, 1965 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10

145

Applicability of the Act 145 Meaning of Bonus and Coverage 145 Definitions 147 Eligibility for Bonus 150 Payment of Bonus 151 Newly Set-up Establishments 153 Settlement of Disputes 154 Application of Act to Public Sector Establishments 155 Administration of Act 156 Amount Payable as Bonus 157 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 166

11. Employees Provident Fund and Miscellaneous Provisions Act, 1952 11.1 11.2 11.3 11.4 11.5 11.6 11.7

Objective and Applicability of the Act 168 Definitions 169 Employees Provident Funds Scheme 171 Employees’ Pension Scheme 175 Employees Deposit Linked Insurance (EDLI) Scheme Protection of Amount Due 178 Penalties 179

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Contents

11.8 Administration 179 11.9 Other Provisions 180 11.10 Duties of Employer as to Submission of Returns 183 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 185

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12. Payment of Gratuity Act, 1972 12.1 12.2 12.3 12.4 12.5 12.6

Objective and Applicability of the Act 186 Definitions 187 Payment of Gratuity 189 Forfeiture of Gratuity 192 Administration 193 Penalties 195 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 197

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13. Nature of a Company 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10

Applicability of the Companies Act, 1956 198 Meaning of a Company 198 Classification of Companies 199 Features of a Company 199 Exceptions to Limited Liability 200 Corporate Veil—Rule of Separate Legal Identity 201 Lifting of Corporate Veil 202 Types of Companies 203 Conversion of Private Company to Public or Vice Versa 208 Miscellaneous 209 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 212

14. Incorporation of a Company 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8

Promoters 213 Pre-incorporation or Preliminary Contracts 214 Procedure for Incorporation of a Company 216 Memorandum of Association 219 Changes in Memorandum of Association 221 Articles of Association 225 Alteration of Articles—Section 31 227 Doctrine of Ultra Vires 227

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Contents

Effect of Memorandum and Articles 228 Doctrine of Constructive Notice 230 Doctrine of Indoor Management 230 Service of Documents 231 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 235

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15. Prospectus 15.1 15.2 15.3 15.4 15.5 15.6

Meaning and Issue of Prospectus 237 Contents of Prospectus 239 Registration of Prospectus 242 Documents Deemed to be Prospectus 243 Liability for Misstatement in Prospectus 247 Other Penalties 249 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 251

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16. Allotment and Membership in Company 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8

Allotment of Shares 252 Application to Stock Exchange 254 Effect of Irregular Allotment 255 Return of Allotment 257 Underwriting and Brokerage Commission 257 Membership in Company 258 Capacity to Become a Member 259 Register and Index of Members 260 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 263

17. Share Capital 17.1 17.2 17.3 17.4 17.5 17.6 17.7 17.8 17.9

Overview of Shares 264 Issue of Share Certificates 266 Voting Rights of Shareholders 268 Issue of Shares at Premium 270 Issue of Shares at Discount 270 Issue of Sweat Equity Shares 270 Preference Share Capital 271 Further Issue of Capital 272 Buy-back of Shares 274

252

262

264

Contents

17.10 17.11 17.12 17.13 17.14 17.15

Bonus Issue, Calls, Alteration, Forfeiture & Surrender of Shares 276 Reduction of Share Capital 280 Transfer of Shares 282 Transmission of Shares 284 Refusal to Transfer of Shares 284 Miscellaneous 286 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 289

288

18. Public Deposits and Debentures 18.1 18.2 18.3 18.4 18.5 18.6 18.7

291

Power of Company to Borrow 291 Public Deposits 292 Small Investors 295 Offences Relating to Public Deposits 295 Issue of Debentures 296 Steps for Issue of Debentures 296 Registration of Charges 299 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 302

302

19. General Meetings 19.1 19.2 19.3 19.4 19.5 19.6 19.7 19.8 19.9 19.10

303

Meaning of Meeting 303 Authority to Call a General Meeting 304 Notice to Call a General Meeting 304 Quorum for a General Meeting 306 Conduct of a General Meeting 308 Resolutions 311 Minutes of Meeting 313 Statutory Meeting 315 Annual General Meeting 316 Extraordinary General Meeting 318 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 324

20. National Company Law and Appellate Tribunal 20.1 Constitution of National Company Law Tribunal 326 20.2 Constitution of National Company Law Appellate Tribunal

21. Company Law in Computerized Environment 21.1 MCA-21 Project 329

xix

319

326 327

329

xx

Contents

21.2 E-Forms and E-Filing 331 21.3 DIN and Digital Signatures 332 Self-Review Questions (Including Previous Years’ Examination Questions) Hints and Answers 333

333

Part II: Ethics

335

22. Business Ethics 22.1 22.2 22.3 22.4

Introduction to Ethics 337 Ethical Dilemma 339 Morals Vs Ethics 340 Ethical Influence on Business Strategy 340 Self-Review Questions (Including Previous Years’ Examination Questions)

337

341

23. Corporate Governance 23.1 23.2 23.3 23.4

Corporate Governance 342 Corporate Social Responsibility 345 Global Reporting Initiatives (GRI) 348 International Developments in CSR 349 Self-Review Questions (Including Previous Years’ Examination Questions)

342

350

24. Workplace Ethics 24.1 Workplace Ethics 352 24.2 Ethical Issues at Workplace 353 24.3 Discrimination and Harassment 354 Self-Review Questions (Including Previous Years’ Examination Questions)

352

356

25. Environment Ethics 25.1 25.2 25.3 25.4 25.5 25.6 25.7

Environment Ethics 357 Sustainable Development 358 Pollution and Resource Depletion 359 Conservation of Natural Resources 360 Benefits of Eco-Friendly Practices 361 Green Accounting 361 Developments in Environment Protection in India 361 Self-Review Questions (Including Previous Years’ Examination Questions)

26. Ethics in Marketing 26.1 Need for Ethics in Marketing 363 26.2 Healthy Competition 363

357

362

363

Contents

26.3 Consumer Welfare 366 26.4 Consumer Protection in India 366 Self-Review Questions (Including Previous Years’ Examination Questions)

368

27. Ethics in Accounting and Finance 27.1 27.2 27.3 27.4 27.5

Importance of Ethics in Accounting and Finance 369 Fundamental Principles Relating to Ethics in Finance and Accounting 370 Ethical Threats in Accounting and Finance 371 Safeguards to Reduce or Eliminate Ethical Threats 372 Ethical Conflict Resolution 373 Self-Review Questions (Including Previous Years’ Examination Questions)

369

374

Part III: Communication

375

28. Essentials of Communication 28.1 28.2 28.3 28.4 28.5 28.6 28.7 28.8

Communication and Its Importance 377 Formal Communication 380 Informal Communication or Grapevine 381 Interdepartmental Communication 383 Communication Medium 383 Effective Communication 385 Business Communication 386 Planning Business Messages 388 Self-Review Questions (Including Previous Years’ Examination Questions)

377

390

29. Interpersonal Skills 29.1 Interpersonal Communication 391 29.2 Active Listening and Critical Thinking 392 29.3 Emotional Intelligence 394 Self-Review Questions (Including Previous Years’ Examination Questions)

391

396

30. Group Dynamics 30.1 30.2 30.3 30.4 30.5

Groups 397 Team Roles 398 Group Conflicts 399 Consensus Building 400 Negotiating and Bargaining 400 Self-Review Questions (Including Previous Years’ Examination Questions)

xxi

397

401

xxii

Contents

31. Communication Ethics

402

31.1 Ethical Communication 402 31.2 Ethical Dilemmas in Communication 403 31.3 Advantages of Ethical Communication 404 Self-Review Questions (Including Previous Years’ Examination Questions)

404

32. Corporate Culture

405

32.1 Meaning of Corporate Culture 405 32.2 Change Management 407 32.3 Innovation 408 Self-Review Questions (Including Previous Years’ Examination Questions)

409

33. Communication in Business Environment 33.1 33.2 33.3 33.4 33.5 33.6 33.7 33.8 33.9 33.10

Notice of an Annual General Meeting 410 Minutes of the Annual General Meeting 411 Notice of Statutory Meeting 413 Minutes of Statutory Meeting 413 Notice of First Board Meeting 414 Notice of any Subsequent Board Meeting 415 Minutes of First Board Meeting 415 Chairman’s Speech 418 Corporate Press Release 418 Corporate Announcement at Stock Exchanges 420 Self-Review Questions (Including Previous Years’ Examination Questions)

410

422

34. Legal Deeds and Documents 34.1 34.2 34.3 34.4 34.5 34.6 34.7 34.8

423

Meaning of Document, Instrument and Deed 423 Partnership Deed 424 Power of Attorney 429 Lease Deed 431 Affidavit 433 Indemnity Bond 434 Gift Deed 436 Annual Report 437 Self-Review Questions (Including Previous Years’ Examination Questions)

Appendix

438

441

Model Test Paper I

443

Model Test Paper II

454

Nature of Contract

Part 1

Law Section A: 1. 2. 3. 4. 5. 6. 7. 8.

Indian Contract Act, 1872

Nature of Contract Consideration and Other Essentials Void, Contingent and Quasi-contracts Performance and Discharge Breach of Contract Indemnity and Guarantee Bailment and Pledge Agency

Section B:

Other Business Laws

9. Negotiable Instruments Act, 1881 10. Payment of Bonus Act, 1965 11. Employees Provident Fund and Miscellaneous Provisions Act, 1952 12. Payment of Gratuity Act, 1972

Section C: Companies Act, 1956 13. 14. 15. 16. 17. 18. 19. 20. 21.

Nature of a Company Incorporation of a Company Prospectus Allotment and Membership in Company Share Capital Public Deposits and Debentures General Meetings National Company Law and Appellate Tribunal Company Law in Computerized Environment

1

Nature of Contract

Section A: Indian Contract Act, 1872

1

NATURE

OF

CONTRACT

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning of the term ‘agreement’ and how it differs from a ‘contract’ Essentials of a valid contract ������������������������������������������������������������������������������������� Essentials of a valid offer and acceptance Rules regarding communication of an offer, its acceptance and revocation How does an offer lapse?

1.1

APPLICABILITY OF THE INDIAN CONTRACT ACT, 1872

Applicability of the Act—Section 1

Overriding Effect

1.2

MEANING OF AGREEMENT

Definition of Agreement—Section 2(e)

Essential Elements of an Agreement Consensus-ad-idem

3

4

Law, Ethics and Communication

Proposal—Section 2(a) proposal. offer

Promise—Section 2(b) promise.

Promisor—Section 2(c) promisor

Promisee—Section 2(c) promisee.

1.3

MEANING OF CONTRACT

Definition of Contract—Section 2(h)

All contracts are agreements but all agreements are not contracts.

Example H promises to pay his wife W ` 10,000 every month for household expenses. However, later on, he refuses to pay. This is not a valid contract since it is purely a domestic arrangement between husband and wife. (Balfour vs Balfour)

Table 1.1

Differences between an agreement and a contract Agreement

Contract

Nature of Contract

1.4

ESSENTIAL ELEMENTS OF A VALID CONTRACT—SECTION 10

Meaning of ‘Consideration’—Section 2(d) Quid-pro-quo

something in return

Essentials of a Valid Contract legal relationship Lawful forbidden by law defeat the provisions of any law injury immoral

opposed to public policy

competent to contract Free Consent consensus-ad-idem

5

6

Law, Ethics and Communication

not expressly declared void

possible to perform writing, stamped or registered

1.5

TYPES OF CONTRACT

Classification of Contracts—Based on Enforceability 1. Valid contract—section 2(h)

2. Voidable contract—section 2(i)

In the following situations, a contract becomes voidable:

3. Void agreement—section 2(g)

4. Void contract—section 2(j) In the following situations, a valid contract becomes void:

5. Unenforceable contract

Nature of Contract

6. Illegal contract

Classification of Contracts—Based on Creation 1. Express contract

2. Implied contract or tacit contract

3. Quasi contract

Classification of Contracts—Based on Execution 1. Executed contract

2. Executory contract

3. Partly executed/partly executory contract

4. Unilateral contract

5. Bilateral contract

7

8

Law, Ethics and Communication

Table 1.2

Differences between a void agreement and a void contract Void Agreement

Table 1.3

Differences between a void agreement and a voidable contract Void Agreement

Table 1.4

Void Contract

Voidable Contract

Differences between a voidable contract and a void contract Voidable Contract

Void Contract

Nature of Contract

Table 1.5

Differences between an illegal agreement and a void agreement Illegal Agreement

1.6

Void Agreement

ESSENTIALS OF AN OFFER

Examples 1. M makes a bid in an auction for sale of flats. This is an implied offer made by M to buy a flat. 2. C orders and takes lunch in a restaurant. This is an implied offer made by C to pay for the food consumed. 3. A shoeshine boy starts polishing G’s shoes without being asked to. This is an implied offer by the shoeshine boy to G offering his services for some money. 4. A local bus is plying on the road to take passengers from one stop to another. This is an implied offer by the bus service company to offer transportation services in exchange for the fare.

Classification of Offer

1. Specific offer

2. General offer

9

10

Law, Ethics and Communication

Example P offers a reward of ` 1000 to anyone who finds his lost dog. This is a general offer by P to anyone who finds his dog.

3. Cross offer

Example A offers to sell his car for ` 2 lakh to B through a letter. At the same time B offers to buy A’s car for ` 1.75 lakh, without knowing that A has already offered his car on sale. These are cross offers by A to B and B to A.

4. Counter offer

Example A offers to sell his car for ` 2 lakh to B. B agrees to buy provided the car is dented and repainted. This is a counter offer by B to A in response to the original offer of A to B.

5. Open offer (Standing or continuing offer)

Example M agrees to supply grains to XYZ Company at a certain price as will be ordered by the company during a calendar year. It is an open or standing offer. Each order given by XYZ Company will be an acceptance of the offer and M will be bound to supply the ordered quantity of grains.

Legal Rules Governing a Valid Offer 1. Intention to create a legal relationship

2. Clear and certain terms

Nature of Contract

11

Example An actress was engaged for a tour. The agreement provided that if the party went to London in next season, she would be engaged at a salary to be mutually agreed. There is no contract as the terms are not definite and incapable of being made definite without further agreement of the parties. (Lotus vs Roberts)

3. Communication to offeree

Examples 1. G offers a reward to anyone who returns his lost nephew. L finds and brings the nephew without any knowledge of the offer of reward. L is not entitled to the reward because L cannot be said to have accepted the offer which he was not even aware of. (Lalman Shukla vs Gauri Dutt) 2. K through an advertisement in a newspaper offers a reward to anyone who returns his lost dog. F on reading this advertisement finds and brings the dog. The offer has thus been communicated to F, who is now entitled to the reward by accepting the general offer made by K.

4. Seek, express and acceptance

Example A offers to sell his car to B and says that if B does not reply within a week, it will be deemed that B has accepted the offer. B does not reply within the prescribed time. There is no contract since the offer is not valid. (Felthhouse vs Bindley, Ramji Daya Wala vs Invest Import)

5. Special terms and conditions

Examples 1. M purchased an airline ticket for travelling from Chennai to New Delhi. On the back of the ticket, certain conditions were printed in very small font, one of which excluded the liability of the airline company for any loss, injury or delay to the passenger or his luggage. However, there was nothing on the ticket to draw attention to these terms and conditions and M never looked at the back of the ticket. His luggage got lost in the transit. M will be entitled to claim damages and not bound by the special terms and conditions since there was no indication thereof drawing his attention. (Mukul Datta vs Indian Airlines) Contd.

12

Law, Ethics and Communication

2. M deposits his bag in a cloakroom at a railway station. On the face of the receipt ticket issued by the cloakroom, there was printed “See Back” in bold red font. One of the conditions printed on the back limited the liability of the railway authorities for any package to ` 1,000. M’s bag was lost. While claiming damages equivalent to the actual value of his bag, which was ` 5,000, he argued that he had not read the terms and conditions on the back of the receipt. In this case, railway authorities had given reasonably sufficient notice on the face of the receipt as to existence of special terms and conditions and, therefore, M will be bound by these even though he had not read them. He will get ` 1,000 only as damages. (Parker vs SE Rail Co.) 3. R and her husband hired a room at a hotel and paid for a week’s boarding and lodging in advance. Before the reception manger handed over the keys of the room to R, he asked the couple if they were carrying any valuables so that these can be kept at the front desk for safe custody. He also informed that the hotel owners will not be held responsible for articles lost or stolen unless handed to the front desk for safe custody. R did not hand over the valuables and a thief entered the hotel room and stole some of their property. R cannot recover the damages from hotel owners since the terms and conditions were explicitly informed to her before they accepted the room at the hotel. (Olley vs Marlborough) 4. L gave her clothes to laundry for washing where she was given a receipt. One point in the terms and conditions on the receipt stated that the laundry will take due care in washing but it is not responsible for any loss if the colours of the clothes are not fast and spoil other clothes. L’s clothes got spoiled by unfast colours of some other clothes. She cannot recover any damages from the laundry because by taking the receipt she was bound by a tacit acceptance of the conditions of the laundry. (Lily White vs R. Muthuswami) 5. L gave her clothes to laundry for washing where she was given a receipt which mentioned the terms and conditions including that in case of loss or misplacement of clothes, the laundry shall be responsible for only 20% of the value of the garment. The terms are unfair and not reasonable because in effect it means that the laundry can buy the garments at 20% of their value. 6. A transport carrier accepted the goods for transport without any conditions. Subsequently, he issued a circular to the owners of goods limiting his liability for the goods. His existing customers who have already entered into a contract with him will not be bound by the circular since the special conditions were not communicated prior to the date of contract for transport. (Raipur Transport Co. vs Ghanshyam)

6. Offer as distinguished invitation to offer

Examples 1. ITC Ltd. issues an advertisement in a newspaper declaring its intent to sell used machinery. The interested parties were asked to submit their offers quoting the maximum amount which they are ready to pay. This is an example of ITC Ltd. inviting offers to buy the used machinery. 2. Goods are displayed on the shelves of a supermarket with price tags. It is an invitation to offer only. It is only when a customer picks up the merchandise, he is offering to buy the article. This offer is accepted by the cashier when he receives the payment and then it results into a binding contract. (Pharmaceutical Society of Great Britain vs Boots Cash Chemists) Contd.

Nature of Contract

13

3. N advertised in a newspaper for selling old furniture in his office through an auction on a certain date. H, a prospective purchaser, came from a distant place with the intention to buy furniture but the auction was cancelled. He cannot file a suit against N for his loss of time and expenses because the advertisement was merely a declaration of intention to hold auction. (Harris vs Nickerson) 4. L of Mumbai wrote a letter to C of Delhi stating the terms on which he is willing to do business with him. The letter of L is a mere statement of intent and not a business offer. 5. H sent a letter to F asking him, “Will you sell me your car? Please let me know the lowest price acceptable.” F replies back saying, “The lowest price is ` 1,50,000”. H sends the money to F but F refuses to sell. In this case, there is no offer by F to sell his car as he replied only to the second part of F’s question, and reserved his willingness to sell his car. (Harvey vs Facie)

1.7

ESSENTIALS OF AN ACCEPTANCE

Who can accept an offer?

Examples 1. A company manufactured a medicine which was a carbolic ball whose smoke could be inhaled through the nose to cure influenza, cold and other connected ailments. The company issued an advertisement for sale of this medicine. The advertisement also included a reward of ` 1,00,000 to any person who contracted influenza, after using the medicine. Mrs C bought these smoke balls and used them as directed but contracted influenza. Mrs C was entitled to a reward of ` 1,00,000 as she had performed the condition for acceptance. Further as the advertisement did not require any communication of compliance of the condition, it was not necessary to communicate the same. (Carlill vs Carbolic Smoke Ball Co.) 2. M offers a reward of ` 1000 through a newspaper to anyone who traces her lost dog. B after reading this offer, finds M’s dog. He would be entitled to the reward as he had accepted the offer by doing the required act. 3. S boards a bus from Greater Kailash for going to Connaught Place. This is an implied acceptance by S and she is bound to pay the fare.

Rules laid down in case of Carlill vs Carbolic Smoke Ball Co.

14

Law, Ethics and Communication

Legal Rules Governing a Valid Acceptance 1. Acceptance by offeree

Example A school advertised the vacancy for the post of headmaster. The school managing committee after interviewing a lot of candidates finalized P for the post. However, the decision of the committee was not communicated to P. Q was a member of the committee and also a friend of P. Q privately informed P about his selection for the post. In the meantime, the committee changed its decision and appointed R as the headmaster. P filed a suit against the school committee. It was held that the decision to appoint P did not result into a valid contract since the decision was not communicated to P and Q’s information to P did not amount to acceptance since Q alone is not authorized to accept the offer on behalf of the school. (Powell vs Lee)

2. Absolute and unqualified—section 7(1)

Examples 1. N offers to sell his car to M for ` 2 lakh. M accepts the offer and sends ` 1 lakh as advance but subject to the condition that the car shall have to be dented and repainted. This is not a valid acceptance but a counter offer by M to N. 2. N offers to sell his car to M for ` 2 lakh. M accepts the offer but subject to the condition that the car shall have to be dented and repainted. N does not agree. M then conveys his acceptance to the original offer to buy car as it is for ` 2 lakh. The original offer of N was put to an end by M’s counter offer. Therefore, once the offer has ended, its subsequent acceptance is not a valid acceptance.

3. Prescribed mode and manner—section 7(2)

4. Communication to offeror

Nature of Contract

15

Example B sent a draft agreement relating to coal supply to the manager of a railway company for acceptance. The manager approved the draft, signed on the agreement and put the draft in his table drawer intending to send it to B. By oversight, the agreement remained in the drawer and was never sent. There is no contract between B and the railway company since the communication of acceptance has not been given to the offeror. (Brogden vs Metropolitan Railway Company)

5. Within reasonable time

Example A company issued a prospectus in January for subscription to its shares by the members of the public. Mr Patel fills up the form and deposits it in January itself. The company accepts his application for allotment of shares and asks for the allotment money in November. This is not a valid acceptance as the company has not conveyed its acceptance within a reasonable period and Mr Patel is now not bound to buy the shares. (Ramsgate Victoria Hotel Co. vs Montefiore, India Cooperative Navigation and Trading Co. Ltd. vs Padamsey Prem Ji)

6. Acceptance by conduct—Section 8

1.8

RULES REGARDING COMMUNICATION OF OFFER AND ACCEPTANCE

When is the Communication of an Offer Complete?—Section 4

When is the Communication of an Acceptance Complete?—Section 4

16

Law, Ethics and Communication

Example A proposes to sell his house to B for ` 10 lakh through a letter posted on 8th January. B receives the letter on 15th January. He replies back to A conveying his acceptance of the offer through a letter posted on 16th January which is received by A on 20th January. Communication of offer = 15th January when the letter containing offer comes to the knowledge of B Communication of acceptance as against A = 16th January when B posts the acceptance letter Communication of acceptance as against B = 20th January when the letter of acceptance comes to the knowledge of A

What if an Acceptance is Lost in Transit?

1.9

REVOCATION OF OFFER AND ACCEPTANCE

When the Communication of a Revocation is Complete?—Section 4

Acceptance to an Offer is What a Lighted Match is to Gunpowder

When can an Offer be Revoked?—Section 5

Example A proposes to sell his house to B for ` 10 lakh through a letter posted on 8th January. B receives the letter on 15th January. He replies back to A conveying his acceptance of the offer through a letter posted on 16th January which is received by A on 20th January. A may revoke his offer at any time before or at the moment when B posts the acceptance letter on 16th January but not afterwards. To make a valid revocation of his proposal, A should have communicated the revocation through some faster mode (e.g. fax or telegram) which should have reached B before he posted his acceptance on 16th January.

Nature of Contract

17

When can an Acceptance be Revoked?—Section 5

Example A proposes to sell his house to B for ` 10 lakh through a letter posted on 8th January. B receives the letter on 15th January. He replies back to A conveying his acceptance of the offer through a letter posted on 16th January which is received by A on 20th January. Now, B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A on 20th January, but not afterwards.

Consequences where revocation of acceptance arrives before acceptance itself

Consequences where revocation and acceptance arrive simultaneously

Countess of Dunmore vs Alexander Example Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the validity of the acceptance in the light of the following: (i) The telegram of revocation of acceptance was received by Ramaswami before the letter of acceptance. (ii) The telegram of revocation and letter of acceptance both reached together. [May 2006] Answer (i) Yes, the revocation of acceptance by Ramanathan (the acceptor) is valid. (ii) If Ramaswami opens the telegram first (and this would be normally so in case of a rational person) and reads it, the acceptance stands revoked. If he opens the letter first and reads it, revocation of acceptance is not possible as the contract has already been concluded. Alternative answer to (ii): Two communications reaching simultaneously will neutralize each other and there is no agreement due to lack of consensus ad idem.

1.10

LAPSE OF AN OFFER

When does an Offer Lapse?—Section 6 notice of revocation

18

Law, Ethics and Communication

lapse of the time failure of the acceptor death or insanity of the proposer

Other Cases When an Offer Lapses death of the offeree

rejection or by way of counter offer

not accepted in the prescribed manner offer becomes void

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) `

`

[May 2005] `

Nature of Contract

19

`

`

Nov 2008]

May 2004]

May 2006]

Nov 2010] Nov 2011]

Hints and Answers Carlill vs Carbolic Smoke Ball Co

20

Law, Ethics and Communication

Mukul Datta vs Indian Airlines

Carlill vs Carbolic Smoke Ball Co

Consideration and Other Essentials

21

CONSIDERATION AND OTHER ESSENTIALS

2 CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning of the term ‘consideration’ and its importance in a contract Legal rules governing a valid consideration Effect of illegal object or consideration in a contract Agreements opposed to public policy Concept of ‘Privity of Contract’ and rights of a ‘Stranger to Contract’ in exceptional cases Exceptional circumstances where there may be a valid contract even in the absence of consideration Competency of parties to a contract Concept of ‘consensus-ad-idem’ and free consent, and factors vitiating free consent in a contract

2.1

MEANING OF CONSIDERATION

Definition of Consideration—Section 2(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise. Consideration = quid-pro-quo or something in return.

No Consideration, No Contract Any promise without consideration cannot lead to a valid contract since it will be a gratuitous promise.

Example A promised to give ` 50,000 to a building fund of a temple. Later on A declined to pay the said amount. Clearly, the promise of A is gratuitous and there is no consideration for A’s promise to pay, hence the agreement is void. (Abdul Aziz vs Mazum Ali)

22

Law, Ethics and Communication

2.2

LEGAL RULES GOVERNING A VALID CONSIDERATION

1. Consideration must Move at the Desire of Promisor (Privity of Consideration) This fact is supported by the opening words of Section 2(d) which defines consideration: “When, at the desire of the promisor…….” While the consideration must move at the desire of the promisor, it is not necessary that the benefit must accrue personally to the promisor only. It is possible that in a contract the consideration may move to a third party. Examples 1. B, a Zamindar, constructed a drinking water reservoir in a market at the instance of the district collector. To compensate B, the shopkeepers in the said market promised to pay B a commission on articles sold through their shops. There was no consideration because the money was not spent by B at the request of the shopkeepers, but voluntarily for a third person, i.e., the collector and, thus, the contract between B and shopkeepers is void. If the shopkeepers later on refuse to pay B, he cannot recover the amount legally. (Durga Prasad vs Baldeo) 2. S agrees to pay C ` 10,000 at the end of six months if D, who owes this sum to C, fails to pay it. C promises to grant 6 months’ time to D accordingly. There is a valid consideration for S’s promise to pay ` 10,000 although the benefit of the consideration is accruing to D.

2. Consideration may Move from Promisee or Any Person (Doctrine of Constructive Consideration) Section 2(d) defining consideration says: “… the promisee or any other person has done or abstained from doing,…”. This other person (other than promisee) is called stranger to consideration. As long as there is a consideration for a promise, it is immaterial whether the promisee or stranger has furnished it. Example A transfers a property to B under an arrangement that B will pay a monthly annuity for life to C (A’s brother). B makes an agreement with C to pay the annuity. Later on B refuses to pay the annuity to C contending that no consideration has moved to him from A. The contention of B is invalid since Section 2(d) of the Indian Contract Act clearly states that the consideration may move from promisee or any other person, which in the instant case is A. (Chinnayya vs Ramayya)

3. Consideration may be Past, Present or Future Section 2(d) states, “ …..the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, …..” Past consideration is good consideration only if it is given by the promisee at the desire of the promisor.

Consideration and Other Essentials

23

Example A, a minor, was given the benefit of certain services by S: S rendered those services, not voluntarily but at the desire of A. These services were continued even after majority at the request of A who subsequently promised to pay an annuity to S. It was held that the past consideration was a good consideration. Therefore, in the contract for annuity payable by A to S, entered into after A became major, the consideration was services performed by S earlier. (Sindhe vs Abraham)

4. Consideration must be Real and More than What One is Legally Bound to Perform Consideration must be something valuable, real and not illusory. Also, an agreement to do something, which one is legally duty-bound to do, cannot be consideration for a contract. Examples 1. K hires a legal counsel to defend him in a court case for a fee of ` 50,000. After certain hearings, K promises to pay additional ` 25,000 if the suit was successful. The contract for additional fee void for want of consideration since the counsel is under a pre-existing contractual obligation to render the best of his services and try to win the suit. (Ramachandra Chintaman vs Kalaraju) 2. ABC Ltd. has a factory in an area which was disturbed due to civil unrest. It requests the local police authorities to provide protection to its property. The police authorities agree to provide mobile surveillance. However, ABC Ltd. insisted on a stationary guard to be provided and in return it agreed to pay ` 1,000 per day. The agreement to pay daily reward not without consideration. The police, no doubt, are duty-bound to provide protection but they have the discretion of choosing how to do so. The undertaking to provide more protection than what they deemed to be necessary was a consideration for the promise of daily reward. (Classbrook Brothers vs Glamorgan Country Council)

5. No Condition of Adequacy of Consideration—Expl. 2 to Section 25 There is no condition of whether the consideration is adequate or not. However, if later on a dispute arises where any party to the contract alleges coercion or undue influence or fraud, then the adequacy or inadequacy of the consideration becomes an important piece of evidence to decide.

6. Consideration must be Lawful—Section 23 Consideration is unlawful; – if it is forbidden by law. – if it is of such a nature that, if permitted, it would defeat the provisions of any law. – if it is fraudulent. – if it is immoral or opposed to public policy.

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Law, Ethics and Communication

Examples 1. A promises to obtain a secret formula from a government laboratory for B in consideration of ` 1,00,000. The agreement is void as the object of the same is unlawful. 2. A loan granted to the guardian of a minor to enable him execute the marriage of the minor in contravention of the Child Marriage Restraint Act is illegal and hence cannot be recovered. (Srinivas vs Raja Ram Mohan) 3. A’s estate is sold for arrears of land revenue and the law prohibits him from buying the estate back. A enters into an agreement with B to buy the estate from revenue authorities and convey the estate to him upon receiving from him the price which B has paid. The agreement is void since it defeats the purpose and object of the law. 4. P is negotiating a deal to sell his property to T through his broker A. T promises to pay A a sum of ` 1,00,000 if he can get the price lowered by P. The agreement between T and A is void because it implies a fraud by concealment by A on his principal P. 5. P, Q and R entered into an agreement to purchase shares in a company with the purpose of creating artificial demand and inducing other persons to believe that there is huge value in the shares of the company. This is a void agreement as the object of it is to cause loss to others. 6. L lends a sum of money to W instigating her to obtain divorce from her husband and then marry L. This is an immoral agreement and hence void.

2.3

EFFECT OF ILLEGAL OBJECT OR CONSIDERATION

If the illegal part cannot be severed from the legal part of the agreement, the entire contract is void.

Consideration Illegal—Section 24

Example A promises to manage, on behalf of B, his diamond cutting business in Surat as well as manufacture of diamond jewellery made from smuggled diamonds. B promises to pay to A a salary of ` 1,00,000 per month. The agreement is void since the object of A’s promise, and the consideration for B’s promise, being in part unlawful.

Object Illegal—Section 57, 58 Where persons reciprocally promise, firstly, to do certain things which are legal, and, secondly, under specified circumstances to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement. In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.

Consideration and Other Essentials

25

Examples 1. A and B agree that A shall sell B a house for ` 10 lakh, but if B uses it as a gambling house, he shall pay A ` 50 lakh for it. The first set of reciprocal promises, namely, to sell the house and to pay ` 10 lakh for it, is a contract. The second set is for an unlawful object, namely, that B may use the house as a gambling house, and therefore it is a void agreement. 2. A and B agree that A shall pay B ` 10,000 for which B shall afterwards deliver to A either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement for opium delivery.

2.4

AGREEMENTS OPPOSED TO PUBLIC POLICY

1. Trading with alien enemy—Contracts made with persons of a country at war with India, unless made with the permission of the Government, are void. 2. Agreements for stifling prosecution—Contracts for compounding or suppressing of criminal charges for offences of a public nature are illegal and void. 3. Agreements in the nature of champerty and maintenance—A contract of extortionate and not bona fide nature, whereby a party assists another in recovery of any property or promotes litigation, without 4. Agreements for sale of public offices and titles—Agreements for sale of public offices and appointments are void. 5. Agreements in restraint of parental rights—Agreements in nature whereby exercise of parental rights are restricted are void. 6. Marriage brokerage agreements—Any agreement where either of the parties or their parents or any third party receives a certain sum of money in consideration of marriage are void (e.g. dowry). 7. Agreements in restraint of marriage—According to Section 26 of the Indian Contract Act, 1872, every agreement in restraint of the marriage of any person other than a minor is void. 8. Agreements in restraint of trade—According to Section 27 of the Indian Contract Act, 1872, agreements in restraint of trade, whether the restraint is total or partial, are void. 9. Agreements in restraint of legal proceedings—According to Section 28 of the Indian Contract Act, Exceptions to agreements in restraint of legal proceedings (i) If parties agree to submit the dispute to arbitration and agree to abide by its award, such an agreement between the parties is valid. (ii) If parties agree in writing to refer any question already arisen or which may arise in future to arbitration, such an agreement is valid. 10. Agreements interfering with justice—Any agreement for using improper influence of any kind with 11. Agreements to create monopolies—Being opposed to public interest, the contracts tending to create monopolies are void. 12. Agreements in restraint of personal liberty—Any agreement which unduly restricts the personal freedom of persons is void and illegal being against public policy.

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2.5

STRANGER TO A CONTRACT

Rule of Privity of Contract A contract is essentially an agreement between the promisor and promisee and therefore, only the

He is a total outsider and does not have any legal rights in the contract. He cannot sue on the contract even if the contract is for his benefit. Example S bought tyres from D at ` 5000 per unit on the condition that he will not sell it further below the purchase price. S sells the goods further to A under similar condition and A promised that in the event of breach, he shall pay a penalty of ` 1000 per unit to D. In this case, A is the promisor, S is the promisee and D is a ‘stranger to contract’ between S and A. If A sells tyres below ` 5000 per unit, D cannot recover any penalty from him as he is a stranger to the contract between S and A. (Dunlop Pneumatic Tyre Co. vs Selfridge and Co.)

Exceptions to Rule of Privity of Contract (i) Trust agreements: A beneficiary can enforce his rights even though he may not be a party to the trust contract which is between the author and the trustee. (Khawja Mohammed Khan vs Mussaini Begum) (ii) Family settlements in writing: Family settlement agreements such as marriage, separation or partition, if the terms of settlement are reduced into writing, may be enforced by the members of family who may not originally be party to such agreements. (Shuppu vs Subramanian) (iii) Hindu Law: In case of partition of Hindu Undivided Families (HUFs), female members are entitled to marriage expenses. (Sunder Raja vs Lakshmi, Rakhmanbai vs Govind) (iv) Assignment of contract: In case of assignment of a contract whereby the benefits under the contract are assigned to a third party, the assignee can enforce the original contract. (Krishanlal Sadhu vs Primila Bala Dasi) (v) Acknowledgement of a Debt: In case of an acknowledgement of liability or by past performance, the party so admitting becomes liable in a contract. (vi) Agency: On the same grounds, a principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.

2.6

AGREEMENTS WITHOUT CONSIDERATION

Exceptions to rule of “No Consideration, No Contract”—Section 25 1. Agreements of natural love and affection Agreements made on account of natural love and affection between near relatives provided these are written and registered. It may be noted that only nearness of relation does not imply natural love and affection.

Consideration and Other Essentials

27

2. Compensation for past voluntary act of promisee for promisor Any promise to compensate any voluntary act of another is a valid contract. 3. Promise to pay time-barred debt A debt becomes time-barred by the Indian law of limitation, if the same is not claimed within a period of 3 years and therefore becomes legally irrecoverable. But if the debtor promises in writing to repay such time-barred debt (either whole or partially) then such a promise is enforceable. 4. Completed gifts The rule of agreement without consideration being void does not apply to completed gifts, i.e. gifts actually made and accepted. 5. Agency relationship Contracts establishing the relationship of a principal and an agent. (Section 185) 6. Charities

the promisee on the strength of the promise undertakes a liability, the contract is valid. This is also known as doctrine of promissory estoppel. Examples 1. A husband and wife are always quarrelling and as a result the husband agrees to give a sum of money to wife to live apart. The agreement will not be enforceable u/s 25(1), since in spite of nearness of relation there is no love and affection. (Venkataswamy vs Rangaswamy, Rajlakshmi Devi vs Bhootnath) 2. B finds C’s purse and gives it to him. C promises to give B ` 100. This is a valid contract. 3. G supports R’s infant son. R promises to pay G’s expenses in so doing. This is a valid contract. 4. G supports R’s infant son. R offers to pay to G but she refuses to take any money. R promises to pay certain sum of money to G’s husband. There is no valid contract since there is no consideration between R and G’s husband. 5. A helps in putting out the fire at B’s godown without being asked to do so and sustains injuries. B promises to compensate A for his medical expenses. This is a valid contract. 6. G promises to give ` 50,000 to a building fund of a temple. On the faith of G’s promise, the temple secretary engages a contractor for renovating the temple interiors and undertakes a liability. Later on G declines to pay the said amount. The contract is enforceable and G is liable to pay an amount not exceeding ` 50,000. (Kedarnath vs Gorie Mohammad)

2.7

PARTIES COMPETENT TO CONTRACT—SECTION 11

In order for a person to be competent to contract, he should (ii) be of sound mind; and (iii) not be disqualified from entering into a contract.

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2.8

AGREEMENTS BY A MINOR

What a Minor Cannot Do? (i) Any agreement entered into by a minor or with a minor is void ab-initio. (ii) The minor cannot bind himself by a contract. The rule of estoppels is also not applicable against a minor. (iii) The contract by a minor is void even if the minor misrepresents about his age. (iv) A minor cannot be forced to refund any benefit received under a contract with him. (v) A contract by a minor cannot be ratified (vi) A minor cannot be a partner in a partnership firm. (vii) A minor cannot be declared insolvent because he is incapable of contracting debts. (viii) The parents or guardian of a minor are not liable for any acts done by the minor.

What a Minor Can Do? (i) A minor can plead minority and avoid the contract. (ii) A minor is not competent to contract but he still can be a beneficiary or be a transferee in a contract. Therefore, contracts of apprenticeship, service or education for the benefit of minor are valid. (iii) A minor can make the other party bound to him in a contract. (iv) A minor cannot be forced to refund any benefit received in a void contract, but on the basis of equity, the court may grant compensation to the aggrieved party by restituting the money or the property involved. (Kanhya Lal vs Girdhari Lal, Khan Gul vs Lakha Singh) (v) A minor can be admitted to the benefits of partnership with the consent of all the partners of the partnership.

(vii) A minor can act as an agent and bind his principal by his acts without incurring any personal liability. (ix) A contract may be entered into on behalf of a minor by his guardian or manager of his estate. In such a case the contract can be enforced by or against the minor provided that the contract is within the scope of the authority of the guardian or manager, and is for the benefit of the minor. (Subramanyam vs Subba Rao) However, all contracts made by a guardian on behalf of a minor are not valid. The guardian of a minor has no power to bind the minor by a contract for the purchase of immovable property. (Mir Sarwarjan vs Fakharuddan) (x) According to Section 68 of the Indian Contract Act 1872, a contract for supply of necessities to a minor or to those who are dependent on him can be enforced against the property of the minor. to maintain a certain level of standard of living, and marriage of female. It may be noted that the parent or guardian of a minor cannot be held liable for necessaries supplied to a minor unless those goods or services are supplied to a minor as the agent of the parent or guardian.

Consideration and Other Essentials

29

Examples 1. M, a minor, borrowed a certain sum of money from L by fraudulently representing himself to be a major. He refused to repay it and L sued him for money. The contract is void and M was not liable to pay. (Leslie vs Shiell) 2. M, a minor borrowed a certain sum of money from L by executing a mortgage deed in favour of the lender. The amount borrowed remained unpaid and many years later, M raised a suit in a court for setting aside the mortgage in response to which L prayed for recovery of the amount loaned. The court held that as the minor’s contract was void, any money advanced to him could not be recovered. (Mohiri Bibi vs Dharmodas Ghosh) 3. M gave a promissory note in satisfaction of one previous note executed by him for money borrowed when he was a minor. The court held that the claim thereunder could not be enforced because there was no fresh consideration and the consideration given during minority is not a good consideration. (Indran Ramaswamy vs Anthaopa Chettiar) 4. T executed a promissory note in favour of M, a minor. The promissory note is valid and can be sued (Raghvachariah vs Srinivasa) upon by M. 5. A minor delivered certain goods to the buyer under a contract of sale. The minor is entitled to (Abdul Gaffar vs Prem Piare Lal) maintain suit for recovery of price. 6. G, a minor billiards player, agreed with R, a leading professional billiards player, to go on a world tour. G was to pay certain sum of money to R for his (G’s) expenses and also for learning the game. R made all the arrangements for the matches and spent money but G refused to go. R sued G for breach of contract and damages. G was liable to pay, as the agreement with R was for his benefit and hence valid. (Roberts vs Gray)

2.9

AGREEMENTS BY PERSONS OF UNSOUND MIND—SECTION 12

(i) Lunatics—Persons who are mentally ill due to some strain, personal experience or disease, etc. (ii) Drunkards—Persons who are under influence of liquor or any other drug or toxic substance etc. (iii) Idiots—Persons who are permanently of unsound mind due to inborn defect A person is said to be of sound mind for the purpose of making a contract, if, at the time when he interests. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.

Contract for Necessaries—Section 68 A contract for supply of necessities to a person of unsound mind or to those who are dependent on him can be enforced against the property of such person.

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2.10

AGREEMENTS BY PERSONS DISQUALIFIED BY LAW

Alien Enemies Alien = Citizen of a foreign country Alien friend = Citizen of a foreign country which is at peace with India Alien enemy = Citizen of a foreign country which is at war with India Any contract with an alien friend is enforceable and valid. Any contract with an alien enemy is unenforceable and void. All contracts entered into before the war breaks out, which are against the public policy or are such that may benefit the enemy, stand dissolved. The contracts which are not against public policy are merely suspended for the duration of the war and revived after the war is over, provided they have not already become time-barred under the Law of Limitation.

Foreign Diplomats They can enter into contracts and enforce those contracts in Indian courts. However, they can be proceeded against in Indian courts: (a) Only if they submit themselves; or (b) With the sanction of the Central Government.

Convicts A convict is not competent to contract during the continuance of the sentence of imprisonment. A convict can, however, enter into, or sue on, a contract when on parole or when he has been pardoned by the court.

Ultra Vires Contracts If the company enters into any contract which is not permitted in its Memorandum of Association, it is said to be ultra vires and such a contract is void. Similarly, the contractual capacity of a Statutory Corporation incorporated under any special Act of Parliament is expressly defined by the statute creating it.

Insolvents all his property vests in the official receiver or liquidator appointed by the court.

2.11

FREE CONSENT

Meaning of Consent—Section 13 Two or more persons are said to have consented when they agree upon the same thing in the same manner.

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31

This is referred to as identity of minds or consensus-ad-idem. If there is any error on the part of the parties relating to nature of transaction, person dealing with or Further, not only there should be mutual consent of the parties in a contract, but also it should have been caused by free will of the parties.

Meaning of Free Consent—Section 14 Consent is said to be free when it is not caused by (1) (2) (3) (4)

Coercion, as defined in Section 15, or Undue influence, as defined in Section 16, or Fraud, as defined in Section 17, or Misrepresentation, as defined in Section 18, or

Coercion—Section 15 Coercion is — the committing, or — threatening to commit (i) any act forbidden by the Indian Penal Code, or — with the intention of causing any person to enter into an agreement. Explanation to Section 15—It is immaterial whether the Indian Penal Code is or is not applicable at the place where the coercion is employed. Some of the acts forbidden by the Indian Penal Code are: committing a murder, kidnapping, causing hurt, rape, defamation, theft, filing a suit on false charges, etc. Coercion may be used by persons other than the parties to the contract, and it may be used against persons other than the parties to contract. Note: Threat to file suit on false charges = Coercion Examples 1. A, on board an English ship on the high seas, causes B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code. A afterwards sues B for breach of contract at Calcutta. A’s act is not an offence by the law of England but he has employed coercion. Although Section 506 of the Indian Penal Code was not in force at the time or place where the act was done, yet the contract is voidable at the option of B. 2. A Hindu widow was forced to adopt a boy under threat that her husband’s dead body would not be allowed to be removed for cremation unless she adopts a boy. The widow adopted the boy and subsequently applied for cancellation of the adoption. It was held that the adoption was voidable at her option as her consent was obtained by coercion because preventing the dead body from being removed for cremation is an offence under Section 297 of the Indian Penal Code. (Ranganayakamma vs Alwar Setti) Contd.

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3. A person, by a threat to commit suicide, induced his wife and son to execute a release deed in favour of his brother in respect of certain property. The transaction was set aside on the ground of coercion. (Ammiraje vs Seshamma) [Although threat to commit suicide is not punishable in IPC, attempt to suicide is punishable in IPC, and the court regarded threat to commit suicide also as deemed to be forbidden under IPC] 4. An agent refused to hand over the books of accounts to his principal unless he released the agent from all liabilities concerning past transactions. The release so given was not binding since it was a result of coercion. (Muthia vs Karuppan)

Undue Influence—Section 16 Undue influence arises when the relation between the parties is 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. A person is deemed to be in a position to dominate the will of another: (a) Where he holds a real or apparent authority over the other (e.g. parent and child, guardian or ward, master and servant, etc.); or (b) Where he stands in a fiduciary relation to the other (e.g. trustee and beneficiary, doctor and patient, solicitor and client, a guru and disciple, etc.); or (c) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress. Examples 1. P was suffering from a chronic ailment. S was acting as a medical attendant to P. Under S’s influence over her, P agrees to pay S an unreasonable sum for his professional services. S employed undue influence. (Sher Singh vs Prithi Singh) 2. F, the farmer is in a heavy debt to L, the moneylender of his village. L advances a further sum of ` 10,000 to F only if he executes a bond for ` 20,000 with interest at 20% per month. L employs undue influence. 3. Sundaram applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. Sundaram accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence. 4. U was a follower of a religious sect. The Guru of sect influenced U to gift away her assets for attainment of moksha. U gifted all her property to the Guru. Held, the Guru employed undue influence on U. (Mannu Singh vs Umadat Pandey) 5. A student was induced by his teacher to sell his brand new car to the latter at less than the purchase price to secure more marks in the examination. Accordingly the car was sold. However, the father of the student persuaded him to sue his teacher. The student can sue his teacher on the ground of undue influence under the provisions of the Indian Contract Act, 1872.

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Difference between Coercion and Undue Influence Table 2.1 lists differences between coercion and undue influence. Table 2.1 Coercion

Undue Influence

1. Consent is obtained under a criminal act or threat of offence.

1. Consent is obtained by putting mental pressure but not of an offence.

2. There is no requirement that prior relation should be there between the contracting parties.

2. Some prior relationship of authority or trust must exist between the contracting parties.

3. It generally involves physical force or threat.

3. It involves moral or mental pressure.

4. Coercion need not come from one of the parties. Threat may even be employed by a stranger to contract.

4. The pressure is employed by the party to contract.

5. In case of rescinding the contract, the benefit obtained has to be restored.

5. party to restore or refund the benefit received if the contract is avoided.

Fraud—Section 17 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 the intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (i) The suggestion, as a fact, of that which is not true, by one who does not believe it to be true; (ii) The active concealment of a fact by one having knowledge or belief of the fact; (iii) A promise made without any intention of performing it; (iv) Any other act fitted to deceive; (v) Any such act or omission as the law specially declares to be fraudulent. Fraud may be committed by: (i) A party to contract himself, or (ii) By any person with his connivance, or (iii) By his agent

Conditions for Proving Fraud (i) The fraud must have been committed by a party to contract or by anyone with his connivance or by his agent. Therefore, any fraud by person unrelated to contract is not covered. (ii) The fraud must have been committed with an intention to deceive the other party or to induce him to enter into the contract. (iii) There must be some assertion or representation which is not true. (iv) This representation must be related to a fact and is not an expression of an opinion. (v) The other party must have relied on such assertion or representation. (vi) The party must have suffered some loss due to such reliance. (vii) Active concealment of facts is also fraud.

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Is Silence about Facts Fraud? party to the contract, does not generally amount to fraud. However, a contract induced by fraudulent silence is void.

Fraudulent Silence—Explanation to Section 17 (i) Where the circumstances of the case are such that, having regard to them, it is the duty of the person keeping silence to speak. — Such duty to speak arises in the cases where one party reposes his trust and confidence in the other party or where one party has to depend on the good faith of the other party. (ii) Where silence in itself is equivalent to speech.

Exception to Rule of Contract Voidable if Caused by Fraudulent Silence—Section 19 When consent is caused by fraudulent silence, the contract is not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

Summary of provisions relating to fraud If consent secured by intentional misrepresentation of facts = Fraud. Contract is void. If consent secured by fraudulent silence = Fraud. Contract is void. If consent secured by fraudulent silence but the other party could discover truth by ordinary diligence

Examples 1. A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud by A because of the rule ‘Silence is not fraud’. 2. In the above example assume B is A’s daughter and has just come of age. Here the relation between the parties would make it A’s duty to tell B if the horse is unsound. 3. A is selling his horse to B. The horse appears to be normal but B wants to be sure and says to A, “If you do not deny it, I shall assume that the horse is sound”. A keeps quiet. Here, A’s silence is equivalent to speech and hence there is fraud by A. 4. P and Q, being traders, enter upon a contract. P has private information of a change in prices which would affect Q’s willingness to proceed with the contract. P is not bound to inform Q. 5. A director of a company issues prospectus containing a misstatement knowing well about such misstatement. It was held that any person, who purchases shares on the faith of such misstatement, can repudiate the contract on the ground of fraud.

Consideration and Other Essentials

2.12

35

MISREPRESENTATION—SECTION 18

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

(3) Causing, however innocently, a party to all agreement to make a mistake as to the substance of

Conditions for Proving Misrepresentation (i) (ii) (iii) (iv) (v) (vi)

There must be an assertion or representation of fact which is untrue. The representation must have been made innocently, honestly believing it to be true. The representation must have been made without any intention to deceive the other party. The representation must have been made with a view to induce the other party to enter into the contract. The representation must relate to a fact material to the contract (and not an opinion). The other party while consenting to the contract must have relied on such assertion or representation.

Exception to Rule of Contract Voidable if Caused by Misrepresentation —Section 19 Ordinarily the aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the contract. This right is lost if he could discover the truth with ordinary diligence. Also, no protection is available if his consent is not induced by misrepresentation. Further, if he, after coming to know about the misrepresentation, expressly affirms the contract, then the contract is no more voidable. Examples 1. S induced M to buy his motorcycle saying that it was in a very good condition. After taking the motorcycle, M complained that there were many defects in the motorcycle and he wanted to rescind the contract. S proposed to get it repaired and promised to pay 40% cost of repairs to which M agreed. After a few days, the motorcycle broke down completely and M again wanted to rescind the contract. Now, M cannot rescind the contract, as his acceptance to the offer of S to bear 40% of the repair cost impliedly amounts to final acceptance of the sale. (Long vs Llyod) 2. A while selling his factory misrepresents to B that his factory can produce 500 tons of sugar, whereas it actually produced 300 tons of sugar. B had the opportunity to examine the accounts through which he could have found out the truth, but he did not do so. Now B cannot repudiate the contract.

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Difference between Fraud and Misrepresentation Table 2.2 lists differences between fraud and misrepresentation. Table 2.2

Difference between Fraud and Misrepresentation Fraud

Misrepresentation

1. The wrong representation is made intentionally.

1. The wrong representation is made honestly believing it to be true.

2. The intention is to deceive the other party.

2. There is no intention to deceive the other party.

3. The aggrieved party can not only avoid the agreement but also claim damages.

3. The aggrieved party can only avoid the agreement.

4. The contract is voidable even if the aggrieved party had the means of discovering the truth with ordinary diligence.

4. The aggrieved party cannot avoid the agreement where it had the means of discovering the truth with ordinary diligence.

2.13

MISTAKE—SECTIONS 20, 21, 22

Types of Mistake Mistake of Fact or Mistake of Law Unilateral Mistake (where only one party is under mistake) Bilateral Mistake (where both the parties are under mistake)

Unilateral Mistake of Fact A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. Therefore, if only one party is under mistake, contract is valid.

Bilateral Mistake of Fact Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. An erroneous opinion as to the value of the thing not to be deemed a mistake as to a matter of fact.

Mistake of Law in India A contract is not voidable because it was caused by a mistake as to any law in force in India. Therefore, if either or both parties are under mistake as to a matter of law in India, contract is valid, because ignorance of law is no excuse.

Mistake of Law of Foreign Country A mistake as to a law not in force in India has the same effect as a mistake of fact.

Consideration and Other Essentials

37

Examples 1. A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that before the day of the bargain the ship bringing the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void since both the parties are under mistake as to a matter of fact. 2. A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. The agreement is void in terms of Section 20 of the Indian Contract Act. 3. D and C make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation. The contract is not voidable since it is a mistake as to a matter of law. 4. R sold wine to C by sample and C thinking that it is sample from 100-year-old wine stock, purchased 20 barrels. In fact, the wine was newly brewed. C is bound by the contract since it is a unilateral mistake as to fact on the part of C. 5. A agrees to purchase from B 18 carat gold thinking it to be pure gold but B was not instrumental for creating such an impression; therefore the contract between A and B should be treated as valid.

Consequences of Agreements made without Free Consent Table 2.3 lists consequences of agreements made without free consent. Consequences of Agreements made without Free Consent

Table 2.3

Section Applicable

Consequence

Section 19

VOIDABLE when consent caused by coercion, fraud or misrepresentation.

Exception to Section 19

VALID if misrepresentation or fraudulent silence could have been discovered with ordinary diligence.

Explanation to Section 19

VALID if fraud or misrepresentation did not cause the consent.

Section 19A

VOIDABLE when consent was caused by undue influence.

Section 72

A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

2.14

FREE CONSENT – PROVISIONS SUMMARISED

Table 2.4 summarises provisions relating to free consent. Table 2.4

Summary of Provisions relating to Free Consent

Reason vitiating free consent Coercion

Consequence Contract voidable at the option of the aggrieved party. Any benefit received to be restored.

Burden of Proof Lies on the aggrieved party.

Contd.

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Undue influence

Contract voidable at the option of the aggrieved party. Court has the discretion to ask the aggrieved party to refund the benefit in full or in part.

Fraud

Contract voidable at the option of aggrieved party. The aggrieved party may insist on specific performance. However, if consent was caused by fraudulent silence, contract is not voidable if the aggrieved party had the means of discovering the truth with ordinary diligence. Also damages can be claimed.

Lies on the aggrieved party.

Misrepresentation

Contract voidable at the option of the aggrieved party. The aggrieved party may insist on specific performance. However, contract is not voidable if the aggrieved party had the means of discovering the truth with ordinary diligence.

Lies on the aggrieved party.

Mistake

Void only if both the parties are under mistake as to a fact. Any benefit received to be restored.

Lies first on the aggrieved party to prove the dominant position of the other party and that he used it to obtain unfair advantage. The burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other.

Self-Review Questions (Including Previous Years’ Examination Questions) 1. X transferred his house to his daughter M by way of gift. The gift deed, executed by X, contained a direction that M shall pay a sum of `

with reasons under the provisions of the Indian Contract Act, 1872 whether M is liable to pay the said Nov 2007] 2. Mr. Singh, an old man, granted certain landed property to A, his daughter, by a registered deed of gift. In the terms of the deed, it was stipulated that an annuity of ` B, who was the brother of Mr. Singh. On the same day. A made a promise with B and executed in his favour an agreement to give effect to the stipulation. A failed to pay the stipulated sum. In an action

Consideration and Other Essentials

39

against her by B, she contended that since B had not furnished any consideration, he has no right of action. Examining the provisions of the Indian Contract Act, 1872, decide whether the contention of A Nov 2009] in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. Whether the contract is induced by undue influence? Decide. Nov 2002]

that there were many defects in the motorcycle. Sohan proposed to get it repaired and promised to rescind the contract. Decide giving reasons. Nov 2003] 5. X offers to sell a painting to Y. Both believe that the painting is an old original masterpiece. Y agrees to pay a very high price quoted by X. The painting turns out to be only a modern copy. Discuss the validity of the contract? Would your answer be different if X knew that the painting was not an original masterpiece? ` X possesses assets worth ` 2 lakhs. On due date X fails to repay the loan to B. B now wants to recover decide whether B would succeed. Nov 2006] 7. Hari sold some goods to Sham on credit not knowing that Sham was a minor. Hari did not received the successful? 8. W is the wife of H, who is a lunatic, purchases a diamond set worth ` Beauty Jeweller is entitled to claim the above amount from the property of H. To support his legal campaign, Mr. Seth enlists the services of Mr. X, a legal expert, stating that an amount of ` but at the end of the litigation Mr. Seth refuses to pay. Decide whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian Contract Act, 1872. Nov 2004] agreed that during the term of agreement, X will not practise on his own account in Ludhiana. At the provisions of the Indian Contract Act, 1872, decide whether X could be restrained from doing so? Nov 2007] 11. State with reason whether the following statement is correct or incorrect: A promissory note duly Nov 2010] 12. State whether the following statement is correct or incorrect – An agreement with a minor may be May 2011] (a) He cannot become a partner in the firm.

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Law, Ethics and Communication

(c) He can be admitted to the benefits in the firm. May 2011] 14. What do you understand by “coercion” and “undue influence” under the provisions of the Indian Nov 2011] 15. L, an owner of a piece of land, told to B, a prospective buyer that in his opinion the land can support opinion of L. Later on realising the truth, he wants to repudiate the contract alleging fraud by L. Will he succeed?

Hints and Answers 1. M is liable to pay. Consideration can move from any person. See Chinnaya vs Ramayya. 2. Same as 1. See Chinnaya vs Ramayya.

contract when he agreed to share the repair expenses. knew that the painting is not original, the contract would be valid so long as he makes no representation to Y, since silence as to facts is not fraud. of necessaries. Education is a necessary.

11. Incorrect. Although a contract with minor is void-ab-initio, but a contract in favour of minor can be executed at the option of the minor. 12. Incorrect. An agreement with minor is void-ab-initio and cannot be ratified even on his attaining cannot enter into an agreement of partnership. 14. See topic 2.11 – Free Consent – Section 15 and 16. fraud by L.

(Bisset Vs Wilkinson)

Void, Contingent and Quasi-contracts

41

VOID, CONTINGENT AND QUASI-CONTRACTS

3 CHAPTER

Learning Objectives After reading this chapter, you will understand: ���������������������������������������������������������������������������� ������������������������������ ��������������������������������������������������������� ������������������������������������������������������������������������������ ���������������������������������������������������������������������������������� ���������������������������������������������������������������������������

3.1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

VOID AGREEMENTS Agreements by or with persons incompetent to contract—Section 11 Agreements entered into through a mutual mistake of fact between the parties—Section 20 Agreements the object or consideration of which is unlawful—Section 23 Agreements the consideration or object of which is partly unlawful—Section 24 Agreements made without consideration—Section 25 Agreements in restraint of marriage—Section 26 Agreements in restraint of trade—Section 27 Agreements in restraint of legal proceedings—Section 28 Agreements void for uncertainty—Section 29 Agreements by way of wager—Section 30 Agreements to do impossible act—Section 56

*Agreements at S. No. 1 to 9 have already been covered in the previous chapters.

3.2

AGREEMENTS BY WAY OF WAGER

Meaning of Wager—Section 30 A wagering agreement is a promise by one person to give money or money’s worth to another on happening or non-happening of a future uncertain event.

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Law, Ethics and Communication

In simple language, all gambling and betting contracts are wagers. Agreements by way of wager are void. No suit for recovery of any amount won in a wager is enforceable. Example Krishan agrees to pay ` 5,000 to Mohan if India wins a one-day cricket match with Australia. Mohan agrees to pay ` 500 if Australia wins the match. This is a wagering contract.

Features of a Wager Contract It is dependent upon happening or non-happening of an uncertain future event. Each party must win or lose. None of the parties should have any interest in the event except of their stake money. None of the parties should have any control over the event. The promise must be to pay money or money’s worth.

Agreements not Wager 1. Hedging or speculative transactions for the sale and purchase of stocks and shares or for the sale and delivery of goods, with a clear intention to give and take delivery of shares or goods, as the case may be. However, if the intention is only to settle the difference in price, the transaction is a wager and hence void. 2. Winning a prize in competitions which are games of skill, quiz competitions, talent game shows, etc. 3. Contracts of insurance where the payment of money by the insurer may depend upon a future uncertain loss are not wagering agreements. 4. A subscription/contribution made for, or an agreement to subscribe/contribute entered into towards any plate, prize or sum of money of the value or amount of ` 500 or more, to be awarded to the winner of a horse race is valid. (Exception to Section 30)

Illegal Wagers Wagering agreements have been declared as illegal in Gujarat and Maharashtra. In rest of India wagering agreements are void only.

3.3

AGREEMENTS TO DO IMPOSSIBLE ACTS— SECTION 56 An agreement to do an impossible act in itself is void. A contract to do an act which, after the contract is made, becomes impossible or unlawful, without any fault of promisor, becomes void when such act becomes so impossible or unlawful. A promise about whose impossibility the promisor knows but the promisee did not know; the promisor must make compensation for any loss which such promisee sustains through the non-performance of the promise.

Void, Contingent and Quasi-contracts

43

When a Contract becomes Impossible (i) (ii) (iii) (iv) (v)

Destruction of subject matter Death or personal incapacity of the promisor Change of law making the contract to be unlawful Cessation of a state of things (change in conditions) forming part of the contract Declaration of war

Supervening Impossibility (Doctrine of Frustration) The performance becomes impossible. The impossibility is because of an event beyond the control of promisor. The impossibility should not be self-induced by the promisor. The impossibility arises subsequent to making of the contract.

Effect of Supervening Impossibility In cases of supervening impossibility, the contract becomes void and the parties are discharged from their obligations.

Supervening Impossibility is not Difficulty in Performance Supervening impossibility is not same as difficulty in performance. In the following cases, the contract shall not be discharged: (i) A contract is not discharged simply on the ground that its performance has become more difficult, more expensive or less profitable than that agreed at the time of its formation. (ii) A contract is not discharged if it could not be performed because of the default of a third party on whose work the promisor relied. (iii) A contract is not discharged on the ground of strikes, lockouts and civil disturbances unless agreed otherwise by the parties to the contract. (Budget vs Bennington; Jacobs vs Credit Lyonnais) (iv) A contract is not discharged simply on the ground of impossibility of some of the objects of the contract.

Effect of Impossibility of Performance (i) Where both the promisor and promisee know about the initial impossibility—the contract is void ab initio. (ii) Where both the promisor and promisee do not know about the initial impossibility—the contract is void on the ground of mutual mistake. (iii) Where the promisor alone knows about the initial impossibility—the contract is void and the promisor must compensate the promisee for any loss which he sustains through the nonperformance of the promise. (iv) Where there is supervening impossibility—the contract becomes void when the act becomes impossible or unlawful. In addition, where the promisor alone knew about the impossibility, he must compensate the promisee for any loss which he sustains through the nonperformance of the promise.

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Law, Ethics and Communication

Obligation of the Person who has Received any Advantage Under a Void Contract—Section 65 Any person who has received any advantage under such an agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

3.4

CONTINGENT CONTRACT

Meaning of Contingent Contract—Section 31 A contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

Features of Contingent Contract It must fulfil the basic requirements of a valid contract, i.e., offer and acceptance, consideration, legality of object, etc. Performance of the contingent contract is conditional on happening or non-happening of some future event. The future event must be uncertain. The future event must be collateral or ancillary and not part of the contract itself. The collateral event should be neither performance promised nor a consideration for a promise. Examples 1. United India Insurance Company contracts to pay to K ` 100,000 if his shop gets damaged due to fire. This is a contingent contract. 2. LIC of India contracts to pay ` 500,000 to B’s son, for certain amount of premium, if B dies. This is a contingent contract. 3. M contracts to sell K 100 bales of cotton for ` 10,000 if the truck by which they are coming from Rajasthan reaches Delhi safely. This is a contingent contract. 4. L promises to give a loan of ` 9,000 to F if he is elected as the chairman of the municipal committee. This is a contingent contract. 5. S promises to pay a commission of 10% to a property broker if he manages to let out his house at a rent of ` 10,000. This is not a contingent contract since the uncertain event of letting out of house forms consideration for the commission to be paid. 6. Reliance agrees to hire M, an oil exploration engineer, for a period of 5 years if it manages to get a contract from the government. It is a contingent contract since getting the contract from the government is a collateral event independent of hiring of engineer by the company.

When can Contingent Contracts be Enforced? Table 3.1 summarises rules regarding enforcement of contingent contracts.

Void, Contingent and Quasi-contracts

Table 3.1 Section applicable

45

Rules for Enforcement of Contingent Contracts Contract Contingent upon

Can be Enforced event

has

Becomes Void

Example#

When the event becomes impossible

1, 2

32

An event happening

When the happened

33

An event not happening

When the event becomes impossible

When the happened

has

3

35

An event happening within specified time

When the event happened within specified time

When the event becomes impossible before the expiry of the specified time or When the event has not happened within the specified time

4, 5

35

An event not happening within a specified time

When the event becomes impossible before expiry of the specified time or When the event has not happened within the specified time

has the

6

36

Impossible event

Never, since the contract is void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made

7, 8

34

On future conduct of a living person

When the person acts in the manner as per the contract

has the

event

When the event happened within specified time

When the person does anything which makes the desired conduct impossible or dependent on further contingencies

9

Examples 1. B contracts with G to sell certain machinery at a specified price if K, to whom the machinery has been first offered, refuses to buy it. The contract cannot be enforced by law between B and G unless and until K refuses to buy the machinery. The contract becomes void if K chooses to buy. 2. M contracts to pay G a sum of money when N marries H. H dies without being married to N. The contract becomes void. 3. United India Insurance Company agrees to pay N a sum of money if a certain ship does not return. The contract can be enforced only if the ship sinks. The contract becomes void if the ship returns. 4. United India Insurance Company contracts to pay to K ` 100,000 if his shop gets damaged due to fire in the next one year. The contract may be enforced if the shop gets burnt within one year, and becomes void if no such accident happens in next one year. 5. M contracts to sell K 100 bales of cotton for ` 10,000 if the truck by which they are coming from Rajasthan reaches Delhi safely in next 15 days. The contract may be enforced if the truck comes within next 15 days, and becomes void if the truck does not return in next 15 days or meets accident and goods therein get destroyed. Contd.

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Law, Ethics and Communication

6. United India Insurance Company promises to pay N a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within a year or is burnt within a year. The contract becomes void if the ship returns within a year. 7. A agrees to pay S ` 1,000 if two straight lines should enclose a space. The agreement is void because two straight lines can never enclose a space. 8. K agrees to pay M ` 100,000 if M will marry K’s daughter C. C was dead at the time of the agreement. The agreement is void. 9. M agrees to pay G a sum of money if N marries H. The contract can be enforced only if N and H get married. Suppose, H marries F. The marriage of N to H must now be considered impossible, even though it is possible that F may die and then H may marry N.

Differences between Wagering Agreement and Contingent Contract Table 3.2 summarizes differences between wagering agreement and contract. Table 3.2

Differences between Wagering Agreement and Contingent Contract

Wagering Agreement

Contingent Contract

1. A wagering agreement is a promise by one person to give money or money’s worth to another on happening or non-happening of a future uncertain event.

1. A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.

2. A wagering agreement contains reciprocal promises wherein one party wins and the other loses.

2. A contingent contract may not necessarily contain reciprocal promises.

3. All wagering agreements are of contingent nature.

3. A contingent contract may or may not be of wagering nature.

4. As per the Indian Contract Act, agreements by way of wager are void.

4. All contingent contracts are not necessarily void and the Indian Contract Act provides rules for enforcing contingent contracts.

5. The parties have no other interest in the occurrence or non-occurrence of the event except for winning or losing of the wagering amount.

5. The parties have real interest in the occurrence or non-occurrence of the future collateral event.

3.5

QUASI-CONTRACTS

Meaning of Quasi-contracts Quasi-contracts are certain relations resembling those created by a contract. Quasi-contracts are also called constructive contracts or implied contracts. Quasi-contracts are based on the principle of equity and justice and on the ground that a person shall not be allowed to unjustly enrich himself at the expense of another.

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47

Example P, a consignor, delivers certain goods to be dispatched to Q. Mistakenly the goods are delivered to R, another consignee. R consumed the goods for his own use. P is entitled to recover the cost of the goods from R.

Normal Contracts vs Quasi-contracts In normal contracts, there is an offer and acceptance with free consent. In quasi-contracts, the essentials of a valid contract are missing but the obligations similar to a contract are created by operation of law on the principles of equity.

Types of Quasi-contracts 1. Supply of necessaries—Section 68 — Where any person supplies necessaries to another person who is not competent to contract (minor, unsound mind, etc.); or — Where any person supplies necessaries to persons dependent on such incapable person; — The person who furnishes such supplies is entitled to be reimbursed from the property of such incapable person. Necessaries are the things which a person needs and include articles required to maintain a particular person in the state, degree and status in life in which he is. Basic necessities of life such as food, cloth, housing, cost of study, and marriage expenses of Hindu minor are held to be necessaries. Luxury items such as expensive watches, jewellery, expensive clothes, etc. are not necessaries. Examples 1. A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property. However, there is no personal liability of B to reimburse A for the necessaries. 2. A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B’s property.

2. Payment of debt of another by person interested—Section 69 A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. The person making payment must have acted bona fide for protection of his own interest. Example M holds land in Madhya Pradesh on a lease granted by Z, the landlord. The revenue payable by Z to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of M’s lease. M, in order to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from Z. Z is bound to make good to M the amount so paid. (Muni Bibi vs Trilokinath)

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Law, Ethics and Communication

3. Compensation for non-gratuitous act—Section 70 If a person has enjoyed the benefit of a non-gratuitous act done by another, he is liable to compensate such other person. Essential conditions required to establish a right of action under Section 70: 1. The act done must be lawful; and 2. It must be done by a person not intending to act gratuitously; and 3. The person for whom the act is done has enjoyed the benefit of such act. Examples 1. B, a trader, leaves goods at C’s house by mistake. C treats the goods as his own. He is bound to pay B for them. 2. A’s property is on fire. B, a bystander, saves his property. B is not entitled to any compensation from A if the circumstances show that he intended to act gratuitously. 3. A coolie takes the luggage of a passenger at the railway station without being asked by the passenger. The passenger also does not object to the coolie. He is bound to pay reasonably for the same as the work was not intended to be gratuitous.

4. Finder of goods—Section 71 A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee. (a) (b) (c) (d)

He should not appropriate the goods so found for his own use. He should return it to the owner when traced. He is required to take due care of goods found. He should make efforts to trace the true owner of goods.

Example P, a consignor, delivers certain goods to be dispatched to Q. Mistakenly the goods are delivered to R, another consignee. Now it is the duty of R to take proper care of the goods, not to appropriate the goods for his own use, and when the owner is traced, return the goods.

5. Receiver in case of mistake or coercion—Section 72 A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Examples 1. A and B jointly owe ` 10,000 to C. A alone pays the entire amount to C, and B, not knowing this fact, pays ` 10,000 again to C. C is bound to repay the amount to B. 2. A railway company refuses to deliver certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee is in urgent need of the goods and therefore pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally levied in excess by the railway company.

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49

Compensation for Failure to Perform a Quasi-contract—Section 73 Any person injured by the failure to discharge a quasi-contract is entitled to receive the compensation from the defaulting party as in a normal contract.

Self-Review Questions (Including Previous Years’ Examination Questions) 1. X agreed to become an assistant for 5 years to Y who was a doctor practising at Ludhiana. It was also agreed that during the term of the agreement X would not practise on his own account in Ludhiana. At the end of one year, X left the assistantship of Y and began to practise on his own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether X could be restrained from doing so? 2. X and Y were two organizations trading in wheat of ‘Popular’ brand in Uttar Pradesh. X realized that the wheat business is high yielding. To expand his business X offered Y a sum of ` 10 lakh on the condition that Y would not sell the ‘Popular’ brand wheat in Uttar Pradesh. Accordingly Y stopped selling the ‘Popular’ brand wheat in Uttar Pradesh. X failed in making the promised payment to Y. Y filed a suit against X for the non-fulfilment of the promise. Is the suit maintainable? Decide with reference to the provisions of the Indian Contract Act, 1872. 3. Akhilesh entered into an agreement with Shekhar to deliver him (Shekhar) 5,000 bags to be manufactured in his factory. The bags could not be manufactured because of strike by the workers and Akhilesh failed to supply the said bags to Shekhar. Decide whether Akhilesh can be exempted from liability under the provisions of the Indian Contract Act, 1872. [May 2004] 4. Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land revenue payable by X to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be termination of Y’s lease. Y, in order to prevent the sale and the consequent termination of his own lease, pays the Government the sum due from X. Referring to the provisions of the Indian Contract Act, 1872 decide whether X is liable to make good to Y the amount so paid? [May 2007] 5. A in Mumbai bets with B and loses. A applies to C for a loan in order to pay B. C gives the loan to A to enable him to pay B. Can C recover the amount of loan from A? Would it make any difference if this transaction takes place in New Delhi? 6. Point out with reasons whether the following agreements are valid or void: (i) Kamala promises Ramesh to lend ` 50,000 in lieu of consideration that Ramesh gets Kamala’s marriage dissolved and he himself marries her. (ii) Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the horse was dead at the time of agreement. (iii) Ram sells the goodwill of his shop to Shyam for ` 4,00,000 and promises not to carry on such business forever and anywhere in India. (iv) In an agreement between Prakash and Girish, there is a condition that they will not institute legal proceedings against each other without consent. (v) Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend. [May 2008]

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Law, Ethics and Communication

7. Z rents out his house situated at Mumbai to W for a rent of ` 10,000 per month. However, Z is in arrears of a sum of ` 5 lakh to be paid as house tax to the Municipal Corporation. His house is advertised for sale by the corporation. W pays the corporation the sum due from Z to avoid legal consequences. Referring to the provisions of the Indian Contract Act, 1872 decide whether W is entitled to get the reimbursement of the said amount from Z. [May 2010]

Hints and Answers 1. No. Agreement in restraint of trade etc. is void u/s 27. 2. No. Agreement in restraint of trade is void and not enforceable. 3. Difficulty in performance is not same as supervening impossibility. Akhilesh is liable to Shekhar for non-performance. See Budget vs Bennington; Jacobs vs Credit Lyonnais. 4. Yes. Payment by person interested is a quasi-contract u/s 69. 5. Wagering agreements are illegal in Maharashtra. Therefore, collateral transaction also becomes unenforceable. So, C cannot recover. If the transaction happens in New Delhi, only wager transaction is void but the collateral transaction between A and C is valid. 6. (i) Void - Immoral contract (ii) Void - Bilateral mistake (iii) Void - Agreement in restraint of trade (iv) Void - Agreement in restrain of legal proceedings (v) Valid - Agreement with alien enemy is void, but agreement with alien friend is valid. 7. Yes. Payment by person interested is a quasi-contract u/s 69.

Performance and Discharge

4

PERFORMANCE

AND

51

DISCHARGE

CHAPTER

Learning Objectives After reading this chapter, you will understand: Various modes in which a contract is discharged by the parties Types of performance in a contract and obligations of the parties Effect of any default in performance of a contract Rights and duties of joint promisors in a contract Assignment and Succession of contracts Rules relating to performance of reciprocal promises Rules relating to time and place of performance of a contract Rules relating to appropriation of payment in a contract

4.1

DISCHARGE OF CONTRACT

Modes of Discharge of Contract (i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

4.2

Discharge by performance Discharge by mutual agreement Discharge by remission or waiver Discharge by lapse of time Discharge by operation of law Discharge by impossibility of performance Discharge by breach Discharge by neglect

PERFORMANCE OF CONTRACT

Types of Performance 1. Actual Performance—Actual performance is when a party to a contract has done whatever he had promised and is discharged of his liability under the contract.

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Law, Ethics and Communication

2. Offer to Perform (tender of performance, attempted performance) promisee refuses to accept the performance. (i) (ii) (iii) (iv)

It must be unconditional. It must be made at a proper time and place. It must be for whole of what a promisor is bound to do. In case of a contract relating to supply of goods etc., the person to whom it is made must be

to all of them.

Obligation of Parties to Contract—Section 37 — To perform; or — To offer to perform; unless — Such performance is dispensed with or excused under the provisions of the Indian Contract Act or any other law.

Default in Performance

1. Effect of refusal to accept performance by promisee—Section 38 accepted, the promisor is not responsible for non-performance; and

2. Effect of refusal by promisor to perform—Sections 39, 65

— The promisee may put an end to contract —

promisor’s failure to perform. received under such contract.

Performance and Discharge

53

Example Chitra, a singer, enters into contract with A, the owner of a theatre, to sing at his theatre two nights every week during next two months for a fee of ` 1000 for each night’s performance. On the sixth night, Chitra willfully absents herself from the theatre. A is at liberty to put an end to the contract. However, if with the assent of A, Chitra sings on the seventh night, A has signified his acquiescence in the continuance of the contract, and cannot now put an end to it. But A is entitled to compensation for the damage sustained by him through Chitra’s failure to sing on the sixth night.

Who can Demand Performance?

1. Contracts of personal nature and death of promisee promisee. Example Praveen promises to paint a picture for Raveena. Before the contract is executed, Raveena dies. The contract will become void since no other person can now demand performance from Praveen.

2. Devolution of joint rights—Section 45

— —

Example A, in consideration of ` 5,00,000 lent to him equally by B and C, promises B and C jointly to repay them that sum with interest on a specified day. Subsequently B dies. The right to claim performance rests with B’s representatives jointly with C during C’s life; and, after the death of C, with the representatives of B and C jointly.

By whom Contracts must be Performed?

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Law, Ethics and Communication

compel the promisor to perform the contract again. (Section 41)

1. Contracts of personal nature and the death of the promisor the death of promisor, the contract will become void. Examples 1. Praveen promises to paint a picture for Raveena. Praveen must perform this promise personally, and if Praveen dies before completing his promise, the contract will be void. 2. Chitra, a singer, enters into a contract with A, the owner of a theatre, to sing at his theatre two nights every week during the next two months. Chitra must perform the contract personally.

2. Devolution of joint liabilities—Section 42

— —

Example A, B and C jointly promise to pay ` 3,00,000 to D. A dies subsequently. B and C along with A’s legal representative are jointly liable to pay the amount to D.

Rights and Duties of Joint Promisors—Section 43

himself to the performance of the promise, unless a contrary intention appears from the contract.

Examples 1. A, B and C jointly promise to pay D ` 3,00,000. D may compel either A or B or C to pay him ` 3,00,000. 2. A, B and C jointly promise to pay D ` 3,00,000. C is compelled to pay the entire amount. C is entitled to recover ` 1,00,000 each from A and B. 3. A, B and C jointly promise to pay D ` 3,00,000. C is compelled to pay the entire amount. A is declared insolvent, but his assets are sufficient to pay 50% of his debts. C is entitled to receive ` 50,000 from A’s estate, and ` 1,25,000 from B. 4. A, B and C jointly promise to pay D ` 3,00,000. C is unable to pay anything, and A is compelled to pay the entire amount. A is entitled to receive ` 1,50,000 from B.

Performance and Discharge

55

Release of One Joint Promisor—Section 44

Examples 1. A, B and C jointly promise to pay D ` 3,00,000. D releases A from the liability to pay. This release of A does not discharge B and C from their liability to pay D. 2. In the above case, if D recovers the entire amount from C, he can claim contribution from A and B.

4.3

ASSIGNMENT & SUCCESSION OF CONTRACTS

Meaning of Assignment rights and benefits are transferred to another person.

these cannot be assigned. (ii) Obligations under a contract cannot be assigned to a third person except with the consent of the promisee. (iii) If the promisee accepts performance from a third person, he cannot afterwards enforce the same against the original promisor.

Meaning of Succession rights and obligations through the process of law (for example, on account of death of any person). to the extent of property inherited.

Difference between Assignment and Succession party ceases to exist. get transferred to the legal heirs to the extent of property inherited.

4.4

PERFORMANCE OF RECIPROCAL PROMISES

Meaning of Reciprocal Promises—Section 2(f)

the performance of the other party’s promise.

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Law, Ethics and Communication

Rules for Performance of Reciprocal Promises 1. Concurrent reciprocal promises—Section 51 to be performed simultaneously—No promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. Example K and M contract that K shall deliver goods to M to be paid for on delivery. K need not deliver the goods unless M is ready and willing to pay for the goods on delivery. M need not pay for the goods unless K is ready and willing to deliver them on payment.

2. Conditional or dependent reciprocal promises—Section 54 one promise cannot be performed till the other has been performed—If the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise.

Examples 1. S hires K’s truck on agreed freight to take in and convey some cargo to be provided by S from Kolkata to Delhi. On the appointed day K keeps the truck ready but S does not provide any cargo for the truck. Now S cannot claim the performance of K’s promise, and must make compensation to K for the loss which K sustains by the non-performance of the contract. 2. C, a carpenter, contracts with B to make a wooden table for a fixed price, B supplying the wood and necessary material for the work. On the agreed date, C turns up for work but B refuses to furnish any wood and the work cannot be executed. C need not execute the work, and B is bound to make compensation to C for any loss caused to him by the non-performance of the contract.

3. Order of performance of reciprocal promises—Section 52

Examples 1. A builder and a client contract that the builder shall build a house for the client at a fixed price. The builder’s promise to build the house must be performed before the client’s promise to pay for it. 2. A wholesaler and a retailer contract that the wholesaler shall deliver his entire stock-in-trade to the retailer at a fixed price, and the retailer promises to give security for the payment of the money. The wholesaler’s promise need not be performed until the security is given, for the nature of the transaction requires that the wholesaler should have security before he delivers up his stock.

3. Liability of the party preventing performance of reciprocal promises—Section 53

Performance and Discharge

57

4. Reciprocal promise to do things legal and illegal—Section 57

agreement. Example A and B agree that A shall sell B a house for ` 10,00,000, but that if B uses it as a gambling house, he shall pay A ` 50,00,000 for the same. The first set of reciprocal promises, namely, to sell the house and to pay ` 10,00,000 for it, is a valid contract. The second set is for an unlawful object, namely, that B may use the house as a gambling house, and is a void agreement.

5. Alternative promise to do things legal and illegal—Section 58 alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. Example M and P agree that P shall pay M ` 1,00,000 for which M shall afterwards deliver to P either rice or smuggled opium. This is a valid contract to deliver rice, and a void agreement as to the opium.

4.5

TIME AND PLACE OF PERFORMANCE

Table 4.1

Rules regarding Time and Place of Performance of a promise—Sections 46 to 50

Section applicable

Condition

Performance

or sanctioned by the promisee Where the Promisor is to perform without application by the Promisee 47

At any time during usual business hours at a place at which the promise ought to be performed The promisor to apply and the promisee to appoint a reasonable place for performance

Where the Promisor is to perform only on application by the Promisee place at usual business hours

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Law, Ethics and Communication

Time as the Essence of the Contract

the real intention of the parties

(a) The parties expressly agree to treat it as the essence of the contract;

essence of the contract.

the contract.

1. Consequence of failure to perform by agreed time where time is the essence—Section 55 option of the promisee. damages unless he gives notice of such claim while allowing late performance itself.

2. Consequence of failure to perform by agreed time where time is not the essence—Section 55

failure.

4.6

APPROPRIATION OF PAYMENTS

Meaning of Appropriation of Payment

Rules of Appropriation—Sections 59 to 61

Performance and Discharge

59

(Rulia Devi vs Raghunath Prasad)

4.7

OTHER MODES OF DISCHARGE OF A CONTRACT

1. Discharge by Mutual Agreement (Novation, Rescission and Alteration)— Section 62 contract need not be performed.

Novation

Rescission

Alteration contract.

Novation vs Alteration

parties to the contract.

2. Discharge by Remission or Waiver—Section 63

The promisee may unilaterally agree to (i) Dispense with the performance of the promise in whole or partially; or

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Law, Ethics and Communication

(iii) May extend the time for such performance; or made to him.

3. Dischage by Lapse of Time Contracts barred by limitation period

by lapse of time.

4. Discharge by Impossibility of Performance—Section 56 Agreement to do impossible act

promisor, becomes void when the act becomes impossible or unlawful.

promise.

5. Discharge by Breach of Contract Breach of contract per the terms of the contract.

from performing his part of the contract. Note:

6. Discharge by Neglect of Promisee—Section 67 Neglect to perform

thereby.

Performance and Discharge

61

Example R contracts with S to repair S’s house. S neglects or refuses to point out to R the places in which his house requires repair. R is excused for the non-performance of the contract if it is caused by such neglect or refusal.

Self-Review Questions (Including Previous Years’ Examination Questions) tly borrowed ` (i) Y can recover the contribution from X and Z? (ii) Legal representatives of X are liable in case of death of X? (iii) Y can recover the contribution from Z’s assets if Z becomes insolvent?

[Nov 2007]

`

Nov 2007] `

` (i) If on the sixth night, S wilfully absents herself from the theatre and wants to sing on the seventh night but M does not allow her to sing on the seventh night. (ii) If on the sixth night, S wilfully absents herself from the theatre and M allows her to sing on seventh night. (iii) If on the sixth night, S is too ill to sing. (iv) If on the sixth night, S dies before she sings. performance of 7. State, in brief, the grounds on the basis of which a contract is discharged under the provisions of the Nov 2011)

Hints and Answers liable to pay but only to the extent of the estate of the deceased he received. (iii) Y can recover from Z’s assets.

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Law, Ethics and Communication

` `

` `

now rescind the contract but can claim the compensation for the damages sustained by him through S’s failure to sing on the sixth night. (iii) & (iv) S is discharged on the sixth night because of her incapability to sing and M cannot claim the compensation for the damages sustained by him through S’s failure to sing on the sixth night. f personal nature cannot be enforced on the death of the promisee. 7. See Topic 4.1

5

BREACH

OF

CONTRACT

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and types of breach of contract Remedies of breach of contract under Indian Contract Act, 1872 ������������������������������������������������������������������������������������� Rules relating to assessment of damages in case of breach of contract

5.1

MEANING OF BREACH OF CONTRACT

(i) Express breach (ii) Implied breach

Types of Breach

(i) Anticipatory breach before the time fixed for its performance;

(ii) Actual breach on the day of performance the performance of the contract

during

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Law, Ethics and Communication

5.2

REMEDIES OF BREACH OF CONTRACT UNDER INDIAN CONTRACT ACT, 1872

Rescission of Contract and Compensation for Damages (i) Effect of rescission of contract

(ii) Remedies available to the promisee on breach—Section 75

(iii) Breach where time is essence—Section 55

(iv) Option to the promisee in case of anticipatory breach

(v) Consequences if the promisee keeps contract operative Rules laid down in Frost vs Knight and Avery vs Bowden

(vi) Obligations of the promisee on rescission of contract

Breach of Contract

65

Examples 1. P contracts to deliver to Q at his warehouse, on the 1st of March, 100 bales of cotton of a particular quality. However, on 15th February itself P informs Q that he will not be able to supply the cotton. Q can rescind the contract on 15th February and can claim damages for non-performance. 2. P contracts to deliver to Q at his warehouse, on the 1st of March, 100 bales of cotton of a particular quality. However, on 15th February itself P informs Q that he will not be able to supply the cotton. However, Q decides to wait till 1st March. However, on 1st March P supplies the agreed quantity. Q is now not entitled to any compensation since P has performed as per the contract. 3. P contracts to deliver to Q at his warehouse, on the 1st of March, 100 bales of cotton of a particular quality. However, on 15th February itself P informs Q that he will not be able to supply the cotton. However, Q decides to wait till 1st March but P fails to supply the agreed quantity on 1st March. Q now can rescind the contract and claim compensation for damages due to non-performance. 4. P contracts to deliver to Q at his warehouse, on the 1st of March, 100 bales of cotton of a particular quality. However, on 15th February itself P informs Q that he will not be able to supply the cotton. However, Q decides to wait till 1st March. On 20th February, the Government declares private trading in cotton as illegal. The contract now becomes void and Q would not be able to recover any damages. 5. P contracts to deliver to Q at his warehouse, on the 1st of March, 100 bales of cotton of a particular quality. On the due date P fails to supply the agreed quantity but asks for an extension of 15 days to supply the goods. Q now can grant the extension with or without compensation for damages, but he has to clearly notify P for his claim of damages at the time of granting extension.

5.3

SUIT FOR SPECIFIC PERFORMANCE

(i) Meaning of specific performance

(ii) When a suit for specific performance is maintainable

(iii) When a suit for specific performance is not maintainable

5.4

SUIT FOR INJUNCTION

(i) Meaning of injunction

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Law, Ethics and Communication

(ii) When a suit for injunction is maintainable

Examples 1. Chitra agreed to sing at A’s theatre for three months from 1st December. She also agreed not to sing for any one else during that period. Subsequently she contracted with Sony Television and refused to sing at A’s theatre. On a suit by A, the court may refuse to order specific performance of her positive engagement to sing at the plaintiff’s theatre, but will grant an injunction restraining Chitra from singing elsewhere and award damages to A to compensate him for the loss caused by Chitra’s refusal. (Warner Bros. vs Nelson) 2. G agrees to buy the entire electricity energy from M. On G’s refusal to do so, the court may grant an injunction preventing G from buying electricity from any other person. (Metropolitan Electric Supply Co. vs Ginder)

5.5

SUIT FOR ‘QUANTUM MERUIT’

(i) Meaning of Quantum Meruit

(ii) When a suit for Quantum Meruit is maintainable

whether the contract is divisible or indivisible only if the contract is divisible

(iii) When a suit for Quantum Meruit is not maintainable

and the contract is indivisible

Summary of rules for Quantum Meruit when available Contract

Divisible

Indivisible

Breach of Contract

67

Examples 1. Chitra contracts to sing at A’s theatre for six weeks. However, after four weeks, A cancels the contract. Chitra is entitled to receive payment for the four weeks she performed at the theatre. 2. R is engaged to do paint job for K’s house for a consolidated sum of money. After he has completed 25% of the contracted work, the house gets destroyed by lightning. The contract between R and K becomes void due to supervening impossibility (destruction of subject matter). R cannot claim quantum meruit because no money is due till the whole job is done.

5.6

ASSESSMENT OF DAMAGES ON BREACH

Fundamental Principle for Allowing Damages in India

Type of Damages Unliquidated Liquidated

(i) Unliquidated damages (a) Assessment of unliquidated damages—Section 73 Ordinary damages Special damages Also known as Rule laid down in Hadley vs. Baxendale; See Examples 4 and 5] Deterioration caused by delay

(b) Obligation of the promisee—Explanation to Section 73

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Law, Ethics and Communication

Examples 1. P contracts with Q for delivering 100 bales of cotton at ` 50 per bale after 6 months. On the appointed day when the price of the cotton bale is ` 75 Q refuses to supply the goods. P can demand damages equivalent to the difference in the contract price and the price prevailing on the due date of performance, i.e., ` 25 per bale. 2. A contracts to buy B’s car for ` 1,75,000, but later on refuses to take the delivery. B finds another buyer who is ready to pay only ` 1,55,000. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the car at the time of the breach of promise, i.e., ` 20,000. 3. M agrees to buy shares from J. However, on due date M refuses to honour his commitment. The difference in contract price and the market price on the date of breach is ` 1,09,218. However, J was able to sell the shares subsequently in rising market and the actual loss amounted to ` 79,882. J can still recover the loss of ` 1,09,218 from M. (Jamal vs Mulla Dawood) 4. S delivers to T, a transport carrier, a machine, to be delivered at S’s factory in Himachal Pradesh. He informs T that production is halted at his factory and the machine is required to be delivered urgently. T unreasonably delays the delivery of the machine, and as a consequence, S also loses a profitable contract with the Government. S is entitled to receive from T, by way of compensation, the average amount of profit which would have been made by the working of the factory during the time by which the machine delivery was delayed, but not the loss sustained through the loss of the Government contract. (Hadley vs Baxendale, Madras Railway Company vs Govind Ram) 5. In the above case if S informs T that production of material to be supplied to the Government is halted at his factory due to urgent requirement of the machine then S would be entitled to recover loss of profit on the Government contract also. 6. A buys wool for making caps for sale during winter. But, due to delay in transit by the carrier, she was unable to utilize it for making caps for sale during the season. After the end of season, the price of wool fell. The fall in the value of the wool after the season amounted to a deterioration in stock for which A would be entitled to recover damages from the carrier. (Wilson vs Lancashire & Yorkshire Railway Co.) 7. H booked a late night flight from Chandigarh to Delhi. However, on the appointed time the airline company cancelled the flight and H had to travel by bus to Delhi in cold night. As a result he caught cold and fell ill. The airline company is liable for the personal inconvenience but not for medical expenses as this cause was too remote. (Hobbs vs London & SW Rail Co.)

(ii) Liquidated damages (a) Assessment of liquidated damages—Section 74 not exceeding

(b) Exceptions to rule of reasonable compensation

Breach of Contract

69

Examples 1. P contracts with Q to pay Q ` 1,000 on a given day, and in the event of breach to pay ` 5000. P fails to pay Q ` 1000 on that day. Q is entitled to recover from P such compensation, not exceeding ` 5,000, as the Court considers reasonable. 2. A gives B a bond for the repayment of ` 1,00,000 with interest at 12% p.a. at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75% p.a. from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the court considers reasonable. (Ram Devi vs State of MP) 3. A undertakes to repay B a loan of ` 1,00,000 by five equal monthly instalments, with a stipulation that in default of payment of any instalment, the whole of the amount remaining unpaid shall become due for repayment immediately. This stipulation is not by way of penalty, and the contract may be enforced according to its terms.

Self-Review Questions (Including Previous Years’ Examination Questions) `

` Nov 2004] ` `

May 2007]

` `

`

70

Law, Ethics and Communication

May 2007] ` `

May 2005]

Nov 2005] May 2011] Nov 2011]

Hints and Answers `

`

` ` `

` ` ` `

`

`

Warner Bros. vs Nelson

Indemnity and Guarantee

6

INDEMNITY

AND

71

GUARANTEE

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning of contract of indemnity Rights of parties in a contract of indemnity Meaning of contract of guarantee Distinction between contract of indemnity and contract of guarantee How a surety is discharged in a contract of guarantee Rights of a surety

6.1

CONTRACT OF INDEMNITY

Meaning of Contract of Indemnity—Section 124

Gajanan Moreshwar vs Moreshwar Madan) Example A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of money. This is a contract of indemnity where A is the indemnifier and B is the indemnified.

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Law, Ethics and Communication

6.2

RIGHTS OF PARTIES IN A CONTRACT OF INDEMNITY

Rights of Indemnity Holder—Section 125 acting within the scope of his authority (i) Damages in suit— (ii) Costs of suit— (iii) Costs of compromise—

Commencement of indemnifier’s liability

Rights of Indemnifier Jaswant Singh vs State)

6.3

CONTRACT OF GUARANTEE

Meaning of Contract of Guarantee—Section 126

surety principal debtor creditor co-sureties

Consideration for contract of guarantee—Section 127

Indemnity and Guarantee

73

Implied promise to indemnify surety—Section 145

Parties and contracts in a guarantee the creditor the surety

three parties three contracts the principal debtor the creditor

the surety

the principal debtor

Essential Features of a Contract of Guarantee Existence of a debt Consideration, essentials of a valid contract The creditor and the surety must be competent The surety’s liability is dependent on the principal debtor’s default. must not misrepresentation must not concealment of material facts. Examples 1. C engages D as clerk to collect money for him. D fails to account for some of his receipts, and C in consequence calls upon him to furnish security for his duly accounting. S gives his guarantee for D’s duly accounting. C does not acquaint S with D’s previous conduct. D afterwards makes default. The guarantee is invalid. 2. S guarantees to C payment for iron to be supplied by him, to D upto an amount of 2,000 tons. C and D have privately agreed that D should pay five rupees per ton beyond the market price, the excess price to be applied for liquidation of an old debt. This agreement is concealed from S. S is not liable as a surety.

Table 6.1

Distinction between the Contract of Indemnity and the Contract of Guarantee

Basis of Distinction

Contract of Indemnity

Contract of Guarantee

No. of parties No. of contracts Contd.

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Law, Ethics and Communication

Table 6.1

Contd.

Loss to be covered

Nature of liability

Request by party Recovery from third party

Extent of Surety’s Liability—Section 128, 144 is co-extensive with that of the principal debtor has the right to limit his liability The liability of the surety arises immediately when a default is made by the principal debtor

Examples 1. S guarantees C the payment of a bill of exchange by D, the acceptor. The bill is dishonoured by D. Since S’s liability is co-extensive with that of D, S is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. 2. C lends ` 5,000 to D and S gives the guarantee for ` 3,000 only. If D makes a default, S shall be liable for ` 3,000 only. 3. D requires a loan of ` 1,00,000 from a bank. S1, S2 and S3 agree to guarantee the loan repayment, but S3 agrees only if S1 and S2 join in contributing in case of default. This is a condition precedent to the guarantee and S3 will be liable only if S1 and S2 contribute in repayment.

Indemnity and Guarantee

6.4

75

TYPES OF GUARANTEE

Classification of Contract of Guarantee Specific or continuing—Section 129 (i) Specific guarantee or specific transaction (ii) Continuing guarantee transactions

a single debt

separable and distinct

Prospective or retrospective guarantee

Fidelity Guarantee

Examples 1. C is a dealer in oil who supplies a certain quantity of oil to D under the contract that if D does not pay for the goods, his friend S would make the payment. This is a contract of specific guarantee and S’s liability would come to an end the moment the price of the goods is paid to C by D. 2. S, in consideration that C will employ D in collecting the rents of C’s zamindari, promises to be responsible for an amount of ` 50,000 for the due collection and payment by D of those rents. This is a continuing guarantee.

6.5

DISCHARGE OF SURETY

Discharge by Revocation—Sections 130, 131 1. By notice of revocation—Section 130

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Law, Ethics and Communication

as to future transactions the surety remains liable for the transactions which have already taken place

2. By death of surety—Section 131 regarding future transactions estate of the deceased surety will be liable

3. Novation of contract

Discharge by Conduct of the Creditor—Section 133 to 139 1. Variance in the terms of contract—Section 133 without the surety’s consent transactions subsequent to the variance

2. Release of principal debtor—Sections 134, 139

3. Arrangement between creditor and debtor—Sections 135, 136, 137 composition with, or promises to give time to, or not to sue, the principal debtor with a third person Mere forbearance on the part of the creditor to sue

4. Creditor’s act or omission impairing surety’s eventual remedy—Section 139

Indemnity and Guarantee

77

Examples 1. S becomes surety to C for D’s conduct as manager in C’s bank. Afterwards, C and D contract, without S’s consent, that D’s salary shall be raised, and that he shall become liable for 25% of the losses on overdrafts. D allows a customer to overdraw, and the bank loses a sum of money. S is discharged from his surety-ship by the variance made without his consent, and is not liable to make good this loss incurred after the variation of D’s salary. 2. C contracts with D for a fixed price to build a house for C within a stipulated time, C supplying the necessary timber. S guarantees D’s performance of the contract. C omits to supply the timber. S is discharged from his surety-ship. 3. D owes to C a debt guaranteed by S. The debt becomes payable. C does not sue D for a year after the debt has become payable. S is not discharged from his surety-ship. 4. S puts D as apprentice to C, and gives a guarantee to C for D’s fidelity. C promises on his part that he (C) will check the accounts of D, atleast once a month. C omits to check the accounts as promised, and D embezzles money. S is not liable to C on his guarantee.

Discharge by Invalidation of the Contract—Sections 142, 143, 144

Guarantee obtained by misrepresentation by the creditor Guarantee obtained by concealment by the creditor Failure of co-surety to join a surety

When a Surety is not Discharged 1. Agreement with third party 2. Creditor’s forbearance to sue Mahant Singh vs U. Bai) 3. Release of one co-surety by the creditor

6.6

RIGHTS OF SURETY

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Law, Ethics and Communication

Rights against the Principal Debtor—Sections 140, 145 1. Right of Subrogation 2. Right of Indemnity

Rights against the Creditor—Section 141 1. Right to securities whether the surety knows about the existence of such security or not 2. Right to set-off

Examples 1. C advances to D, his tenant, ` 2,000 on the guarantee of S. C also has a further security for his loan by a mortgage of D’s furniture. D becomes insolvent and C sues S on his guarantee. S is discharged from liability to the extent of the amount of the furniture mortgaged to C. 2. C advances to D, his tenant, ` 2,000 on the guarantee of S. D has to recover ` 500 from C for repairs in the house. D becomes insolvent and C sues S on his guarantee. S’s liability is limited to ` 1,500 after claiming setoff of the amount due to D by C.

Rights against the Co-sureties 1. Mutual arrangement between co-sureties—Section 132

2. Release of one co-surety—Section 138

3. Co-sureties to contribute equally—Section 146 in the absence of any contract to the contrary

4. Co-sureties bound in different sums—Section 147 subject to the maximum of the amount guaranteed by each one

Indemnity and Guarantee

79

Examples 1. P, Q, R and S are co-sureties for a debt of ` 2,000 lent by C to D. D defaults in repaying the loan. P, Q, R and S are liable to contribute ` 500 each. 2. Q, R and S are sureties to C for the sum of ` 1,000 lent to D, and there is a contract between Q, R and S that Q and R shall be responsible for 25% each but S shall be responsible for 50% of the debt. D makes default in payment. As between the sureties, Q is liable to pay ` 250, R ` 250 and S ` 500. 3. Q, R and S, sureties for D, enter into three separate bonds, each in a different penalty, viz., Q for ` 10,000, R for ` 20,000 and S for ` 40,000. D makes default to the extent of ` 30,000. Q, R and S are liable to pay ` 10,000 each. 4. If in (3) above, D defaults to the extent of ` 40,000, then Q would be liable for ` 10,000 and R and S for ` 15,000 each. 5. If in (3) above, D defaults to the extent of ` 70,000, then Q would be liable for ` 10,000, R for ` 20,000 and S for ` 40,000.

Self-Review Questions (Including Previous Years’ Examination Questions)

` ` `

Nov 2002]

` ` `

May 2006] `

`

80

Law, Ethics and Communication

Nov 2008]

Nov 2006] Nov 2006] ` ` `

Nov 2008]

Hints and Answers

`

`

Indemnity and Guarantee

81

Mahant Singh vs U Bai)

7

BAILMENT

AND

PLEDGE

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning of contract of bailment Rights and duties of parties in a contract of bailment Rights of parties against wrongdoer ������������������������������������� Meaning of contract of pledge and its distinction with contract of bailment Rights and duties of parties in a contract of pledge

7.1

CONTRACT OF BAILMENT

Meaning of Bailment—Sections 148-149 delivery of goods the purpose is accomplished

upon a contract returned or otherwise disposed

bailor bailee Explanation to Section 148

Constructive Delivery “

Essentials of Valid Bailment 1. Agreement



Bailment and Pledge

83

2. Delivery of goods voluntary delivery of goods

3. Purpose some purpose

4. Return of the goods

5. Consideration

Examples 1. X delivers some gold to jeweller Y to make bangles for his wife. In this case X is the bailor and Y is the bailee. By delivering gold to Y a relationship of bailment is created between X and Y. 2. A, a thief, enters a house and steals some ornaments. There is no bailment in this case; though the possession of goods has been transferred, it is not voluntary. 3. Depositing money by a customer in a bank in a current, savings or fixed deposit account is not bailment because the contract relates to money, and there is no obligation to return the identical money but an equivalent of it. 4. When valuables or coins or notes are deposited in a bank locker, there is no contract of bailment because the keys of the locker remain with the owner only. 5. A pledge of ornaments/jewellery on the security of which money is borrowed is a contract of bailment, for these are to be returned as they are and not their monetary value. 6. Goods delivered to a railway company for being carried and delivered to the consignee is a contract of bailment.

7.2

KINDS OF BAILMENT

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Law, Ethics and Communication

7.3

DUTIES OF BAILOR = RIGHTS OF BAILEE

1. Duty to Disclose Defects—Section 150

gratuitous bailment,

defects which he is aware

non-gratuitous bailment

all defects

2. Duty to Bear Expenses—Section 158 gratuitous bailment

ordinary as well as extraordinary

expenses non-gratuitous bailment

only extraordinary expenses

3. Restoration of Goods Lent Gratuitously—Section 159

4. Duty to Indemnify the Bailee if the Bailor’s Title is Defective—Section 164

5. Duty to Receive Back Goods—Section 164

6. Duty to Bear Risks

7.4

DUTIES OF BAILEE = RIGHTS OF BAILOR

1. Duty to Take Reasonable Care of the Goods Bailed—Sections 151, 152

Bailment and Pledge

2. Not to Make Unauthorized Use—Sections 153, 154

3. Not to Mix Bailor’s Goods with Own—Sections 155-157 With the consent of bailor Without the consent of bailor – Goods are separable

Without the consent of bailor – Goods are inseparable

4. Duty to Return Goods—Sections 160-161 without demand

5. Duty to Return Accretions—Section 163

7.5

RIGHTS OF BAILEE

1. Right to Deliver Goods to Any of Joint-bailors—Section 165

85

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Law, Ethics and Communication

2. Right to Deliver the Goods to Bailor Even if the Title is Defective—Section 166-167

3. Right to Particular Lien—Section 170 Particular lien to retain such goods

4. Right to General Lien—Section 170 General Lien any goods

Examples 1. A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is entitled to retain the stone till he is paid for the services he has rendered. 2. A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished, and to give a three month credit for the price. B is not entitled to retain the coat until he is paid.

Table 7.1

Differences between Particular Lien and General Lien

Particular Lien

General Lien

Bailment and Pledge

7.6

87

RIGHTS OF BAILOR AND BAILEE AGAINST WRONGDOER

1. Suit by Bailor or Bailee against Wrongdoer—Section 180

2. Compensation Obtained by Such Suit—Section 181

7.7

FINDER OF GOODS

Rights of Finder of Goods—Section 168 no right to sue

finder of goods expense voluntarily

incurred may sue for such reward

Right to Sell Goods—Section 169

Duties of a Finder of Goods

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Law, Ethics and Communication

7.8

TERMINATION OF BAILMENT

7.9

PLEDGE

Meaning of Pledge—Section 172 pledge pawnor

special property

Who can Pledge?

Note:

Difference between Pledge and Bailment

pawnee

Bailment and Pledge

7.10

RIGHTS OF PAWNEE

Right to Retain the Goods and Presumption in Case of Subsequent Advances – Sections 173, 174

Right to Extraordinary Expenses—Section 175 extraordinary expenses incurred by him

Right to Sale—Section 176

Right against True Owner—Section 178A

7.11

DUTIES OF PAWNEE = RIGHTS OF PAWNOR

89

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Law, Ethics and Communication

7.12

DUTIES OF PAWNOR

Self-Review Questions (Including Previous Years’ Examination Questions)

May 2007]

Nov 2003] ` May 2005]

Nov 2008]

` ` ` May 2008] ` `

Bailment and Pledge

91

Nov 2008] ` ` ` ` Nov 2010]

May 2011]

Hints and Answers

Shaw & Co. vs Symmons & Sons

Bank of Chittur Ltd. vs Narasimhulu

92

Law, Ethics and Communication

8

AGENCY

CHAPTER

Learning Objectives After reading this chapter, you will understand: Parties in a contract of agency Various modes of creation of an agency Scope and extent of authority of an agent Distinction between a ‘sub-agent’ and a ‘substituted agent’ Rights and duties of parties in a contract of agency When an agent may be personally liable Liability of the principal to third parties How a contract of agency is terminated

8.1

CONTRACT OF AGENCY

Principal and Agent—Section 182 agent principal

Harbans Lal vs Producer Exchange Corporation)

Agency

93

Who can Appoint an Agent?—Section 183

Madanlal vs Bherulal)

Who may be an Agent?—Section 184

Example P, a principal, entrusts to M, a minor, certain goods worth ` 1 lakh and instructs him not to sell the same for credit or for any amount less than ` 1 lakh. If M sells the same to T on credit for ` 80,000, this transaction will certainly be binding as between P and T. However, P will have no right to claim damages as against M for his misconduct since M happens to be a minor. If M was a person of age of majority, he would be liable to P for damages sustained due to his misconduct.

Consideration for Agency—Section 185 No consideration is necessary to create an agency

Types of Agent 1. General Agent 2. Special Agent 3. Mercantile Agents 4. Non-commercial Agents

8.2

CREATION OF AGENCY

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Express or Implied Agency—Sections 186-187 express words spoken or written implied be inferred from the circumstances of the case; things spoken or written ordinary course of dealing

Examples 1. P owns a shop in Siliguri, living himself in Kolkata. He visits the shop occasionally. The shop is managed by A, and he is in the habit of ordering goods from T in the name of P for the purposes of the shop. A pays for the goods out of P’s funds with P’s knowledge. A has an implied authority from P to order goods from T in the name of P for the purposes of the shop. 2. P and A are relatives. P lives in Delhi and A lives in Kanpur. P has a flat in Kanpur. A with P’s knowledge lets out his flat. A regularly collects the rent and remits the same to P who has been accepting the same. Here A is the implied agent of P though he has not been expressly appointed. 3. P has a car, but he cannot drive it. He allows his neighbour A to drive it. A while driving the car with P meets with an accident and injures T. T can sue P for damages because A is his implied agent.

Further classification of implied agency 1. Agency by estoppel or holding out—Section 237

2. Agency by necessity—Section 189

Agency

95

Examples 1. A tells T in the presence and within the hearing of P that he (A) is P’s agent. P keeps quiet and does not contradict this statement. Later on T enters into a contract with A, honestly believing that A is P’s agent. P is bound by this contract of agency by estoppel. 2. P allows his servant to purchase goods on credit from another dealer on regular basis. P also pays for such goods regularly. Later on when the servant was not in P’s employment, he buys goods on P’s credit from the same dealer. P will be liable because P had held out the servant as his agent on earlier occasions. 3. A consignment of butter which was in danger of becoming useless owing to delay in transit was sold by the railway company for the best available price and it was not possible to obtain instructions of the consignor. In this case, the sale was held to be binding upon the consignor, as the railway company acted as an agent for consignor by necessity. (Sims & Co. vs Midland Rail Co.)

Agency by Ratification—Sections 196, 197

Examples 1. A, without authority, buys goods on behalf of P. Afterwards P sells them to T on his own account. P’s conduct implies a ratification of the purchase made for him by A. 2. A, without P’s authority, lends P’s money to T. Afterwards P accepts interest on the money from T. P’s conduct implies a ratification of the loan given. 3. P appointed A as his agent to buy wheat for him. In addition to buying wheat, A buys 10 bags of rice. P agrees to take the delivery of rice as well. P is liable to pay the price of rice.

Effect of ratification

Bolton Partners vs Lambert)

Rules of ratification expressly contract as an agent the principal should be in existence

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The principal should be competent complete knowledge of material facts (Section 198). within reasonable time ratifies the whole of the transaction

A third party cannot be subjected to damages or termination of rights or termination of interests by ratification of an unauthorised act (Section 200). atification must be communicated Examples 1. A without the knowledge of P enters into a contract with T to buy 100 bales of cotton on behalf of P. Subsequently, the price of cotton bales goes up. P on becoming aware of the transaction purported to have been done on his behalf ratifies it. T refuses to perform the contract. P can compel T to perform the contract. 2. A is an agent of P. A enters into a contract with T to buy 100 bales of cotton without mentioning that he is buying on behalf of P. Subsequently, the price of cotton bales goes up. P on becoming aware of the transaction purported to have been done on his behalf ratifies it. T refuses to perform the contract. P cannot compel T to perform the contract. 3. B (a bailee) is in possession of a car belonging to P. A without authority from P demands, on behalf of P, the delivery of that car. B refuses to deliver the car to A. P cannot ratify the demand made by A so as to make B liable for damages for B’s refusal to deliver the car. 4. A forged P’s signature and withdrew some money from bank. Subsequently, P ratifies A’s act of withdrawing money. The ratification is not valid as forgery is an offence. 5. A director of a company does an act on behalf of the company which is ultra vires the company. The principal (company) cannot ratify such ulta-vires act.

Agency by Operation of Law

8.3

SCOPE AND EXTENT OF AUTHORITY OF AGENT

Authority of Agent—Sections 188, 226 authority to do every lawful

as if the contracts had been entered into the acts done by the principal in person

Agency

97

Agent’s Authority in an Emergency—Section 189

8.4

DELEGATION OF AUTHORITY BY AGENT (SUB-AGENT)

Appointment of Sub-agent—Sections 190, 191

Relationship between Principal, Agent and Sub-agent—Sections 192, 193, 210 Where a sub-agent is properly appointed

Where a sub-agent is appointed without authority

Substituted Agent—Sections 194, 195

named so or selected by another agent

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Examples 1. P directs A, his solicitor, to sell his estate by auction, and if required to employ an auctioneer for the purpose, on his behalf. A names S, an auctioneer, to conduct the sale. S is not a sub-agent but an agent of P for the conduct of the sale. 2. P authorizes A, a merchant in Kolkata, to recover the money due to P from XYZ. A instructs S, a solicitor, to take legal proceedings against XYZ for the recovery of the money. S is not a sub-agent but solicitor for P. 3. Assume in case (2) above, A selects the solicitor negligently and S is found to be incompetent to handle debt recovery cases. As a result, P incurs a loss. A is liable to P. 4. Assume in case (2) above, A selects the solicitor diligently after making full enquiry. In spite of best efforts, S cannot recover the debt. As a result, P incurs a loss. A is not liable to P.

Pretended Agent—Section 235

8.5

DUTIES OF AN AGENT = RIGHTS OF A PRINCIPAL

1. To Conduct Principal’s Business Diligently—Section 211, 212

2. Agent’s Accounts—Section 213

3. Communicate with Principal—Section 214

4. Not to Deal on His Own Account—Sections 215, 216

Agency

99

5. Duty on Death or Insanity of Principal—Section 209

6. Other Duties

Examples 1. P, the principal, instructed his agent A to put certain goods in a particular warehouse. Ignoring P’s directions, A puts the goods in another equally safe warehouse. The goods are destroyed by fire without any negligence on the part of A. A is liable to make good his principal’s loss. 2. A, an insurance broker, was employed by P to effect an insurance on a ship. A insured the ship but failed to see that ‘usual clauses’ were inserted in the policy. The ship was lost in a storm and due to absence of usual clauses from the policy, nothing could be recovered from the insurance company. A is liable to make good the loss suffered by P. 3. P directs A to sell P’s estate. A, on looking over the estate before selling it, finds a mine on the estate which is unknown to P. A informs P that he wishes to buy the estate for himself, but conceals the discovery of the mine. P allows A to buy in ignorance of the existence of the mine. P, on discovering that A knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option. 4. P directs A, his agent, to buy a certain house for him. A tells P that the house cannot be bought and instead buys the house for himself. P may, on discovering that A has bought the house, can compel him to sell it to P at the price he (A) gave for it.

8.6

RIGHTS OF AN AGENT = DUTIES OF A PRINCIPAL

1. Right of Retainer—Section 217 – – –

2. Right to Remuneration—Sections 219, 220

3. Right to Lien—Section 221

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particular lien,

4. Right to Indemnity—Sections 222-224

5. Right to Compensation—Section 225

8.7

PERSONAL LIABILITY OF AN AGENT

Liability of an Agent—Section 230

8.8

LIABILITY OF PRINCIPAL TO THIRD PARTIES

Disclosed Principal—Section 226-229

Agency

Consequences if the agent exceeds authority – If the act is separable – If act is inseparable

Unnamed Principal

– –

Undisclosed Principal—Sections 231–234

8.9

TERMINATION OR REVOCATION OF AGENCY—SECTIONS 201–207

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Effective Time of Termination of Agency—Section 208

Irrevocable Agency

Agency Coupled with Interest—Section 202

Example P has some dues payable to A. P gives authority to A to sell P’s land, and to pay himself, out of the proceeds, the debts due to him from P. P cannot revoke this authority, nor can it be terminated by his insanity or death.

Self-Review Questions (Including Previous Years’ Examination Questions)

`

` ` Nov 2005]

Agency

`

103

May 2008]

May 2008] May 2010] ` `

May 2011]

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Law, Ethics and Communication

Hints and Answers

`

Negotiable Instruments Act, 1881

Section B: Other Business Laws

9

INSTRUMENTS

105

NEGOTIABLE ACT, 1881

CHAPTER

Learning Objectives After reading this chapter, you will understand:



Meaning of a negotiable instrument, characteristics and parties in different types of negotiable instruments Distinction between a holder of a negotiable instrument and a ‘holder in due course’, and meaning of ‘payment in due course’ �������������� ��� ����������� ������������ ��� ���� ������ ��� ���������� ������� ����� ��� �������� ���� validity Computation of maturity date of a negotiable instrument; �� ����������������������������������������������������������������������������������������������� Liabilities of parties to negotiable instrument ������������������������������������������������������������ Crossing of a cheque, types of crossing and their effect Payment of cheque, protection to paying and collecting bankers, and dishonour of a cheque and �������������������������������������������������������������������� Material alteration in a negotiable instrument Discharge of a negotiable instrument

9.1

APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 Object of the Act—To define and amend the law relating to promissory notes, bills of exchange and cheques. Effective—This Act came into force on 1st March, 1882. Applicability—This Act extends to whole of India. Overriding effect—Nothing contained in this Act affects any local usage relating to any instrument in an oriental language, provided such usage may be excluded by the instrument indicating an intention that the legal relations of the parties thereto shall be governed by this Act.

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9.2

Law, Ethics and Communication

NEGOTIABLE INSTRUMENT

Meaning of Negotiable Instrument thereof

it bona fide and for value notwithstanding any defect in the title of the prior party.

Definition of a Negotiable Instrument—Section 13 — a promissory note, — a bill of exchange, or — a cheque

— to bearer

— one or some of several payees.

Characteristics of a Negotiable Instrument 1. Freely transferable from one person to another person. 2. May be transferred by delivery or ‘endorsement and delivery’ 3. The holder in due course obtains good title of the instrument notwithstanding any defect in the previous holder. 4. Holder in due course of a negotiable instrument can sue on the instrument in his own name. 5. Transferable infinitum, i.e., can be transferred any number of times till its satisfaction. Provisions of the Negotiable Instruments Act, 1882 vis-à-vis the Reserve Bank of India Act, 1934 Section 31 of the RBI Act promissory note payable to the bearer of the instrument. any bill of exchange payable to the bearer on demand. Exceptions to Section 31 of the RBI Act A bill or promissory note on being endorsed can be payable to the bearer on demand. A cheque can be made payable to the bearer on demand.

Parties to Negotiable Instrument–Sections 8, 9 Holder—Any person entitled in his own name

Negotiable Instruments Act, 1881

107

— — to receive or recover the amount due thereon from the parties thereto. Holder in due course – Any person who for consideration became the possessor of a negotiable instrument before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. Therefore, a ‘holder in due course’ is a person who holder. for consideration. before maturity. in good faith. A holder of a negotiable instrument who derives title from a holder in due course has the rights thereon of that holder in due course of defects by passing through the hands of a holder in due course, it remains immune from those defects in spite of the fact that a subsequent holder may have noticed that the defects once existed provided he was not a party to them [Guideford Trust vs Goss, Credit Bank vs Schenkers] endorsee and acceptor for honour

Examples 1. A obtains B’s acceptance to a bill by fraud. A endorses it to C who does not know anything about this fraud. C gets good title to the bill as C is holder in due course. 2. A obtains B’s acceptance to a bill by fraud. A endorses it to C who is aware of the fraud. C cannot claim good title since he is not a holder in due course as he did not obtain the instrument in good faith. 3. A obtains B’s acceptance to a bill by fraud. A endorses it to C who takes it as a holder in due course. C endorses the bill to D who knows of the fraud. In normal course D would not have good title, but because of exception in Section 53, D has obtained title from C who himself is a holder in due course and since D is not a party to the fraud, D gets good title to the bill.

Privileges of a Holder in Due Course (HDC)

3. No prior party can set up a defence that the negotiable instrument was drawn, made or endorsed by him 4. No payee of a negotiable instrument can set up a defence that the negotiable instrument was lost or was obtained from him by offence or fraud or for an unlawful consideration. 5. No prior party can allege that the negotiable instrument was delivered conditionally or for a special

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an inchoate negotiable instrument Note: will not be entitled to payment if the instrument is forged or transferred by forgery.

Capacity of Parties to a Negotiable Instrument—Section 26 capable of contracting, according to the law to which he is subject, may bind himself and note, bill of exchange or cheque. minor may draw, endorse, deliver and negotiate such instruments as to bind all parties except himself. instruments except in cases in which, under the law for the time being in force, they are so empowered.

Agency—Section 27

agent the power of accepting or endorsing bills of exchange so as to bind his principal.

Payment in Due Course—Section 10 apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount mentioned therein. 1. 2. 3. 4. 5.

The payment must be in accordance with the apparent tenor of the instrument. The payment must be made by or on behalf of the drawee or acceptor of the instrument. The payment must be made in money. The payment must be made to the holder or the holder in due course. The payment must be made in good faith, without negligence and in bona fide circumstances.

entitled to receive the payment. Meaning of Apparent Tenor – As is apparent from the instrument. For example, if the instrument is payable on a certain date, any payment before that date is not in accordance with apparent tenor.

Negotiable Instruments Act, 1881

109

since it is not as per the apparent tenor of the instrument.

Presumptions as to a Negotiable Instrument—Section 118 Until the contrary is proved (a) Of consideration—That every negotiable instrument was made or drawn for consideration, and that every such instrument, when it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated or transferred for consideration. (b) As to date—That every negotiable instrument bearing a date was made or drawn on such date. (c) As to time of acceptance—That every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity. (d) As to time of transfer—That every transfer of a negotiable instrument was made before its maturity. (e) As to order of endorsements—That the endorsements appearing upon a negotiable instrument were made in the order in which they appear thereon. (f) As to stamps—That a lost promissory note, bill of exchange or cheque was duly stamped. (g) Holder in due course—That the holder of a negotiable instrument is a holder in due course provided that, where the instrument has been obtained from its lawful owner, or from any person in lawful custody thereof, by means of an offence or fraud, or for unlawful consideration, the burden of proving that the holder is a holder in due course lies upon such holder. Table 9.1 summarises differences between a holder and a holder in due course. Table 9.1

Differences between a Holder and a Holder in Due Course

Basis Consideration

Before maturity

Defect in transferor’s title

Privileges

Holder

Holder in due course (HDC)

A person becomes a holder even if he obtains the negotiable instrument without any consideration.

obtains the negotiable instrument for consideration.

A person becomes a holder even if he obtains the negotiable instrument after the maturity of the negotiable instrument.

obtains the negotiable instrument before its maturity.

title of transferor, he cannot hold prior parties responsible.

in good faith, and therefore will get a good title to the instrument even if the title of transferor is defective.

A holder is not entitled to the privileges, specified under the Negotiable Instruments Act, 1881.

Right to sue

A holder cannot sue all the prior parties.

Table 9.2 outlines effects of negotiable instruments forged, lost, stolen, obtained by fraud or unlawful consideration.

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Table 9.2 Effects of Negotiable Instruments Forged, Lost, Stolen, Obtained by Fraud or for Unlawful Consideration Defect in Negotiable Instrument (NI)

Effect on parties to Negotiable Instrument

Forged Mercantile Bank vs D’Silva Lost/stolen title. acquire good title since such NI cannot be transferred by the finder without forging endorsement. Obtained by fraud/unlawful consideration

9.3

be void.

PROMISSORY NOTE—SECTION 4

Definition of a Promissory Note

of, a certain person, or to the bearer of the instrument.

Parties to a Promissory Note Maker Payee—The payee is the person to whom money is to be paid and named as such in the promissory note.

Characteristics of a Promissory Note 1. In writing is not a valid promissory note. 2. Promise to pay 3. Definite and unconditional 4. Signed by maker authority. 5. Payee—The promissory note must specify the payee in clear terms. Where the name of the payee is not mentioned as a party, the instrument becomes invalid.

Negotiable Instruments Act, 1881

111

6. A certain sum of money—The promise to pay must be of certain sum of money or amount which is capable of being made certain. 7. To pay money only—A promissory note must be a promise to pay money only and nothing else. 8. Stamped & dated—A promissory note should be stamped and dated. If it is not dated, then it is presumed to be made on the date of delivery. 9. Not payable to bearer on demand

Examples Consider the following signed instruments which may or may not be promissory notes: (a) I promise to pay B on order ` 500. (b) I acknowledge myself to be indebted to B in ` 1,000, to be paid on demand, for value received. (c) Mr. B, IOU ` 1,000. (d) I promise to pay B ` 500 and all other sums which shall be due to him. (e) I promise to pay B ` 500 first deducting there out any money which he may owe me. (f) I promise to pay B ` 500 seven days after my marriage with C. (g) I promise to pay B ` 500 on D’s death, provided D leaves me enough to pay that sum. (h) I promise to pay B ` 500 and to deliver to him my black horse on 1st January next. (i) I promise to pay B ` 5,000, 7 days after the death of C. The instruments (a), (b) and (i) only are promissory notes. (c) is only an acknowledgement of debt and there is no promise to pay. (d) The amount is not certain. (e) The promise is conditional. (f) The promise is conditional, since it is dependent on an uncertain event i.e. marriage with C. (g) Although death of a person is a certain event, the promise is conditional in so far as it is dependent on D leaving enough money. (i) In comparison to (f), (i) is a certain event though the time of occurrence of event is uncertain. Therefore, (i) is a promissory note.

Figure 9.1

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9.4

BILL OF EXCHANGE—SECTION 5

Definition of Bill of Exchange directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

Parties to a Bill of Exchange Drawer His liability is primary and conditional until the bill is accepted when it becomes secondary and conditional. Drawee—The person on whom the bill is drawn. Acceptor—On acceptance of the bill and giving a notice thereof to the drawer, a drawee is called acceptor and he becomes liable for the payment of the bill. His liability is primary and unconditional. Payee—The person to whom money is to be paid and named as such in the bill. Drawee in case of need—If in the bill or in any endorsement thereon, the name of any person is given in addition to the drawee to be resorted to in case of need such person is called a ‘drawee in case of need’. Where a drawee in case of need is named in a bill of exchange, or in any endorsement thereon,

Characteristics of a Bill of Exchange 1. 2. 3. 4. 5.

A bill of exchange must be in writing. It must be signed by the drawer. It must contain an express order to pay. The order to pay must be definite and unconditional. The sum money only. 7. The drawer, drawee and payee must be certain. 8. A bill of exchange must be stamped. 9. A bill of exchange cannot be originally made as payable to bearer on demand. Note (for Promissory Note as well as Bill of Exchange) 1. A promise or order to pay is not ‘conditional’ because the time for payment of the amount or any instalment is specified to happen at the lapse of a certain period after the occurrence of a specified 2. The sum payable may be ‘certain’ even if it includes future interest or is payable at an indicated rate

3. The person to whom, it is clear that, the direction is given or that payment is to be made may be a

Negotiable Instruments Act, 1881

113

Figure 9.2

Acceptance of Bill of Exchange—Section 7

Types of Acceptance—Section 86 General—Acceptance of bill without any qualification Qualified—Acceptance of bill subject to some qualification

Qualified acceptance payment to be dependent on the happening of an event payment of part payment at a specified place payment at a time other than that at which under the order it would be legally due.

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Effect of qualified acceptance to such acceptance are discharged as against the holder. acceptance.

9.5

CHEQUE—SECTION 6

Definition of a Cheque cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. Explanation I—For the purposes of this section, the expression paper cheque, and is generated, written and signed in a secure system ensuring the minimum asymmetric crypto system.

generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Explanation II—For the purposes of this section, the expression ‘clearing house’ means the clearing

Parties to a Cheque Drawer conditional. Drawee Payee—The person in whose favour the cheque is made and to whom the money is to be paid by the

Characteristics of a Cheque essentials of a valid bill of exchange. 2. A cheque is a peculiar type of negotiable instrument in the sense that it does not require acceptance. 3. It is always drawn on a specified banker 4. A cheque is always payable on demand.

Negotiable Instruments Act, 1881

115

Figure 9.3

Cheque vs Bill of Exchange 2. No days of grace are allowed in case of a cheque. 3. In the case of dishonour of a cheque, notice of dishonour is not necessary. 4. A cheque can be drawn to bearer and made payable on demand, whereas a bill cannot be bearer if it is made payable on demand. 5. No acceptance is required in cheque. It only needs to be presented for payment. 7. A cheque may be crossed, whereas a bill cannot be crossed.

Bank Draft—Section 85A

9.6

CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

Classification of Negotiable Instruments 1. On the basis of location—Sections 11, 12 Inland instrument—A promissory note, bill of exchange or cheque drawn or made in India and made payable in India or drawn upon any person resident in India

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shall be deemed to be an inland instrument.

Foreign instrument made payable shall be deemed to be a foreign instrument. It may be

protest. 9.4 lists out examples of inland and foreign negotiable instruments. Table 9.3

Quick References for Checking Whether a Negotiable Instrument (NI) is Inland or Foreign

Whether NI is drawn or made in India

Whether NI is payable in India

Whether NI is drawn upon any person resident in India

Result

Yes

Yes

Yes

Inland

Yes

No

Yes

Inland

Yes

Yes

No

Inland

Yes

No

No

Foreign

No

Foreign

Table 9.4

Examples of Inland and Foreign Negotiable Instruments Nature of transaction

Type of NI Inland Foreign Inland Inland Foreign

2. On the basis of payee—Section 13 Bearer instrument—An instrument which is expressed to be payable to the bearer or an instrument thereof. A promissory note cannot be made payable to bearer. A bill of exchange cannot be made payable to bearer on demand.

Negotiable Instruments Act, 1881

117

Order instrument—An instrument payable to a specified person or his order. The order instrument can be transferred by endorsement and delivery.

3. On the basis of payment—Sections 19, 21 Demand instrument A promissory note or bill of exchange, in which no time for payment is specified, is payable on

In a promissory note or bill of exchange the expressions “at sight” and “on presentment” means Time instrument—An instrument in which time for payment is specified. A time instrument may be an event which is certain to happen.

4. On the basis of validity—Sections 17 to 21 Valid instrument Negotiable Instrument. Inchoate instrument—Where one person signs and delivers to another a paper stamped in accordance having written thereon an incomplete negotiable instrument, he thereby gives prima facie authority to amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount, provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid there Conditions for an inchoate instrument: A person signs a negotiable instrument. The negotiable instrument is stamped. The person signing such negotiable instrument delivers it to another person. Legal effect instrument. Rights of a person to whom an inchoate instrument is delivered—He can recover only such Rights of holder in due course—He can recover the whole amount stated in the instrument, but not exceeding the amount covered by the stamp duty paid thereon. Ambiguous instruments—Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be thenceforward Example

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Difference in amount stated figures and in words, the amount stated in words

9.7

MATURITY OF NEGOTIABLE INSTRUMENTS

Maturity of a Negotiable Instrument—Section 22 Date of Maturity—The maturity of a promissory note or bill of exchange is the date at which it falls due for payment. Days of grace—Every promissory note or bill of exchange which is not expressed to be payable on demand, at sight or on presentment is at maturity on the third day after the day on which it is expressed to be payable. Interest—If the payment of a negotiable instrument is delayed beyond the maturity date, interest @

Table 9.5

Calculation of Maturity of a Negotiable Instrument—Sections 23 to 25 Negotiable instrument payable

Date of maturity rd

On a specified day

day

On a stated number of days after date rd

day

On a stated number of days after sight rd

On a stated number of days after happening of a certain event

rd

day

day

On a stated number of months after date rd

day

On a stated number of months after sight rd

day

On a stated number of months after happening of a certain event 3rd day If the day of maturity is a public holiday

Immediately preceding business day

If the day of maturity is an emergency or unforeseen public holiday

Immediately succeeding business day

Note –

Negotiable Instruments Act, 1881

119

Examples (a) A negotiable instrument dated 30th January, 2012, is made payable at one month after date. The instrument is at maturity on the third day after the 29th February, 2012, i.e., 3rd March, 2012. (b) A negotiable instrument, dated 30th August, 2011, is made payable three months after date. The instrument is at maturity on 3rd December, 2011. (c) A promissory note or bill of exchange, dated 31st August, 2011, is made payable three months after date. The instrument is at maturity on the 3rd December, 2011.

9.8

NEGOTIATION AND ENDORSEMENT

Meaning of Negotiation—Section 14 When a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated.

Meaning of Endorsement—Section 15

instrument, he is said to endorse the same.

Essentials of a Valid Endorsement

Methods of Negotiation—Sections 47, 48

Consequences of Negotiation The endorsement of an instrument, followed by delivery, transfers the property in the instrument and right of further negotiation to the endorsee.

Types of Endorsement 1. General or Blank The instrument originally payable on order can be made payable to the bearer by general endorsement. 2. Special or Full—When the endorsement is made by a holder with a direction to pay the amount

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3. Restrictive—When the endorser by express words restricts or excludes the right of further negotiation. 4. Conditional or without recourse (sans recourse) —When the endorser by express words excludes due thereon depend upon the happening of a specified event, although such event may never happen. 5. Partial

6. Negotiation back—When an endorser, after he has negotiated an instrument, again becomes a holder of the same instrument.

Effect of Negotiation Back

Conversion of blank endorsement to full endorsement writing above the endorser’s signature, a direction to pay to any other person as endorsee, convert the holder, though he transfers the instrument, does not incur the responsibility of an endorser because his name Exception – it can be claimed from the endorser in full by only the person to whom such endorsement in full has been made.

Examples 1. B signs the following endorsements on different negotiable instruments payable to the bearer: (i) “Pay the contents to C only”. (ii) “Pay C for my use.” (iii) “Pay C or order for the account of B”. (iv) “The within must be credited to C”. Endorsements (i) to (iv) exclude the right of further negotiation by C. These are restrictive endorsements. (v) “Pay C.” (vi) “Pay C value in account with the Oriental Bank.” (vii) “Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the endorser and others.” Endorsements (v) to (vii) do not exclude the right of further negotiation by C. These are full endorsements. 2. A bill is drawn payable to A or order. A endorses it to B, the endorsement not containing the words “or order” or any equivalent words. B can negotiate the instrument.

Negotiable Instruments Act, 1881

121

3. The endorser of a negotiable instrument signs his name, adding the words “sans recourse”. Upon this endorsement he incurs no liability. This is an endorsement without recourse. 4. A is the payee and holder of a negotiable instrument. He transfers the instrument to B. B endorses it to C, C to D, D to E who endorses it back to A. In this case, B, C, D and E are absolved from their liability to A because it involves a circuitry of action and A is not a subsequent party but also a prior party. 5. A is the payee and holder of a negotiable instrument. Excluding personal liability by an endorsement “sans recourse” he transfers the instrument to B. B endorses it to C, C to D, D to E who endorses it back to A. Now, the intermediary parties are not absolved and A is not only reinstated in his former rights, but has the rights of an endorsee against B, C, D and E.

Negotiation Vs. Assignment of a Negotiable Instrument Although, both negotiation and assignment of a negotiable instrument purport to transfer the property in a NI yet both are different concepts in the eyes of law.

Table 9.6

Distinction between Negotiation and Assignment

Basis Applicable Act

Meaning

Negotiation

Assignment

If a negotiable instrument is transferred by way of negotiation, the Negotiable Instruments Act, 1881 applies.

Where any right is transferred by way of

Negotiation means transfer of a negotiable instrument to any other person so as to constitute that person the holder of such negotiable instrument.

Transfer of a right to receive the payment

1882 applies.

written document is called as assignment.

Scope

Negotiation can be made for transferring negotiable instrument only.

Assignment can be made of any right.

Method or manner

A bearer instrument can be negotiated merely by deliver, and an order instrument can be negotiated by endorsement and delivery.

Assignment is valid only if it is made in writing and is signed by the assignor.

Notice

Notice of negotiation is not required to be given to any party.

Notice of assignment must be given by the assignee to the debtor.

Consideration

It is presumed that every negotiable instrument was negotiated for consideration.

There is no such presumption in case of assignment.

Burden of proof

The other party has to prove that negotiation was without any consideration.

The assignee has to prove that there was some consideration.

Better title

The transferee of a negotiable instrument acquires a title better than that of the transferor, i.e., he becomes a holder in due course.

The assignee does not acquire a title better than that of the assignor.

Stamp duty

Negotiation does not require payment of stamp duty.

Assignment requires payment of stamp duty.

122

9.9

Law, Ethics and Communication

LIABILITY OF PARTIES TO NEGOTIABLE INSTRUMENT

Liability of Agent—Section 28 An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only would be held liable.

Liability of Legal Representative—Section 29 A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.

Liability of Drawer—Sections 30, 36, 37 thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the drawer as hereinafter provided. acceptor. Also, he is liable only if due notice of dishonour has been given to, or received by him

on the instrument as a principal debtor and thereafter as a surety.

Liability of Drawee of Cheque—Section 31 to the payment of such cheque, must pay the cheque when duly required to do so, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.

Liability of Maker of Note and Acceptor of Bill—Sections 32, 33, 34 maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance, respectively, and the acceptor of a bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand. the note or bill for any loss or damage sustained by him and caused by such default. therein as a drawee in case of need, or an acceptor for honour, can bind himself by an acceptance. for himself, but none of them can accept it for another without his authority.

Negotiable Instruments Act, 1881

123

Liability of Endorser—Section 35 before maturity, in such endorsement, without expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or due notice of dishonour has been given to, or received by, such endorser as hereinafter provided.

Liability of Prior Parties to Holder in due course—Section 36 instrument is duly satisfied. Exceptions are absolved from their liability.

Maker, Drawer and Acceptor Principals—Sections 37, 38 the acceptor of a bill are, in the absence of a contract to the contrary, respectively liable thereon as acceptor, as the case may be. contrary, also liable thereon as a principal debtor in respect of each subsequent party. Example A draws a bill payable to his own order on B, who accepts. A afterwards endorses the bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.

Suretyship—Section 39 When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under expressly reserve his right to charge the other parties, and in such case they are not discharged.

Discharge of Endorser’s Liability—Section 40 Where the holder of a negotiable instrument, without the consent of the endorser, destroys or impairs the endorser’s remedy against a prior party, the endorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

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Example E is the holder of a bill of exchange made payable to the order of A, which contains the following endorsements in blank: First endorsement–A Second endorsement–B Third endorsement–C Fourth endorsement–D E puts this bill in suit against D and strikes out without D’s consent the endorsements by B and C. E is not entitled to recover anything from D because as between C and D, C is the principal debtor and D is surety. If C is released by the holder under Section 39 of the Act, D, being surety, will be discharged.

Acceptor Bound Although Endorsement Forged—Section 41

accepted the bill.

Acceptance of Bill Drawn in Fictitious Name—Section 42 shall still be liable to any holder in due course claiming under an endorsement by the same hand as the drawer’s signature, and purporting to be made by the drawer.

Duplicate of Lost Bill—Sections 45A, 81 to give him another bill of the same tenor. the bill alleged to have been lost is found again. in case of loss of instrument, the right to be indemnified against any further claim thereon.

Negotiable Instrument Made, etc. Without Consideration—Sections 43, 59 accommodation bill. a consideration which fails, creates no obligation of payment between the parties to the transaction. Exception – 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. 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.

Negotiable Instruments Act, 1881

125

the same to him for a consideration which he has failed to pay or perform in full shall recover thereon

the rights thereon of his transferor. However, in case of accommodation note or bill, any person who, in good faith and for consideration, becomes the holder, after maturity, of a promissory note or bill of exchange made, drawn or accepted without consideration, for the purpose of enabling some party thereto to raise money thereon, may recover the amount of the note or bill from any prior party. Section 59 Examples 1. A is holder of a bill accepted by X without consideration. A endorses the same to B for value. The bill is dishonoured on due date and B recovers the amount from A. A cannot recover the amount from X. 2. X owes a sum of ` 10,000 to A for goods sold. However, he accepts a bill for ` 25,000 drawn by A. A endorses the same to B for value. The bill is dishonoured on due date and B recovers the amount from A. A can recover only ` 10,000 from X.

9.10

CROSSING OF CHEQUE

Types of Cheque Bearer cheque—Expressed to be payable to bearer or on which the only or the last endorsement is an the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation. Order cheque—Expressed to be payable to order, or which is expressed as payable to a particular person with no prohibition on its transfer. Where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee is discharged by payment in due course. Crossed cheque— not to pay the cheque at the counter has been ultimately made.

Types of Crossing—Sections 123 to 131A Table 9.7 lists nature, requirements and effects of different types of crossing of cheque.

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Table 9.7

Nature, Requirements and Effects of Different Types of Crossing of Cheque

Nature of crossing

Requirements The cheque must contain two parallel transverse lines with or without words “and company” or “not negotiable” between them.

Effects The cheque must be paid only to a

The cheque must contain the name of a

once.

into general crossing. If crossed specially to more than one payment.

Not negotiable crossing

A/c payee crossing

The cheque must contain the words ‘not negotiable’. The cheque may be crossed generally or specially.

The cheque nevertheless remains

The cheque must contain the words ‘A/c payee’ or ‘A/c payee only’. The cheque may be crossed generally or specially.

The cheque does not remain negotiable anymore as it is collected only for the account of the payee named in the cheque and no one else.

Figure 9.4

The title of the transferee shall not be better than the title of the transferor. If the title of the transferor is defective, the title of the transferee would also be defective.

Negotiable Instruments Act, 1881

127

Crossing of Cheque after Issue—Section 125

Payment of Crossed Cheque—Sections 126 to 129 Crossed generally Crossed specially Crossed specially to more than one banker—Where a cheque is crossed specially to more than one for the purpose of collection. Crossed cheque paid out of due course

any loss he may sustain owing to the cheque having been so paid. Liability of receiving banker payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment.

Effect of “not negotiable” Crossing—Section 130 negotiable”, shall not have and shall not be capable of giving a better title to the cheque than that which

of the main features of negotiability, i.e., now the holder in due course does not get any better title than what the transferor had. If the transferor had defective title, the title of the holder in due course also becomes defective. Therefore, he will have to refund the amount of the bill to the true owner. cheque can be collected only for the account of the payee named in the cheque and not for anyone else. may be held liable for conversion. Example A, by means of fraud, obtained from B a cheque crossed “not negotiable” and got it encashed at a bank other than the drawee bank. B sued the bank for conversion. Is the bank liable for conversion? In this case since A had obtained the cheque by fraud, he had no title to it and could not give to the bank any title to the cheque or the money; and the bank would be liable for the amount of the cheque for conversion. (Great Western Railway Co. vs London and Country Banking Co.)

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9.11

PAYMENT OF CHEQUE

Liability of Drawee Bank—Section 31 The drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required to do so, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default.

Cheque not Presented for Payment within Reasonable Time—Section 84 — the drawer or the person on whose account it is drawn had the right, at the time when the

— — he is discharged to the extent of such damage.

Examples 1. A draws a cheque for ` 10,000, and, when the cheque ought to be presented, has funds at the bank to meet it. The payee delays the presentment of cheque unreasonably. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the bank for the amount of the cheque. 2. A draws a cheque at Ambala on a bank in Kolkata. The bank fails before the cheque could be presented in ordinary course. A is not discharged, for he has not suffered actual damage through any delay in presenting the cheque.

Protection of Paying Banker—Sections 85, 128 1. Cheque payable to order—Where a cheque payable to order purports to be endorsed by or on behalf 2. Cheque payable to bearer—Where a cheque is originally expressed to be payable to the bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict or exclude further negotiation. 3. Crossed cheque paid in due course

same position in all respects, as they would respectively be entitled to and placed in if the amount of the cheque had been paid to and received by the true owner thereof.

Negotiable Instruments Act, 1881

129

Example The name of the payee and the amount, written on a cheque, were chemically erased and the bank made the payment of the cheque. The bank was not held to be guilty of negligence since it required a UV testing to check the forgery which is not normal in case of payment of cheques in due course. (Supreme Court in Bank of Maharashtra vs Automotive Engg. Co.)

Drawee Bank can Demand Truncated Cheque—Section 64(2)

cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of the instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification. payment is made accordingly.

Protection of Collecting Banker—Section 131 crossed generally or specially to himself, shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. Explanation I of this section notwithstanding that he credits his customer’s account with the amount of the cheque before receiving payment thereof. Explanation II image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or transferring apparent on the face of the instrument that can be verified with due diligence and ordinary case. Vysa Bank Ltd. vs Indian Bank

When a Banker must Refuse Payment of a Cheque 1. On stop payment request of the drawer

4. Assignment of funds by the customer

7. Material alteration, mutilation, incomplete

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When a Banker may Refuse Payment of a Cheque 1. Insufficient funds or exceeds arrangement

Rule in Cheques—Once a Bearer always a Bearer payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or

where the cheque originally is made bearer but subsequently by endorsement in full made payable to order. subsequent endorsements. the instrument can be made payable to order by writing the name of another person above the endorser’s signatures.

9.12

DISHONOUR OF CHEQUES

Dishonour of Cheque for Insufficiency, etc., of Funds in the Account—Section 138 any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt — the amount of money standing to the credit of that account is insufficient to honour the cheque, or — that it exceeds the amount arranged to be paid from that account by an agreement made with that such person shall be deemed to have committed an offence and shall, without prejudice to any other — imprisonment for a term which may extend to two years, or — with fine which may extend to twice the amount of the cheque — both cheque has been presented to the bank within a period of six months from the date on

Negotiable Instruments Act, 1881

131

payee or the holder, in due course of the cheque as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, within 30 days

or, as the case may be, to the holder in due course of the cheque, within 15 days of the receipt of the said notice. Explanation – For the purposes of this section, debt or other liability means a legally enforceable debt or other liability.

When does Section 138 Apply discharge of debt and is dishonoured for insufficiency of funds. If cheque is given as gift and later on is dishonoured or payment is stopped, Section 138 will not apply. ET&TD Corp. vs ID Technologies & Engross Pvt. Ltd. NEPC Micon Ltd. vs Magna Leasing Ltd. Modi Cements Ltd. vs Kuchil Kumar Nandi

SC in Sadanandan Bhadran vs Madhavan Sunil Kumar SC in Uniplas India Ltd. vs Govt. of NCT of Delhi

Presumption in Favour of Holder—Section 139 It shall be presumed, unless the contrary is proved, that the holder of a cheque received the cheque of the

Defence Which may not be Allowed in any Prosecution under Section 138–Section 140 believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section.

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Law, Ethics and Communication

Offences by Companies—Section 141 offence was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

diligence to prevent the commission of such offence. committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation—For the purposes of this section – and

Cognizance of Offences—Section 142 a complaint, in writing, made by the payee or, as the case may be, the holder in due course of complaint is made within one month of the date on which the cause of action arises under

Summary Trial—Section 143 empowered to pass a sentence of imprisonment not exceeding one year and fine not exceeding `

9.13

MATERIAL ALTERATION

What is Material Alteration?

Negotiable Instruments Act, 1881

133

Effect of a Material Alteration—Sections 87, 88

order to carry out the common intention of the original parties. of the consideration thereof. notwithstanding any previous alteration of the instrument.

Payment of Instrument on Which Alteration is not Apparent—Section 89

Table 9.8

Distinction between Material Alteration and Non-material Alteration What is material alteration?

What is non-material alteration?

Negotiable” cheque payable to order

9.14

DISHONOUR AND DISCHARGE

Dishonour of Bill by Non-acceptance—Section 91 default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. drawee is incompetent to contract, or the acceptance is qualified, the bill may be treated as dishonoured.

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Law, Ethics and Communication

2. In case there are two or more drawees who are not partners, and the bill is not accepted by all the drawees. 3. Where the drawee is a fictitious person. 4. When the drawee cannot be found even after a reasonable search. 5. When the drawee is incompetent to contract. conditional acceptance. and he need not wait till the maturity of the bill for it to be dishonoured on presentment for payment. acceptance at the first place.

Dishonour by Non-payment—Section 92

pay the same.

Compensation on Dishonour of Negotiable Instrument

the negotiable instrument is payable

Redraft at sight or on demand, for the amount due to him, together with all expenses properly incurred by him.

Formalities on Dishonour—Sections 92 to 107

the acceptor of the bill or cheque.

Negotiable Instruments Act, 1881

135

discharged from the liability on the NI.

to give it due on the instrument payment or acceptance. On dishonour, the notary records the fact of dishonour and issues a certificate to that effect. protested, if so required by the law of the place where drawn. Example X accepts a bill in favour of B drawn by A. B endorses it to C who endorses it to D who in turn endorses the same to E. On due date, X refuses to pay the bill. E, the holder, gives notice of dishonour only to D and A. E shall have the right of action against D or A only. Assuming, E takes payment from D, D in his turn could claim the amount from A only but not from C and B. In order that D also has right of action against C and B, D must transmit the notice to them as well.

Acceptance for Honour—Sections 108 to 112 noted or protested for non-acceptance or for better security, any person not being a party already liable thereon may, with the consent of the holder, by writing on the bill accept the same for the honour of any party thereto.

whose honour he is accepting, it is assumed to be for the drawer. accepts to pay the amount of the bill if the drawee does not pay. honour for all loss or damage sustained by him in consequence of such acceptance. day of its maturity.

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at its maturity and has been dishonoured by him and noted and protested for such dishonour.

Payment for honour—Sections 113-114 noted or protested for non-payment, any person may pay the same that behalf has previously declared before a notary public the party for whose honour he pays, and that such declaration has been recorded by such notary public.

payment, and may recover from the party for whose honour he pays all sums so paid, with interest

Discharge of a Negotiable Instrument 1. Payment in due course—A negotiable instrument is discharged if the party primarily liable on the instrument must be cancelled or the fact of payment must be recorded on the negotiable instrument. 2. Cancellation—Where the holder cancels the name of the party primarily liable on the negotiable instrument, with intent to discharge him, the negotiable instrument is discharged. 3. Release—Where the holder releases or renounces his right against the party primarily liable on the negotiable instrument, the negotiable instrument is discharged. 4. Negotiation back to acceptor—Where a party primarily liable on a negotiable instrument becomes the holder of the negotiable instrument, the negotiable instrument is discharged.

Discharge of a Party 1. Payment 2. Cancellation—Where the holder cancels the name of any party liable on the negotiable instrument subsequent to him are discharged. 3. Release discharged. 4. Allowing drawee more than 48 hours to accept—Where a drawee requires, a holder has to give 48 hours exclusive of public holidays, for deliberation of the drawee that whether he will accept the bill

Negotiable Instruments Act, 1881

137

5. Qualified acceptance—Where a holder of the bill consents to qualified acceptance, all the prior parties who did not consent to qualified acceptance are discharged. 6. Material alteration—Every party not consenting to a material alteration of the negotiable instrument is discharged. 7. Negotiation back to acceptor—Where a party already liable on the negotiable instrument becomes the holder of the negotiable instrument, such a party and all intermediate parties to whom such a party was previously liable shall be discharged. 8. Operation of law is also discharged if he is declared as an insolvent by the court.

9.15 INTERNATIONAL LAW RELATING TO NEGOTIABLE INSTRUMENT Law Applicable to Foreign Instruments–Sections 134 to 137 note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and the endorser by the law of the place where the instrument is made payable. Example A bill of exchange was drawn by P in California, where the rate of interest is 15%, and accepted by Q, payable in Washington, where the rate of interest is 6%. The bill is endorsed in India, and is dishonoured. An action on the bill is brought against Q in India. He is liable to pay interest at the rate of 6%; but if P is charged as drawer, P is liable to pay interest at the rate of 15%.

which it is made or endorsed, the law of the place where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient. Example A bill of exchange drawn and endorsed in India, but accepted and payable in France, is dishonoured. The endorsee causes it to be protested for such dishonour, and gives notice thereof in accordance with the law of France, though not in accordance with the rules therein contained in respect of bills which are not foreign. The notice is sufficient.

with the law of India, the circumstance that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into, does not invalidate any subsequent acceptance or endorsement made thereon within India. presumed to be the same as that of India unless and until the contrary is proved.

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Self-Review Questions (Including Previous Years’ Examination Questions) ` [Nov 2000] ` [Nov 2000] Nov 2002] Nov 2002] May 2004] Nov 2007] Nov 2007] Nov 2007]

` ` ` ` ` `

the provisions of the Negotiable Instruments Act, 1881 the validity of the promissory note and state Nov 2005] to fill the amount as ` amount as ` `

`

`

cheque.

Nov 2008]

Negotiable Instruments Act, 1881

139

Nov 2006]

May 2001]

endorsed the bill to Y by adding the words ‘sans recourse’.

[Nov 2001]

Nov 2008] 18. L is a legal successor of A who signs on a bill of exchange in his own name admitting a liability of ` the tune of ` accepting the bill limits his liability to the extent of `

Nov 2004] ` `

May 2008] 22. A cheque is drawn and crossed ‘account payee’ and delivered to the payee. However, on payment it

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Law, Ethics and Communication

Nov 2000, Jun 2009]

Instruments Act, 1881. 27. A cheque is drawn originally as payable to the bearer. However, subsequently by endorsement in full

28. A issues a cheque for ` May 2003, May 2005, Nov 2008]

May 2005]

shareholder of the company, was neither a director nor a person in charge of the company. Examining

Nov 2006] 31. A cheque was dishonoured at the first instance and the payee did not initiate action. The cheque was

Instruments Act, 1881.

Negotiable Instruments Act, 1881

141

`

Nov 2002, Nov 2004]

May 2007]

instrument, writes himself the amount. face of instrument.

words ‘on demand’ on the face of the instrument.

Nov 2009]

valuable consideration. valuable consideration.

`

`

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Law, Ethics and Communication

`

Jun 2009] whether the following alterations are material alterations under the Negotiable Instruments Act,

Nov 2007] ` 5 crores. The said amount was payable

May 2008]

[May 2008]

two pieces together in such a manner that the bill seemed to have been folded for safe custody rather

[May 2010] ` ` of `

`

the whole amount of the bill.

[Nov 2010]

transferable.

[May 2011]

Act, 1881.

[May 2011]

of the Negotiable Instruments Act, 1881.

[Nov 2011]

Negotiable Instruments Act, 1881

143

Hints and Answers

4. No. Acceptance is incomplete without delivery by the acceptor to the payee. 5. Yes. The drawee may be named or otherwise indicated in the bill with reasonable certainty. 7. No. Acceptance must be in writing and signed by the drawee. In the second case, signatures of the drawee with or without words ‘accepted’ and delivery to the drawer will constitute valid acceptance. 9. Yes. Endorsement of the bearer instrument can be by mere delivery.

in the case since he himself was party to the fraud. 13. Yes. The holder in due course gets good title irrespective of defect in the title of prior parties.

he can recover the amount from all or any of them

18. A legal representative has to pay the entire amount of the bill accepted by him unless he limits his liable to pay the entire amount. In second case, L will be liable for only `

only `

in both the cases. of M.

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Law, Ethics and Communication

H.N.D. Mulla Feroze vs C.Y. Somayajulu Sadanandan Bhadran vs Madhavan Sunil Kumar

at maturity.

course had a good title to bill.

event, the time of payment is determined by excluding the day from which the time begins to run.

Modi Cements Ltd. vs Kuchil Kumar Nandi – 1998 – SC `

Payment of Bonus Act, 1965

10

BONUS

145

PAYMENT OF ACT, 1965

CHAPTER

Learning Objectives After reading this chapter, you will understand: �������������������������������������������������������������������������������������� Eligibility of employees for bonus Payment of bonus and adjustments/deductions permitted from bonus payable Special provision for newly set-up establishments Administrative mechanism for settlement of disputes relating to payment of bonus Application of the Payment of Bonus Act to public sector establishments ���������������������������������������������������������������������������������������� ������������������������������������������������������������������������������������������������������� set-off of allocable surplus

10.1

APPLICABILITY OF THE ACT

Object of Act

10.2

MEANING OF BONUS AND COVERAGE

Meaning of Bonus Webster’s International Dictionary)

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Law, Ethics and Communication

Coverage of Act—Sections 1(3), 1(5)

20 or more accounting year

after giving notice for not less than 2 months

Act not to Apply to Certain Classes of Employees—Section 32

on any day during an

Payment of Bonus Act, 1965

147

Power of Appropriate Govt. to Exempt—Section 36 be in public interest financial position and ‘other relevant circumstances’

financial position

other relevant circumstances

J.K. Chemicals Ltd. vs Govt. of Maharashtra) bonus liability is negligible

10.3

DEFINITIONS

Accounting Year—Section 2(1)

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Allocable Surplus—Section 2(4)

67% of the available surplus 60% of such available surplus

Appropriate Government—Section 2(5)

Award—Section 2(7)

Corporation—Section 2(11)

Employee—Section 2(13) other than an apprentice ` 10,000 per mensem

salary or wages not exceeding

Payment of Bonus Act, 1965

149

Employer—Section 2(14) owner or occupier of the factory manager of the factory ultimate control over the affairs of the establishment

Salary or Wage—Section 2(21) other than remuneration in respect of overtime work)

includes dearness allowance does not include

Explanation

Salary for Bonus = Salary + DA (by whatever name) + Food allowance (or value of food) in lieu of salary/wage Chalthan Vibhag Sahakari Khand Udyog vs Government Labour Officer) Motor Industries Co vs Popat Murlidhar)

Establishment—Section 3

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a separate establishment

Establishment in Private Sector—Section 2(15)

Establishment in Public Sector—Section 2(16)

10.4

ELIGIBILITY FOR BONUS

Eligibility for Bonus—Section 8 employee not less than 30 working days (ONGC vs Sham Kumar Sehgal, Gammon India Ltd. vs Niranjan Das)

Automobile Karamchari Sangh vs Industrial Tribunal) East Asiatic Co. (P.) Ltd. vs Industrial Tribunal) Bank of Madura Ltd. vs Employee’s Union) Gammon India Ltd. vs Niranjan Das) Mathuradas Kani vs L.A. Tribunal AIR)

Payment of Bonus Act, 1965

151

Wheel & RIM Co. vs Government of T.N.)

Computation of Number of Working Days—Section 14

been laid off

leave with salary temporary disablement maternity leave

Disqualification for Bonus—Section 9 if he is dismissed from service (a) fraud (b) riotous or violent behaviour (c) theft, misappropriation or sabotage

any bonus (Pandian Roadways Corpn. Ltd. vs Presiding Officer, Principal Labour Court)

(Gammon India Ltd. Vs Niranjan Das)

10.5

PAYMENT OF BONUS

Minimum Bonus—Section 10

152

Law, Ethics and Communication

` `

`

State vs Sardar Singh Majithia)

Proportionate Reduction in Bonus in Certain Cases—Section 13 `

`

`

`

Maximum Bonus—Section 11

maximum of 20% of such salary or wage amount set-on or the amount set-off

Calculation of Bonus with Respect to Certain Employees—Section 12 ` `

Adjustment of Customary or Interim Bonus—Section 17 Puja bonus or other customary bonus part of the bonus

Baidyanath Ayurveda Bhavan Mazdoor Sangh vs Management)

Payment of Bonus Act, 1965

153

Deductions of Certain Amounts from Bonus—Section 18 misconduct causing financial loss

Bonus Linked with Production or Productivity—Section 31A

Time Limit for Payment of Bonus—Section 19

within a month be paid within a period of 8 months

10.6

NEWLY SET-UP ESTABLISHMENTS

Special Provision for Newly set-up Establishments—Section 16

Payment of Bonus in Newly set-up Establishments (a) First 5 accounting years*

154

Law, Ethics and Communication

(b) For 6th and 7th accounting year*

(c) From 8th accounting year* onwards

Trial Run—Expl. III to Section 16

Depreciation Provision—Expl. II to Section 16

The Management of Central Coal Washery vs Workmen)

10.7

SETTLEMENT OF DISPUTES

Reference of Disputes Under the Act—Section 22 — — be deemed to be an industrial dispute

Presumption about Accuracy of Accounts—Sections 23 to 26

Payment of Bonus Act, 1965

155

Payment of Bonus in Dispute—Section 19

within a month interest @ 9% p.a.

Recovery of Bonus in Dispute—Section 21

within one year

10.8

APPLICATION OF ACT TO PUBLIC SECTOR ESTABLISHMENTS

Act not to Apply in Public Sector Establishments—Section 20

Exceptions to Section 20 —

in competition with an establishment in private sector — income from such sale or services or both is not less than 20% of the gross income for that year

156

Law, Ethics and Communication

10.9

ADMINISTRATION OF ACT

Maintenance of Register, Records, etc.—Section 26

Registers Prescribed—Rule 4 of The Payment of Bonus Rules, 1975 (a) Form A (b) Form B (c) Form C (d) Form D

Inspectors—Section 27

Penalty—Section 28

6 months ` 1,000

both

Offences by Companies—Section 29

Payment of Bonus Act, 1965

Explanation

Cognizance of Offences—Section 30

Protection of Action—Section 31

Agreements Inconsistent with the Act—Section 34

10.10 AMOUNT PAYABLE AS BONUS Steps for Calculating the Amount Payable as Bonus

Step 1—Computing of gross profit—section 4 & first/second schedule

157

158

Law, Ethics and Communication

Add: (a) Provisions debited to P&L account

(b) Other debits charged to P&L account

(c) Incomes not credited to P&L account Less: Amounts credited to P&L account

Expenses not debited to P&L account

Equals to GROSS PROFIT Step 2—Deduction of prior charges from gross profits—Section 6

Third Schedule

Payment of Bonus Act, 1965

Least of :

Calculation of Direct Tax Payable by the Employer—Section 7

no account shall be taken of

Step 3—Tax saved on bonus paid in previous year

159

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Law, Ethics and Communication

Step 4—Computation of available surplus—section 5

Step 5—Computation of allocable surplus—section 2(4)

Step 6—Set-on and set-off of allocable surplus—section 15 the excess shall, subject to a limit of 20%

THE FOURTH SCHEDULE (See Sections 15 and 16) ` ` Year

Amount equal to 60% (or 67%) of available surplus allocable as bonus

Amount payable as bonus

Set-on or set-off of the year carried forward

Total set-on or setoff carried forward of (year)

Contd.

Payment of Bonus Act, 1965

Year

Amount equal to 60% (or 67%) of available surplus allocable as bonus

Amount payable as bonus

Set-on or set-off of the year carried forward

161

Total set-on or setoff carried forward of (year)

`

Self-Review Questions (Including Previous Years’ Examination Questions)

162

Law, Ethics and Communication

`

Nov 2006, Nov 2007]

May 2007] Nov 2007]

Nov 2005] `

Particulars

Amount `

Payment of Bonus Act, 1965

163

`

`

Nov 2002]

Nov 2009]

May 2003, May 2007]

164

Law, Ethics and Communication

` `

`

`

Nov 2008]

Nov 2004, Nov 2008] `

`

May 2008] `

`

`

Nov 2007]

May 2000]

Nov 2000]

Payment of Bonus Act, 1965

165

Nov 2003]

May 2001]

May 2001, Nov 2005, Nov 2008]

Nov 2003] Nov 2000, Nov 2004] `

May 2007] `

May 2008]

Jun 2009] May 2010]

166

Law, Ethics and Communication

May 2010]

Nov 2010] `

May 2011] Nov 2011]

Hints and Answers

`

` `

`

`

Payment of Bonus Act, 1965

167

RMS vs The Model Mills)

`

`

`

`

(Pandian Roadways Corpn. Ltd. Vs Presiding Officer)

11 CHAPTER

EMPLOYEES PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1952 Learning Objectives

After reading this chapter, you will understand: ������������������������������������������������������������������ Management of the Employees Provident Fund Scheme (eligible employees, contributions, �������������������������������������������������������������������������������������������� �������������������������������������������������������������������������������������������� ��������������������������� Management of the Employees Deposit Linked Insurance Scheme (eligible employees, contributions, ��������������������������������������� Statutory protection to the amount of provident fund Penalties under the EPF Act Administrative mechanism for settlement of disputes—PF Appellate Tribunal and recovery of money due Duties of the employer under the EPF Act

11.1

OBJECTIVE AND APPLICABILITY OF THE ACT

Object of Act

substantial security

Application of the Act—Sections 1(3) and 1(5)

timely monetary assistance

Employees Provident Fund and Miscellaneous Provisions Act, 1952

169

20 or more persons are employed at any time any other establishment employing 20 or more persons two months notice

Different Departments or Branches of an Establishment—Section 2A

Non-applicability of the Act to Certain Establishments—Section 16 (a) Co-operative societies employing less than 50 (b) Central or State Government establishments (c) Establishments set up under any Central, Provincial or State Act financial position

or other circumstances subject to such conditions

Voluntary Coverage—Section 1(4)

no scope for opting out

11.2

DEFINITIONS

Appropriate Government—Section 2(a)

, the Central Government

170

Law, Ethics and Communication

the State Government

Basic Wages—Section 2(b) all emoluments does not include:

Employer—Section 2(e)

Employee—Section 2(f) who gets his wages directly or indirectly includes

Railway Employees Cooperative Banking Society Ltd. vs the Union of India

Employees Provident Fund and Miscellaneous Provisions Act, 1952

Exempted Employees—Section 2(ff)

Exempted Establishment—Section 2(fff)

Factory—Section 2(g)

Industry—Section 2(i)

Manufacture or Manufacturing Process—Section 2(ic)

Family

Schemes Under the Act

11.3

EMPLOYEES PROVIDENT FUNDS SCHEME

Administration of the Fund—Section 5A Board of Trustees or Central Board

171

172

Law, Ethics and Communication

Class of Employees Entitled and Required to Join Provident Fund

Excluded employee

pay ` Explanation:

Explanation:

Contributions—Section 6 Employer’s contribution allowance

12% of the basic wages, dearness allowance and retaining

Where the salary of the employee exceeds ` 6500 per month, the employer’s contribution shall be restricted to amount computed on ` 6500 per month. Dearness allowance shall include the cash value of any food concession

Employee’s contribution

Employees Provident Fund and Miscellaneous Provisions Act, 1952

payment of contribution mandatory

Investments

Advances/Withdrawals

Final Withdrawal

173

174

Law, Ethics and Communication

continuous period of at least 2 months

Nomination

Transfer of Employee—Section 17A

Employees Provident Fund and Miscellaneous Provisions Act, 1952

Account Slips

Exemption from Scheme—Sections 16(2), 17

The exemption does not amount to total exclusion

11.4

EMPLOYEES’ PENSION SCHEME

New Scheme of Pension

175

176

Law, Ethics and Communication

Membership to Pension Scheme

Contribution contribution at the rate of 8.33% Central Government to contribute 1.16% `

Service for Pension

Benefits (a) Monthly Member Pension (b) Pension Scheme Certificate

(c) Invalidity Pension (d) Widow Pension (e) Children Pension (f) Orphan Pension

Employees Provident Fund and Miscellaneous Provisions Act, 1952

(g) Nominee Pension

Commutation of Pension one third of pension

Withdrawal Benefits

Administration

11.5

EMPLOYEES DEPOSIT LINKED INSURANCE (EDLI) SCHEME

Membership to EDLI Scheme

Contribution

`

`

`

Benefits

177

178

Law, Ethics and Communication

` `

` `

Exemption from Scheme

11.6

PROTECTION OF AMOUNT DUE

Statutory Protection—Section 10 shall not in any way be capable of being assigned or charged and shall not be liable to attachment

Priority of Payment of Contribution Over other Debts—Section 11

Employer not to Reduce Wage, etc.—Section 12

Employees Provident Fund and Miscellaneous Provisions Act, 1952

11.7

PENALTIES

Penalties—Section 14 17% to 37% p.a

` `

one year ` 5,000

`

`

11.8

ADMINISTRATION

Administration of Schemes Central Board of Trustees

179

180

Law, Ethics and Communication

Central Provident Fund Commissioner Regional Provident Fund Commissioners

11.9

OTHER PROVISIONS

Determination of Moneys due from Employer—Sections 7A, 7B

ex parte ex parte

Employees Provident Fund and Miscellaneous Provisions Act, 1952

Determination of Escaped Amount—Section 7C

Provident Fund Appellate Tribunal—Sections 7D to 7Q

181

182

Law, Ethics and Communication

Recovery of Moneys by Employers and Contractors—Section 8A

Power to Recover—Section 14B

Liability in Case of Transfer of Establishment—Section 17B by sale, gift, lease or licence

Protection of Action Taken in Good Faith—Section 18

Employees Provident Fund and Miscellaneous Provisions Act, 1952

183

11.10 DUTIES OF EMPLOYER AS TO SUBMISSION OF RETURNS Duties of Contractors

Duties of Employer 1. Particulars concerning the member and his family 2. Contribution card 4. Return of the employees who become members

6. Inspection Notebook particulars of all the branches

wages payment register

annual contribution statement

Self-Review Questions (Including Previous Years’ Examination Questions)

May 2008

184

Law, Ethics and Communication

`

[Nov 2004

Employees Provident Fund and Miscellaneous Provisions Act, 1952

185

May 2010

Nov 2010 May 2011

Nov 2011

Hints and Answers

PAYMENT

12

GRATUITY ACT, 1972

OF

CHAPTER

Learning Objectives After reading this chapter, you will understand: �������������������������������������������������������������������������������������������� Computation of continued service for payment of gratuity Time of payment of gratuity Computation of the amount of gratuity payable Nomination and application for payment of gratuity Forfeiture of gratuity Administrative provisions of the Payment of Gratuity Act (authorities, appeals, inspectors, and ����������

12.1

OBJECTIVE AND APPLICABILITY OF THE ACT

Meaning of Gratuity Gratuitas

Applicability of the Act

Overrides Other Acts—Section 14

Payment of Gratuity Act, 1972

Establishments to Which the Act Applies—Sections 1(3), 3A

10 or more persons are employed on any day of the preceding 12 months

12.2

DEFINITIONS

Appropriate Government—Section 2(a)

the Central Government the State Government

Completed Year of Service—Section 2(b)

Employee—Section 2(e) other than an apprentice — — — — ` With the removal of ceiling on wage every employee will become eligible for gratuity

187

188

Law, Ethics and Communication

Employer—Section 2(f) —



ultimate control over the affairs

Continuous Service—Section 2A

Continuous Service

ONE YEAR

Six months

(i) Employee in Non-Seasonal Establishment

If during the period of 12 calendar months preceding date of calculation, worked for not less than:

If during the period of 6 calendar months preceding date of calculation, worked for not less than:

(ii) Employee in a Seasonal Establishment

Explanation laid off

Payment of Gratuity Act, 1972

leave with full wages temporary disablement maternity leave (not exceeding 12 weeks)

(Baluram vs Phoenix Mills Ltd.)

Family—Section 2(h)

Retirement—Section 2(q)

Superannuation—Section 2(r)

Wages—Section 2(s)

— includes — does not include

12.3

PAYMENT OF GRATUITY

Time of Payment of Gratuity—Section 4(1) continuous service for not less than five years

189

190

Law, Ethics and Communication

Explanation

death or disablement incapacitates

Note: In case of any change of ownership

To Whom is Gratuity Payable—Section 4(1) Proviso

Amount of Gratuity Payable—Section 4 1. Rate of gratuity: wages for each completed year of service wages last drawn 2. 3. Rate of gratuity for piece rate employee:

4. Rate of gratuity for employees in seasonal establishment:

5. Maximum amount of gratuity: ` 10,00,000 6. Rate of gratuity for disabled employee:

15 days’

Payment of Gratuity Act, 1972

191

7. Better terms of gratuity:

Nomination—Section 6 Nomination to be made with a fixed time: within 30 days

completed one year of service

Distribution of gratuity:

Nomination in favour of family:

within 90 days Modification of nomination: Death of nominee:

Safe custody of nomination:

Application for Payment of Gratuity—Section 7(1)

within 30 days

If a person dies without making nomination within 1 year application on plain paper

192

Law, Ethics and Communication

Employer’s Duty to Determine and Pay Gratuity—Section 7

within 30 days 10% simple interest per annum

Compulsory Insurance—Section 4A



compulsory insurance for employer’s liability



fine up to ` 10,000 `

12.4

FORFEITURE OF GRATUITY

Forfeiture of Gratuity—Section 4(6) Where the services of an employee have been terminated: riotous

disorderly conduct

violence moral turpitude

wholly or partially forfeited whose services have been terminated negligence to the extent of the damage

omission or

Payment of Gratuity Act, 1972

Where the service has not been terminated

Attachment of Gratuity in Execution of a Decree—Section 13

12.5

ADMINISTRATION

Exemption—Section 5

Administrative Authorities

Powers of Controlling Authority—Section 7(4) to 7(5) 1. Power to decide the dispute:

2. Power to conduct an inquiry:

3. Power to direct employer:

193

194

Law, Ethics and Communication

4. Power to issue certificate for recovery:

Appeals—Sections 7(7) to 7(8) within 60

extend the said period by a further period of 60 days

Post Appeal Actions

Recovery of Gratuity—Section 8 issue a certificate for that amount to the Collector arrears of land revenue

Payment of Gratuity Act, 1972

Inspectors and their powers—Sections 7A, 7B Appointment of inspectors:

Powers of inspectors:

to furnish any information Enter and inspect

Examine

Make copies

Exercise such other powers as may be prescribed

12.6

PENALTIES

Penalties—Section 9 to 12

(i) False statement or false representation:

195

196

Law, Ethics and Communication

imprisonment for a term which may extend to six months both (ii) For contravention of the Act:

fine which extend to ` 10,000

imprisonment for a term which shall not be less than three months but which may extend to one year fine which shall not be less than ` 10,000 ` 20,000 with both imprisonment for a term which shall not be less than six months years

two

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

[Nov 2008]

[June 2009]

[Nov 2009]

Payment of Gratuity Act, 1972

197

[May 2010]

[Nov 2010]

[May 2011] Nov 2011]

Hints and Answers

Bharat Gold Mines Ltd. vs Regional Labour Commissioner Travancore Plywood Industries Ltd. vs Regional Joint Labour Commissioner Bharat Gold Mines Ltd. vs Regional Labour Commissioner Wazir Chand vs Union of India – SC

198

Law, Ethics and Communication

Section C:

13

Companies Act, 1956

NATURE

OF A

COMPANY

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and characteristics of a company and how it is distinct from a ‘body corporate’ Cases when the liability of members of a company can be unlimited Meaning of corporate veil and cases when the corporate veil can be lifted ���������������������������������������������������������������������������������������������������������� ������������������ Conversion of private company to public company and vice versa

13.1

APPLICABILITY OF THE COMPANIES ACT, 1956

To consolidate and amend the law relating to companies and certain other associations. This Act came into force on 1st April, 1956. It extends to whole of India.

13.2

MEANING OF A COMPANY

Definition of a Company—Section 3 or – an existing company under any of the previous companies laws. – A company is a person, artificial, invisible, intangible and existing only in the eyes of law. – Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. A company is an incorporated association which is – an artificial person created by law,

Nature of a Company

199

– having a separate entity, – with a perpetual succession and – a common seal.

Company vs Body Corporate ’ as explained below. – Body corporate is a wider term and includes company incorporated outside India, public financial institutions, nationalized banks and other statutory associations. – However, a body corporate does not include: (i) A corporation sole (a body corporate constituted in a single person, e.g., President or Public Trustee) (ii) A co-operative society formed under any law relating to co-operative societies (iii) Any other body corporate which the Central Government may notify

13.3

CLASSIFICATION OF COMPANIES

Based on the member’s liability to contribute towards the dues of the company, a company can be classified as follows: A company where a member is liable to contribute only to the extent of amount unpaid on the shares subscribed by him. A company where a member is liable to contribute the amount guaranteed by him. A company where a member is liable to contribute to the extent of amount unpaid on shares subscribed plus the amount guaranteed by him. A company where the member is liable to contribute to the extent of amount of debts remaining unpaid.

13.4

FEATURES OF A COMPANY

of the Companies Act provides some of of an association as company under the Companies Act.

which explain effect of registration

Upon registration, a company becomes body corporate under the Companies Act. A company can be incorporated with minimum 2 members. (7 members if it is a public company) A company is an artificial person in the eyes of law which is capable of doing everything which a normal person would do. The identity of the company is separate from the members or promoters who constituted it. The life of a company once incorporated is not dependent on the life of its members. Even if all the members of a company die, the company will go on.

200

Law, Ethics and Communication

The liability of the members of company is limited to the amount of shares subscribed by them. A company can also be formed where the members’ liability is guaranteed up to a certain amount. Companies with unlimited liability, though possible by law, are very uncommon. A company having a distinct identity if its own, enters into a contracts etc. in its own name for which it requires a ‘seal’. A company has its own signatures in the form of a common seal which is required to be affixed on specified documents under the Act. A common seal of company is kept in custody of a Director or the Secretary or any other officer of the company so authorised by Board of Directors. In the company form of organization, members generally appoint a who are responsible for the day-to-day operations of the company. Being a separate person in the eyes of law, a company is capable of acquiring its own separate property. Members do not have any right on the property of the company. In a company even if almost the entire capital is held by one shareholder, he cannot obtain any insurance on the company’s property in his name. ( vs ) Shares of a company are movable property and freely transferable. However, on the transferability of shares, but it cannot prohibit the transfer altogether. A company being a distinct person in the eyes of law can sue or can be sued as per the laws applicable. A company enjoys the fundamental rights which are available to other persons. However, a company cannot have any citizenship since only an individual can be a citizen.

13.5

EXCEPTIONS TO LIMITED LIABILITY

In a company , the liability of the members is limited up to the amount remaining unpaid on the shares held by them. However, in the following cases, the liability of a shareholder will become unlimited:

1. Members Below Statutory Limit (2 If Private, 7 If Public)—Section 45 — but the number of members is reduced below 7 in case of public and 2 in case of private company, and with reduced membership for more than 6 months, — the company then — every person during that time, and , — shall be personally liable — for the .

2. Winding up—Section 542 — it appears that the business of the company has been carried on with intent to defraud creditors, then

Nature of a Company

201

— the court may declare the persons involved as personally liable, — irrespective of the fact that their liability is limited.

13.6

CORPORATE VEIL—RULE OF SEPARATE LEGAL IDENTITY

—In the eyes of law, a company is a different person altogether from the subscribers to the Memorandum of Association. Even if the business of the company is same as it was before incorporation, and even if the same persons are managing the business as well sharing the profits, the company will be regarded as a separate person from the persons who incorporated it. even if he holds majority or nearly all the shares. when distributed. Case—Salomon vs Salomon & Co. Ltd. S carried on business as leather merchant. He formed a company along with his wife, daughter and four sons to take over his sole proprietorship business. The business was sold to the company for ` 30,000. The purchase consideration was satisfied by allotment of shares worth ` 20,000 and debentures worth ` 10,000 with floating charge on company’s assets. The company went in difficulties and was winded up for insolvency. The creditors of the company claimed preference over the debentures alleging that S and company are the same persons. It was held that the company is a distinct legal person in the eyes of law. Therefore, S will have preference in payment because he is a secured creditor. This landmark case set the following ground rules: 1. 2. 3. 4.

A person can transfer his property to the company and vice-versa. A person can be a member, director, employee and creditor of the company at the same time. A company is not agent of a member. A company has the rights and duties of its own.

Case—Lee vs Lee Air Farming Ltd. L was a pilot and formed a company holding all but one shares in it. L was appointed company’s managing director and also chief pilot. L was killed piloting company’s aircraft. His widow claimed workman compensation under Workmen Compensation Act. The claim was opposed on the grounds that L and the company were same and the same person cannot be the employer and the employee himself. It was held that there was a valid contract of service between L and the company. L was a worker of the company which has a distinct identity in the eyes of law and the claim is maintainable.

202

Law, Ethics and Communication

Case—Bacha F Guzdar vs CIT A company earned income from a tea estate and distributed the same as dividend to shareholders. B who was a shareholder of the company claimed that since the income is agricultural in nature, only 40% of the same is taxable. It was held that the nature of income in company’s hands cannot be regarded as agricultural in the hands of shareholders.

13.7

LIFTING OF CORPORATE VEIL

—A company once incorporated has a distinct identity in the eyes of law, separate from the persons constituting it. —Lifting of corporate veil means looking behind the company as a legal person and finding the realities behind the legal façade. It means finding out the real owners who are controlling the company. —Lifting of corporate veil is not permissible unless otherwise provided expressly in law or for compelling reasons such as prevention of fraud or trading with enemy company. ( vs ) —Lifting of corporate veil is permissible only if it is expressly provided in the law; or there are compelling reasons (such as prevention of fraud or trading with enemy) and that too with permission of court.

Lifting of Corporate Veil under Statutory Provisions In a limited company, if there is reduction of membership and company carries business for more than 6 months, every member who is aware becomes liable for the debts incurred by the company after such 6 months. Every promoter, director or other person authorizing issue of a prospectus containing misrepresentation becomes liable to the persons who subscribe on the strength of such prospectus. In case of public issue where minimum subscription is not received, the directors become personally liable for refund of the money if the same is not returned within 130 days of issue of the prospectus. Any officer of the company becomes personally liable on any instrument where the name of the company is not mentioned correctly. vs ) In certain cases of investigation to find the true owners of the company or in cases of alleged mismanagement or oppressive policy towards its members, the corporate veil will be lifted. Ultra vires The directors or other officers of the company are personally liable for any acts done beyond the powers of the company as sanctioned by its Memorandum of Association. If there are any offences under other laws such as the Income Tax Act or FEMA, the directors can be proceeded against on personal level.

Nature of a Company

203

Lifting of Corporate Veil under Judicial Interpretations companies and the income was handed back to him as loan, it was held that such an arrangement cannot be allowed. ( ) firms’ clients, he formed a private company with his wife and another employee as directors to achieve the same objective, it was held that such conduct cannot be allowed in the garb of formation of a company. ( vs ) performance of a sale contract transferred a piece of land to a private company formed, it was held that such a façade was for avoidance of his liability under a contract. ( vs )

vs ) court held that the veil of corporate entity could be lifted by adjudicating authorities to find out which of the directors was responsible for evasion of excise duty. ( vs ) company was to reduce the amount payable as bonus to workmen, the Supreme Court upheld the piercing of corporate veil. ( vs ) depositors, the Supreme Court regarded all companies as one entity. ( vs ) The courts invariably lift the corporate veil or disregard the corporate personality of a company to protect the public policy and prevent transactions contrary to public policy. ( vs )

13.8 (i) (ii) (iii) (iv) (v)

TYPES OF COMPANIES

Private and public company Holding and subsidiary company Public financial institution Illegal association Non-profit company

Private and Public Company Definition of private company—Section 3(1)(iii) higher paid-up capital as may be prescribed, , if any;

minimum paid-up capital of ` 1,00,000 or such by its Articles;

204

Law, Ethics and Communication

not including— (i) persons who are in the employment of the company; and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and of, the company; from . the purposes of this definition, be treated as a single member. Note: A private company cannot have members in excess of 50, but it can have any number of debenture holders, provided the issue of debentures has not been made by way of public invitation.

Definition of public company—Section 3(1)(iv) (a) is not a private company; (b) has a minimum paid-up capital of ` 5,00,000 or such higher paid-up capital, as may be prescribed; (c) is a private company which is a subsidiary of a company which is not a private company.

Use of words ‘limited’ or ‘private limited’—Section 13 ‘Private Limited’ in case of private limited company. ` 500 per day unless it is a company registered as such under the Companies Act. [Section 631]

Privileges of private companies 1. Minimum number of members = 2 2. Issue of shares without prospectus 3. No need to issue shares to existing members in case of further issue of shares 5. Not required to hold a statutory meeting 6. Minimum number of directors = 2 7. Directors not required to take up qualification shares and other provisions relating to appointment of directors 8. Not required to maintain index of members 9. Quorum for general meetings = 2 members 10. Can have special provisions as to general meetings

Nature of a Company

205

11. No limit of managerial remuneration 13. No need to have rotational retirement of directors 15. No prohibition on loans to directors 16. Minimum paid up capital = ` 1,00,000

Holding and Subsidiary Company Definition of subsidiary company—Section 4 Conditions for subsidiary of another company if: (a) That other company (b) That other company (c) The first-mentioned company is subsidiary.

; or in nominal value of its equity share capital; or which is that other company’s

Control of board company if it can

.

(ii) Appointment as a consequence of appointment as director, manager of any other officer of that other company other company

Meaning of shares held (relation of trust or confidence) or as security for loan, etc

.

considered. be considered. Examples 1. H holds 51% share capital in S. S is a subsidiary of H. 2. H holds 51% share capital in S1. S1 holds 51% share capital in S2. S1 is a subsidiary of H. S2 is a subsidiary of S1 as well as H. 3. H holds 51% share capital in S1 and S2. S1 and S2 hold 30% share capital each in S3. S3 is a subsidiary of H but not of S1 and S2. 4. H holds 51% share capital in S1. H and S1 hold 30% share capital each in S2. S1 is a subsidiary of H. S2 is a subsidiary of H but not of S1.

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Foreign holding and subsidiary companies If any company is a subsidiary or holding company of any foreign body corporate under that foreign law, then such company shall also be deemed to be a subsidiary or holding company of that foreign body corporate

Example S is a private company incorporated in India. H is a company incorporated in France. H neither holds 51% of share capital of S nor it controls the Board of Directors of S. However, H is the sole supplier of raw material used by S for manufacturing its products and due to this H is considered as holding company of S under the laws applicable in France. Now, S will also be regarded as subsidiary of H under the Indian Companies Act.

Indian private company held as subsidiary of public company if: It is a subsidiary of a foreign body corporate, which if incorporated in India, would be a public company; and If 100% of share capital of the private company is not held by such foreign body corporate, either alone or in consortium with other foreign companies. Examples 1. S is a private company incorporated in India. 100% of its capital is held by H which is a private company incorporated in the USA. S will be regarded a subsidiary of a private company only under the Indian Companies Act. 2. S is a private company incorporated in India. 100% of its capital is held by H which is a private company incorporated in the USA in consortium with 10 other foreign companies. S will be regarded a subsidiary of a private company only the under Indian Companies Act. 3. S is a private company incorporated in India. 90% of its capital is held by H which is a private company incorporated in the USA with 10 members. The remaining 10% of the capital of S is held by another member in India. S will be regarded a subsidiary of a public company under the Indian Companies Act.

Definition of holding company—Section 4 of another if that other is its subsidiary. Note: Any allotment or transfer of shares by a holding company to its subsidiary company or its nominee (after becoming holding-subsidiary) is As legal representative of a deceased shareholder As trustee

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207

Public Financial Institutions Definition of public financial institutions—Section 4A 1. Industrial Credit and Investment Corporation of India Limited (ICICI) 2. Industrial Finance Corporation of India (IFCI) 3. Industrial Development Bank of India (IDBI) 5. Unit Trust of India (UTI) 6. Infrastructure Development Finance Company Limited (IDFCL) 7. Any institution notified by the Central Government provided it is constituted under any Central Act or at least 51% of its shares are held by the Central Government. Fire & General Insurance, United Fire & General Insurance, Shipping and Credit & Investment, NHB,

Illegal Association Meaning of an illegal association—Section 11 , , can be formed unless it is registered under the Companies Act or is formed in pursuance of some other Indian law. Exceptions 1. Stock exchange, 2. Non-profit associations, 3. HUF carrying on business as such However, In such a case the members shall be counted excluding minor members.

.

Consequences of an illegal association Personal liability of members, Fine extending to ` 10,000, Cannot sue or be sued, Cannot enter into contract Cannot become legal on subsequent reduction in members. (

vs

)

Non-profit Company Meaning of a non-profit company—Section 25 for

or any other useful object, and

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intends to to

, and to its members,

the Central Government on being satisfied

. certain provisions of the Companies Act which otherwise are applicable to normal companies. infringes any conditions of approval granted, the Central Government will revoke the licence granted to it after providing it an opportunity of being heard. Thereafter, the company shall cease to enjoy the exemptions or privileges granted under Section 25.

13.9

CONVERSION OF PRIVATE COMPANY TO PUBLIC OR VICE VERSA

Conversion of Private Company to Public Company

Conversion of private to public by default—Section 43 regarding private company [Section 3(1)(iii)] i.e. allows free transferability of shares, the number of members exceeds 50, or invites deposits or subscription to shares or debentures from public, the company shall lose all the privileges and exemptions conferred on it by the Act, and the Act shall apply to it as if it were not a private company. such a consequence if it is satisfied that the failure in compliance with the said requirement was not deliberate, was accidental or inadvertent or that on other grounds it is just and equitable to grant relief.

Conversion of private to public by choice—Section 44 comply with the following steps:1. Pass a

Nature of a Company

2. Pass

209

deleting restrictions u/s 3(1)(iii) in its Articles and filing it with

3. Increasing the number of members to 7 5. Increasing paid up capital to ` 5,00,000

Conversion of Public Company to Private Company—Sections 31(1), 31(2A) . 2. Altering Articles of Association incorporating restrictions u/s 3(1)(iii) in its Articles by passing a

of the receipt of approval of the Central Government.

13.10 MISCELLANEOUS Definition of Officer in Default—Section 5, 7 (a) Managing director (s) (c) Manager (d) Secretary (e) Any person in accordance with whose directions or instructions the Board of Directors of the company is accustomed to act (f) Any person charged by the Board with the responsibility of complying with that provision ( ) and the company files a (g) Any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors. is accustomed to act— unless expressly provided by the Act.

Definition of a Relative—Section 6 (a) they are members of a Hindu undivided family; or (b) they are husband and wife; or (c) the one is related to the other in the manner indicated in Schedule IA.

,

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Father Father’s father Mother’s father Son Son’s son Son’s daughter Daughter Daughter’s daughter Daughter’s son Brother Sister

Mother Father’s mother Mother’s mother Son’s wife Son’s son’s wife Son’s daughter’s husband Daughter’s husband Daughter’s daughter’s husband Daughter’s son’s wife Brother’s wife Sister’s husband

Can a Company become Partner in a Partnership Firm

not from status.

in a partnership firm, its Memorandum of Association must contain a provision to that effect in the

SELF-REVIEW QUESTIONS (Including Previous Years Examination Questions) 10th November, 2009. The company, however, continues to carry on its business and incurs debts on 7th December, 2009, 2nd February, 2010 and 18th May, 2010. Discuss the liability of the remaining shareholders. 2. A public limited company has only seven shareholders, all the shares being fully paid–up. All the shares of one such shareholder are sold by the court in an auction and purchased by another shareholder. The company continues to carry on business thereafter. Discuss the liabilities of the shareholders of the company under the Companies Act, 1956. [ ] th April, 2009, all the shares of X (a shareholder of the company) are sold to Y (another shareholder of the company) in an auction by the order of the court. Z (a shareholder of the company) was in USA for a business trip from January and thus he was not aware of the developments. The company continues to carry on its business thereafter. In December, 2009, the company borrowed a sum of ` 5 lakh from the Unique Bank. Later, the company was wound up and the assets of the company were not sufficient for the payment of its liabilities. The Bank filed a suit against Y and Z for recovery of the said loan from them. Decide the if the said loan was taken in the month of March, 2009?

Nature of a Company

211

shares while in employment of the company. Does this company need to be converted to public company? 5. ABC Pvt. Ltd. is a private company having five members only. All the members of the company were going by car to Mumbai in relation to some business. An accident took place and all of them died. Answer with reasons, under the Companies Act, 1956 whether existence of the company has also come to end? [ ] 6. An HUF consisting of 3 major brothers, their wives and minor children totalling 12 enter into a business this business legal? 7. ABC Pvt. Ltd. has a share capital of ` 10 lakh divided into 1 lakh shares of ` and its subsidiary XYZ Pvt. Ltd. hold 30,000 and 25,000 shares respectively in ABC Pvt. Ltd. Is ABC shares in ABC Pvt. Ltd.? 8. The United Traders Association was constituted by two joint Hindu families consisting of 21 major and 5 minor members. The Association was carrying the business of trading as retailers with the object of acquisition of gain. The Association was not registered as a company under the Companies Act, any change in the status of the United Traders Association if the number of its members subsequently reduced to 15? [ ] 9. An association of thirteen members starts a banking business without being registered. Five members retire and thereafter a suit is instituted by one of the continuing members for the partition of assets of the business. Is the suit valid? Decide with reference to the provisions of the Companies Act, 1956. 10. The paid-up share capital of ABC Private Limited is ` one crore consisting of 8,00,000 equity shares of ` 10 each and 2,00,000 cumulative preference shares of `

subsidiaries of UMC Private Limited. Examine with reference to the provisions of the Companies be different if UMC Private Limited controls the composition of Board of Directors of ABC Private Limited? [ ] 11. F, an assessee, was a wealthy man earning huge income by way of dividend and interest. He formed three private companies and agreed with each to hold a bloc of investment as an agent for them. The dividend and interest income received by the companies was handed back to F as a pretended loan. This way, F divided his income into three parts in a bid to reduce his tax liability. Decide for companies may be disregarded?

[

]

incorporated under the Companies Act, 1956.

[

]

the Companies Act, 1956?

[

]

of the Companies Act, 1956.

[

]

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15. State whether the following statements are correct or incorrect: (i) A company is a legal person but not a citizen. (ii) If the Central Government permits, a public company can be converted into a private company. [ ]

Hints and Answers after the 6 months from the date of reduction. 2. Same as answer to Question 1 3. Same as in Question 1. However, Z will not be liable since he is not aware of the default. If the loan is taken in March, 2009 all the shareholders shall be liable only to the extent of share capital. 5. No. The company continues. By way of transmission of shares, shares are transmitted to their legal representatives. The company ceases to exist only on the winding up of the company. 6. Yes. Section 11. Since the number of members excluding minor is 16. 8. 9. 10. 11.

Section 11. Illegal association. Cannot become legal on subsequent reduction of members. No. Illegal association. Suit is not maintainable. ABC Pvt. Ltd. is a subsidiary of UMC Pvt. Ltd. in both cases. Not permissible. Piercing of corporate veil. See Sir Dinshaw Manechjee Petit.

13. See topic 13.8 – Non-Profit Company u/s 25. 15. (i) Correct. A company upon incorporation has a distinct legal identity from its members. However, a company not being a natural person cannot be citizen of any country. (ii) Correct. Section 31 requires that the conversion of public company to private needs to be approved by Central Govt. within 3 months of its alteration of AoA.

Incorporation of a Company

14

213

INCORPORATION OF A COMPANY

CHAPTER

Learning Objectives After reading this chapter, you will understand: Promoters of a company, their liabilities and remuneration Pre-incorporation or preliminary contracts, distinction from ‘provisional contracts’ Procedure for incorporation of a company Requirements as to Memorandum of Association of a company and changes/alterations therein Requirements as to Articles of Association of a company and changes/alterations therein Doctrine of ‘ultra vires’, ‘constructive notice’ and ‘indoor management’ Procedure of service of documents

14.1

PROMOTERS

Meaning of Promoters Persons who conceive the idea of forming the company; and Pre-incorporation or preliminary contracts, as distinct from ‘provisional contracts’ Note: A person acting in professional capacity shall not be a promoter. For example, a chartered accountant in practice who drafts the Memorandum of Association of the company for his client shall not be a promoter of the company.

Position of Promoter of the company since the company has not yet come into existence. A promoter stands in a towards company. Although not an agent for the company nor a trustee for it before its formation, the principles of law of agency and of trusteeship extend to meet the case of promoter. A promoter is accountable to a company for all monies secretly obtained by him from it (Lord Lindley). A promoter from a company to be incorporated. However, he with full and fair disclosure to independent board of directors.

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Example A group of persons bought a property. First, this property was sold to a company formed for the purpose, and the purchase consideration was settled by issue of debentures at a discount to the group members. Then, this company was acquired by the same group of investors. Out of the money provided to the company by the investor group, the debentures were repaid on their nominal values thus resulting in profit to the investing group. Later on, this company was sold at profit to another company promoted by the same set of people. The profit on selling the company was disclosed but profit on repaying debentures was not disclosed. It was held, the new company can recover the secret profit made by promoters. (Gluckstein vs Barnes)

Liability of Promoters (Right of Company in Case of Breach by Promoter) can: and recover the price where the promoter sold his own property to the company; or made by the promoter; or for breach of fiduciary duty. —U/s 63, for any misstatement in the prospectus and can be imprisoned for a term extending to 2 years or fine upto ` 50,000 or both. On an application made by Official Liquidator, the court may hold the promoter liable for misfeasance or breach of trust u/s 543.

Remuneration of Promoters the . —As contracted including expenses and fee incurred for incorporation of the company

Right to subscribe at fixed price Purchase of promoter’s property Lump sum payment Commission

14.2

PRE-INCORPORATION OR PRELIMINARY CONTRACTS

Meaning and Enforceability of a Preliminary Contract incorporated.

Incorporation of a Company

215

—Where the promoters of the company have, before its incorporation, entered into a contract for the purposes of the company, and , the company can enforce it, provided the company has accepted the contract and has communicated such acceptance to the other party to the contract. —Similarly, a third party can also enforce a contract against the company if the . before its incorporation. Therefore, it cannot by ratification obtain the benefit of the contract purported to have been made on its behalf before it came into existence as ratification by the company when formed is legally impossible. The doctrine of ratification applies only if an agent contracts for a principal who is in existence and who is competent to contract at the time of contract by the agent. into fresh contract on the same basis and terms as given in the pre-incorporation contract made by the promoters. .

Provisional Contract which is though incorporated but yet to obtain the Certificate of Commencement of Business. entitled to commence business shall be provisional only, and shall not be binding on the company until that date. Table 14.1

Preliminary Contract Vs Provisional Contract Preliminary Contract

company before it is incorporated.

Provisional Contract before it obtains certificate of commencement of business.

3. A preliminary contract can be entered into on behalf 3. The term provisional contract is relevant only for a public of any company, public or private. company having a share capital, since a private company can commence its business immediately on incorporation. 4. A preliminary contract is not binding on a company 4. A provisional contract automatically becomes binding on unless it adopts the same by entering into a fresh the company on its date of certificate of commencement of contract on the same basis and terms as given in the business and no further adoption or ratification is required. pre-incorporation contract made by the promoters. contract, the promoters are personally liable on such contract.

commencement of business, a provisional contract will never become binding and therefore, neither the company nor the promoters are liable on such contract.

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Law, Ethics and Communication

commencement of business and no further adoption or ratification is required. contract will never become binding on the company and cannot be sued upon.

Preliminary Contract Vs Provisional Contract

14.3

PROCEDURE FOR INCORPORATION OF A COMPANY

Mode of Forming a Company—Section 12 subscribing to a memorandum of association and complying with other formalities of the Act.

of their company.

or defeats the provisions of any other law.

Procedure for Incorporation of Company—Section 33 —An application to be made in to ROC for availability of name along with fee ` 500. 2. Once a name is approved, it is valid for a period of . 3. with ROC– (i) The MoA (Memorandum of Association) and AoA (Articles of Association) duly stamped and dated (ii) The agreement proposed to be entered with any person for appointment of MD or whole-time director. (iii) Statutory declaration of compliance—By an advocate or CS or CA in practice or director, manager or secretary of company.

(vi) *Particulars regarding directors, manager and secretary (Form no. 32) (vii) Requisite fee payable as per nominal capital of company * Can be filed within 30 days of registration but generally filed at the time of incorporation itself.

Undesirable Names—Section 20 undesirable.

Incorporation of a Company

217

previously registered under the Companies Act; or

certain names including certain words which are allowed in name only if the company is formed with some minimum nominal capital, e.g. Corporation—` ` Hindustan—` `

Effect of Registration—Section 34 incorporation.

and having

and a

, . to the assets of the company in the event of its being

wound up as is mentioned in this Act.

Conclusiveness of Certificate of Incorporation—Section 35 that: have been complied with in respect of registration and matters precedent and incidental thereto; and that authorized to be registered and duly registered under this Act. opened up in any court or tribunal after the issue of certificate of incorporation. Companies Act have been complied with and the company is a legal entity. However, the certificate is or would be rendered legal by the certificate.

vs

Examples 1. A public company was formed by 2 adults and 5 minors. The Registrar however issued a certificate of incorporation. It was held that though the formalities are defective, yet the certificate issued by the Registrar is a conclusive proof of existence of the company. (Moosa vs Ibrahim) 2. A company was formed on 8th January but the certificate was issued dated 6th January when the documents were submitted. It was held the company was incorporated on 6th January and any share allotment made on that date is valid. (Jubilee Cotton Mills vs Lewis)

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Law, Ethics and Communication

Commencement of Business—Section 149 incorporation. business from ROC, before it can start its business or exercise its powers to borrow money. commencement of business, then it is punishable with fine extending to ` 5,000 per day. in following cases: — A company can commence business or exercise any borrowing powers only if: Shares up to minimum subscription have been allotted

A certificate of compliance as to above requirements is filed to ROC by the director or —A company can commence business or exercise any borrowing powers only if:

A certificate of compliance as to above requirements is filed to ROC by the director or secretary or a CS in practice in Form 20

Commencement of Main Objects and Other Objects—Section 149

, can be commenced only after approval of members .

votes cast in favour of the resolution exceed the votes cast against it.

Incorporation of a Company

14.4

219

MEMORANDUM OF ASSOCIATION

Definition of Memorandum—Section 2(28) as altered from time to time in pursuance of this Act or any previous company law. which its actions cannot go.

Act to Override Memorandum or Articles of Association—Section 9 any agreement executed by it or any resolution passed by it in general meeting or board of directors meeting. the extent it is repugnant to the provisions of the Act.

Requirements as to Memorandum—Sections 13, 14, 15

—State in which registered office the company is situated

—That liability is limited by shares or guarantee and the amount which a member is liable to pay on winding up. This clause is absent in case of an unlimited company. —Amount of share capital of company and its division into shares and signing in prescribed manner, duly witnessed. of the company, and, on its registration, shall be entered as members in its register of members (

).

shares, etc. Printed, Divided into paragraphs numbered consecutively, and Signed by each subscriber (who shall add his address, description and occupation, if any), in the description and occupation, if any.

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2. The registered office of the company will be situated in the Union Territory of Chandigarh.

4. The liability of the members is limited. 5. The share capital of the company is one hundred thousand rupees, divided into ten thousand shares of ten rupees each. We, the several persons whose names and addresses are subscribed, are desirous of being formed into a of shares in the capital of the company set opposite our respective names.

ABC, ----, Chandigarh, Chartered Accountant, Business PQR, ----, Chandigarh, MSc., Teacher

and Occupation)

The liability of the members is limited. being wound up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the company contracted before he ceases to be a member, and the costs, charges such amount as may be required, not exceeding one hundred rupees.

Publication of Name—Section 147 Paint or affix its name and address of its registered office outside every office or place of business Have its name engraven in legible characters on its seal Have its name and address of its registered office mentioned in all business letters, invoices, negotiable instruments, receipts, etc. ` 500 per day.

221

Incorporation of a Company

Registered Office—Section 146 addressed. th

day of incorporation or actual commencement of

business, whichever is earlier. . of the company.

14.5

vs

CHANGES IN MEMORANDUM OF ASSOCIATION

Alteration of Company Name suo motu (b) For any other reason (for example, conversion from private to public or for reflecting change in nature of business, etc.)

previously registered under the Companies Act; or

Change of Name by Company on Its Own (suo motu)—Sections 21, 22

2. an resolution as stated above.

(Powers delegated to ROC) instead of a special

Change of Name on Directions of Central Government—Section 22

the company.

company.

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Law, Ethics and Communication

2.

`

Effect of Change of Name—Section 23 by ROC.

any legal proceedings by or against it; and any legal proceedings which might have been continued or commenced by or against the company by its former name may be continued by or against the company by its new name.

Change of Registered Office Change within local limits—Section 146 since it does not involve any alteration of the Memorandum of Association. .

Change outside local limits but within same state—Section 146 .

Change from jurisdiction of one ROC to another within same state—Section 17A allowed

2. Application to be made in Form 4BBA to the Regional Director. 4. The company has to file with ROC a copy of the Regional Director’s confirmation order and altered Memorandum filing the above documents. that all the requirements of this Act with respect to the alteration and confirmation have been complied with and henceforth the Memorandum as altered shall be the Memorandum of the company. .

Incorporation of a Company

223

Change from one state to another—Section 17

debentureholder, creditor and every other person whose interest may be affected by alteration. consent or his debts is discharged or secured.

purchase of shares of dissenting members. However, no part of capital of the company shall be expended for such purchase. with ROC of each state.

vs ) that all the requirements of this Act with respect to the alteration and confirmation have been complied with and henceforth the Memorandum as altered shall be the Memorandum of the company. vs

Specified purpose allowed under Section 17 , alter the provisions of its Memorandum so as to from one State to another, of the company so far as may be required to enable it— (a) to carry on its (b) to attain its main purpose (c) (d) to carry on (e) to

; or ; or of its operations; or which under existing circumstances may with the business of the company; or

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Law, Ethics and Communication

(f) to the company; or (g) to with any other company or body of persons. directors of the company to decide. (

)

Alteration of Objects—Section 17 as listed above. 2. Change can be made only by a 3. A copy of the special resolution and the Memorandum as altered to be filed with ROC

to that effect. that all the requirements of this Act with respect to the alteration and confirmation have been complied with and henceforth the Memorandum as altered shall be the Memorandum of the company.

Alteration of Liability Clause—Section 38 the Memorandum binding any member (after the date on which he became member); To increase his liability in any way by contributing to the share capital of the company or by any other method. Exceptions: to such alteration. recurring or periodical subscriptions or charges at a higher rate although he does not agree in writing to be bound by the alteration. of the company. However, such alteration will not affect any debts and liabilities entered into by the company before such re-registration.

Alteration of Capital Clause—Section 94 its share capital by issuing new shares and dividing share capital into shares of larger amount share capital into shares of smaller amount

Incorporation of a Company

225

Cancelling shares which have not been taken or agreed to be taken and diminishing the share capital by shares so cancelled authorized by the Articles of Association. ordinary resolution.

Summary of approval provisions relating to alteration of memorandum

Director

14.6

ARTICLES OF ASSOCIATION

Definition of Articles—Sections 2(2), 26

Contents of Articles—Section 27 Unlimited company Limited by guarantee Private company Note

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Law, Ethics and Communication

an unlimited company, the capital clause is stated in the AoA and can be altered only by a special resolution.

2. 3. 4. 5.

Share certificates and warrants Calls, lien on shares Transfer and transmission of shares Forfeiture of shares

Adoption of Table A—Section 28

modify the provisions contained in Table A.

Form of Articles of Association—Section 29 company (distinguished by liability of the company). A company can draft its AoA in a form as near thereto and is free to incorporate any additional matters therein so far as they are not inconsistent with the provisions contained in the model forms. Table of Schedule I

Type of Company

Table A

Company limited by shares

Table C

Company limited by guarantee and not having share capital

Table D

Company limited by guarantee and having share capital Unlimited company

Incorporation of a Company

227

Form and Signature of Articles—Section 30 be printed; be divided into paragraphs numbered consecutively; and be signed by each subscriber of the Memorandum of Association (who shall add his address, description and occupation, if any) in the presence of at least one witness who shall attest the

14.7

ALTERATION OF ARTICLES—SECTION 31

The Articles of Association can be changed by passing

only.

Limitation on Power to Alter Articles

14.8

DOCTRINE OF ULTRA VIRES

Meaning of Ultra Vires Ultra vires ultra vires is: to be employed; and payment, are not dissipated in unauthorized activities. ultra vires if

of the company. ultra vires generally means any act ultra vires by the entire body of members.

. Such an act cannot be ratified

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Law, Ethics and Communication

Any act which is beyond the powers of directors is referred to as ultra vires . Such act can be ratified by passing a resolution by members in a general meeting. Any act which is beyond the rules stated in the Articles of Association of a company is called as ultra vires . Such act can be ratified by amending the Articles by passing a special resolution in a general meeting. Example A company is formed with object of ‘Mechanical Engineers and General Contractors’. The company entered into an agreement for financing construction of a railway in Belgium. On a suit for breach of agreement, it was held that the words ‘General Contractors’ would only mean contracts as such connected with the business of Mechanical Engineers and cannot be interpreted to include contracts of any description in the world. (Ashbury Rlwy Carriage & Iron Company vs Riche)

Effect of Ultra Vires Acts ab initio and the company is not bound by any act which is ultra vires. even by entire body of members. ultra vires can be restrained from such act

2. The . 4. The the company.

for any ultra vires act to third parties as well as loss to

ultra vires intra vires , the same can be ratified by the general body of shareholders by passing a resolution or by altering the Articles of Association. ultra vires act using the company’s money, the company has acquired by such ultra vires act because as against third parties, it represents application of the company’s money. of ultra vires practically everything under the sun that can be done by a company. Further, this rule has also been ultra vires act done by its officers.

14.9

EFFECT OF MEMORANDUM AND ARTICLES

Binding Force of Memorandum and Articles—Section 36 if they respectively have signed them and agreed to observe all the provisions of the MoA and AoA. also in respect of any alterations duly carried out as per the provisions of the Act. due from him to the company.

Incorporation of a Company

229

Effect of Binding of Memorandum and Articles 1.

Members bound to Company

members are bound to the company as in a contract and the company

2.

Company bound to members

company is also liable to members as to whatever is contained in its ultra vires

3.

Members bound to other members

4.

Binding with third parties

5.

bind the members inter se

do not bind either the company or the members to any third party

Directors bound to company

directors by their actions bind the company ultra vires

Copies of MoA and AoA to be Given to Members—Section 39 ` `

Alterations to be Noted in Every Copy—Section 40

`

Table 14.2 Basis

Distinction between the Memorandum of Association and the Articles of Association Memorandum of Association

Articles of Association

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Law, Ethics and Communication

14.10 DOCTRINE OF CONSTRUCTIVE NOTICE Meaning of Constructive Notice

to its directors. understood them in their true context.

these documents.

Example A company provides a bill of exchange which was signed by one of its directors. The Articles of the company provided that any bill of exchange to be effective must be signed by two directors. It was held the payee cannot claim the amount under the bill.

14.11 DOCTRINE OF INDOOR MANAGEMENT Meaning of Indoor Management

Articles have been complied with by the officers of the company. which otherwise are not evident from the Memorandum or Articles of the company.

Example The directors of a company were authorized by the Articles to borrow on bonds such money as is required from time to time by a resolution in the general meeting. The directors gave a bond to T without the authority of any such resolution. It was held the company was liable on bond since T was entitled to assume that the resolution has been passed in a general meeting. (Royal British Bank vs Turquand)

Exceptions to Doctrine of Indoor Management , he cannot claim protection by applying the

Incorporation of a Company

2. Where the person is surrounding a transaction.

231

or transaction is of unusual magnitude or there are suspicious grounds of the

company. . Examples 1. A person knowing fully that directors do not have the authority to make the transaction but still enters into it cannot seek protection under the Doctrine of Indoor Management. (Howard vs Patent Ivory Mfg. Company) 2. An accountant of a company transferred some immovable property of the company in favour of AB. The transaction was held void since the authority of transferring immovable property cannot be considered within the apparent authority of an accountant. (Anand Bihari Lal vs Dinshaw & Company) 3. A person, who does not consult the Memorandum and Articles and therefore did not rely on them, cannot claim protection due to the Doctrine of Indoor Management. (Rama Corporation vs Proved Tin & General Investment Company) 4. Where the secretary of a company forged signatures of two of directors required under the Articles on a share certificate, the applicants were refused registration as members. Since a forged instrument cannot pass on good title, the holders cannot take advantage of the Doctrine of Indoor Management. (Ruben vs Great Fingall Consolidated Company)

14.12 SERVICE OF DOCUMENTS Service of Documents on Company—Section 51 at the registered office of the company: or , or . 2. Where the , the records of the beneficial ownership may be served by such depository on the company by means of or by delivery of floppies or discs.

Service of Documents on Registrar—Section 52 A document may be served on a Registrar by sending it to him at his office or or it to, or leaving it for, him at his office.

Service of Documents on Members by Company—Section 53 (a) (b)

, or to him to his

, or

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supplied by him to the company for the giving of notices to him. 2. Where a document is sent by post: (a) Service thereof shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the document. (b) However, , then the company shall post it accordingly. 3. A document circulating in the neighbourhood of the registered office of the company shall be deemed to be duly served

in the register in respect of the share. 5. A document may be served by the company on the persons entitled to a share in consequence of the of a member by sending it through the post in a prepaid letter addressed to them.

Authentication of Documents and Proceedings—Section 54 Save as otherwise expressly provided in this Act, a document or proceeding requiring authentication by a company may be signed by a director, the manager, the secretary or other authorized officer of the company, and need not be under its common seal.

SELF-REVIEW QUESTIONS (Including Previous Years Examination Questions)

] 2. The Memorandum of Association of a company was presented to the Registrar of Companies for registration and the Registrar issued the certificate of incorporation. After complying with all the legal business. The company contends that the nature of the business cannot be gone into as the certificate of incorporation is conclusive. Answer the question whether the company’s contention is correct or not. ] 3. A company is incorporated on 6th th

th

Discuss the validity of the contract entered into by the company. 4. Before the incorporation of a company, the promoters of the company entered into an agreement with

]

Incorporation of a Company

233

of certain furniture for the company and payment was to be made to the suppliers of furniture by the company after incorporation. The company was incorporated and the furniture was used by it. Shortly after incorporation, the company went into liquidation and the debt could not he paid by the company for the purchased furniture. As a result, suppliers sued the promoters of the company for the recovery of

] and the certificate of incorporation of the company was issued by the Registrar on 20th October, 2006. The company denies the said liability on the ground that the company is not bound by the contract entered into prior to issuing of the certificate of incorporation. Decide under the provisions of the ] the certificate of commencement of business is obtained, the company went in liquidation. Discuss whether F can enforce payment.

to alter its Memorandum to include cinema business. Discuss.

‘Mall with shops’ with the words ‘Shops, residential buildings and warehouses for letting purposes.’ ]

clause of the Memorandum of Association to enable the company to carry on such business. State ] company, and that he shall not be removed except on the ground of misconduct. Can the company ] company to do trading in fruits and vegetables. The company, however, entered into a partnership with Mr. S and traded in steel and incurred liability to Mr. S. The company, subsequently, refused to admit the liability to S on the ground that the deal was ultra vires ]

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Law, Ethics and Communication

` whether the said distribution of money was ultra vires

]

` resolution altering the Articles so as to increase the salary of managing director to ` 2,50,000. One of the shareholders who dissented subsequently brought an action against the company and the directors alleging that the resolution was not binding on the company. Decide. ` received the certificate of incorporation on 20th the public to subscribe for its equity shares. Meanwhile, the company intended to commence its operations without obtaining the certificate of commencement of business. Advise the company stating the conditions to be fulfilled for obtaining the certificate of commencement under the Companies Act,

only through e-mail (or fax etc.). Arvind sent a document to the company by registered post. The company did not accept the document on the ground that sending documents to the company by post was in violation of the Articles. As a result, Arvind suffered loss. Decide the validity of the company’s ]

] 20. Under the Articles of Association of Sunshine Ltd. Company, directors had power to borrow up to ` ` 35,000 to the

]

to another company ABC Ltd. and received an agreed fee of ` Memorandum of Association of the company authorizes the company to carry on any other trade or business which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with the company’s general business. Referring to the provisions of the

Incorporation of a Company

235

]

laptops worth ` ground that the transaction was ultra vires ] 23. RSP Limited is a public limited company with a limited liability of its members by a guarantee of ` `

] 24. Which documents are required to be filed with the Registrar of Companies at the time of registration ] office of the company from one State to another State under the provisions of the Companies Act, ] 26. Distinguish between "pre-incorporation contracts" and "provisional contracts" under the Companies ] ]

Hints and Answers certificate will be valid.

3. The contract is valid since it is entered into after the date of incorporation. the same on incorporation. (i) Promoters are personally liable since the company cannot adopt or ratify the contract by promoters. (ii) Promoters’ liability comes to an end when the new contract is entered into by the company on same terms. 6. Since the company is incorporated on 20th Oct., 2006 it cannot be held liable on a contract entered on 5.

goes into liquidation before COB, the dealer cannot enforce payment. However, if the company goes into liquidation after obtaining COB, the contract is binding on the company and F can claim his dues.

(

vs

)

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Law, Ethics and Communication

(

vs

) ultra vires

the company since it was conducive to the continued growth of the company.

COB is granted by ROC.

20. The company is liable only up to ` claim benefit of indoor management. ultra vires. is ultra vires.

Prospectus

15

237

PROSPECTUS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and issue of prospectus Contents of a prospectus Procedure for registration of prospectus with the registrar of companies Other documents deemed to be prospectus Civil and criminal liability for any misstatement in a prospectus

15.1

MEANING AND ISSUE OF PROSPECTUS

Meaning of Prospectus—Section 2(36) Prospectus means any document described or issued as a prospectus; and Prospectus includes any notice, circular, advertisement or other document inviting deposits from the public, or inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate. Therefore, a document shall be called a prospectus if it satisfies the following two conditions: 1. It is an invitation calling offers for subscription to shares or debentures or deposits of a company. 2. It is an invitation made to public. prospectus. In relation to issue of prospectus and allotment of shares, the Securities and Exchange Board of India (SEBI) has been vested with administrative powers relating to issue of guidelines and inquiry into offences.

Meaning of ‘Inviting Offers from Public’—Section 67 will include offering to:

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Law, Ethics and Communication

any section of public; whether as member or debentureholder or clients of person issuing prospectus or in any other manner. will not include any offer if it does not result into shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer. was made specifically to him, then it is a public offering. not a public offering. vs Lynde) —If the offer or invitation is made to 50 or more persons, it will be considered as public offering. from unrelated investors through any kind of market intermediaries. In effect, if subscription to shares is arranged by brokers, etc., it will amount to public offering. However, if the subscription is through friends, relatives or associates, then it will be considered as private placement. Examples 1. A document marked ‘confidential and private’ inviting offers for subscription to shares of a company is issued to a group of people, not more than 50 in number. It shall not amount to ‘invitation of offers from public’. 2. A document marked ‘confidential and private’ inviting offers for subscription to shares of a company is issued to a group of people, exactly 50 in number. It shall amount to ‘invitation of offers from public’. 3. A document marked ‘confidential and private’ inviting offers for subscription to shares of a company is issued to a group of people, not more than 50 in number. Mr. X, who though is not part of the group, comes to know about the invitation and makes an offer to the company. The company refuses Mr. X’s offer. It shall not amount to ‘invitation of offers from public’. 4. A document marked ‘confidential and private’ inviting offers for subscription to shares of a company is issued to a group of people, not more than 50 in number. Mr. X, who though is not part of the group, comes to know about the invitation and makes an offer to the company. The company accepts Mr. X’s offer. It shall amount to ‘invitation of offers from public’.

Issue of Prospectus—Section 56 (i) by or on behalf of company; or (ii) by or on behalf of any person who is or has been engaged or interested in the formation of a company (i.e. promoter)

When issue of prospectus is not required—Section 56(5) 1. Where the public offering is made to existing members or debentureholders (Rights Issue) whether or not members have the right of renunciation. 2. In case of a listed company where public offering is made for issue of shares or debentures which are uniform in all respects with the previously issued shares or debentures.

Prospectus

239

3. Invitation to a person to enter into a bona fide underwriting arrangement. 4. Where shares are issued through private relations, and there is no offer or invitation to public. However, a statement in lieu of prospectus shall be required to be filed in such case. private company is not required to issue a prospectus.

15.2

CONTENTS OF PROSPECTUS

Contents of Prospectus—Section 56 2. Information and reports as per Part II of Schedule II and SEBI. (Part III of Schedule II) void. by a company. matters to be included in a prospectus, yet the company is under moral duty to voluntarily disclose any other information which may affect the decision of the prospective investor to invest in the company. This is also referred to as Golden Rule for framing of prospectus as laid down in vs Muggeridge.

Statement of Expert—Sections 57, 58, 59 Expert is a person who is not, and has not been, engaged or interested in the formation or promotion, or in the management, of the company.

should not be connected with the company as a promoter. The expert has given his written consent to the issue thereof with the statement included in the form and context in which it is included, and has not withdrawn such consent before the delivery of a copy of the prospectus for registration; and prospectus. ` 50,000.

Newspaper Advertisements of Prospectus—Section 66 of shares or debentures. advertisements are also required to adhere to the code and guidelines issued by SEBI.

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Law, Ethics and Communication

to incomplete prospectus (e.g. “This is only an announcement and not a prospectus.”) it shall not be necessary in the advertisement to specify the contents of the memorandum or the signatories thereto, or the number of shares subscribed for by them.

Contents of Prospectus—Part I of Schedule II I. General information

(d) Statement relating to punishment of fictitious applicants (e) Declaration for refund of application money if minimum subscription of 90% is not received within 90 days from the closure of the issue (f) Declaration for issue of allotment letters/refunds within a period of 10 weeks (g) Date of opening, closing, and the earliest closing of an issue

(l) Declaration by the board of directors relating to separate bank account and utilization of application money

II. Capital structure of the company (b) Size of the present issue giving separately reservation for preferential allotment to promoters and others

III. Terms of the present issue (a) Terms of payments (c) How to apply—availability of forms, prospectus and mode of payment

IV. Particulars of the issue (a) Objects (b) Project cost (c) Means of financing (including contribution of promoters)

V. Company, management and project (a) History and main objects and the present business of the company

Prospectus

241

(b) Subsidiaries of the company, if any (c) Promoters and their background directorships in other companies) (f) Plant and machinery, technology, process, etc. (h) Infrastructure facilities for raw materials and utilities like water, electricity, etc. (i) Schedule of implementation of the project and progress made so far, etc. (j) Details of the products, nature, users, marketing set up, exports, etc. (l) Stock market data—High/low price in each of the last three years and monthly high/low during the last six months (if applicable)

VI. Particulars regarding the companies under the same management which made any capital issue during the last three years (b) Year of issue (c) Type of issue (public/rights/composite) (e) Date of closure of issue (f) Date of completion of delivery of share/debenture certificates (g) Date of completion of the project, where object of the issue was financing of a project

VII. Details of outstanding litigation & defaults (a) Outstanding litigation pertaining to: (i) matters likely to affect operation and finances of the company including disputed tax liabilities of any nature; and (ii) criminal prosecution launched against the company and the directors for alleged offences under (b) Particulars of default, if any, in meeting statutory dues, institutional dues and payables of debentures, fixed deposits, preference shares. and prospects of the company

VIII. Management perception of risk factors (a) Sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing of products, cost/time overrun, etc.

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Law, Ethics and Communication

Information and Reports in Prospectus—Part II of Schedule II A. General information bankers to the company, bankers to the issue and experts 2. Expert opinion obtained, if any

5. Procedure and time schedule for allotment and issue of certificates bankers to the company, bankers to the issue, and brokers to the issue

B. Financial information in the last 5 years 2. Similar report for subsidiary companies 3. Similar report for business or company to be acquired from the proceeds of public issue 4. Principal terms of loan and assets charged as security

C. Statutory and other information 1. 2. 3. 4. 5.

Minimum subscription Expenses of issue including fee to advisers, registrars, managers and trustees Underwriting commission and brokerage Particulars of previous issues in the last 5 years Debentures and redeemable preference shares outstanding

7. Option to subscribe for securities to be dealt with in a depository 8. Particulars of property to be purchased by the company 9. Particulars about directors

13. Material contracts and inspection of documents

15.3

REGISTRATION OF PROSPECTUS

Registration of Prospectus—Section 60 before its issue to public.

Prospectus

243

must be issued to public within 90 days of registration.

valid). ` 50,000.

Contract in Prospectus not to be Varied—Section 61 of prospectus, except subject to the approval of, or except on authority given by, the company in the general meeting.

Dating of Prospectus—Section 55 shall be dated, and that date shall, unless the contrary is proved, be taken as the date of publication of the prospectus.

15.4

DOCUMENTS DEEMED TO BE PROSPECTUS

Abridged Prospectus—Sections 2(1), 56(3) prescribed (Form 2A). to public must be accompanied with a memorandum containing salient features of prospectus. ` 50,000 besides the liability under any other provision

Shelf Prospectus in case of Financial Institutions—Section 60A Who can issue shelf prospectus? , or whose main object is financing make loans or subscribe to the share capital of a private industrial enterprise engaged in infrastructural financing.

(iii) Industrial Development Bank of India (v) Unit Trust of India

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Law, Ethics and Communication

Meaning of shelf prospectus Shelf prospectus means a prospectus issued by any financial institution or bank for one or more issues of the securities or class of securities specified in that prospectus.

Issue process valid for a period of one year from the date of opening of the first issue. offer of securities within the validity period of the shelf prospectus. information memorandum

making a second or subsequent offer. between the first offer of securities, the previous offer and the succeeding offer of securities within a period of 3 months, prior to making of a second or subsequent offer of securities under the shelf prospectus.

Book Building, Information Memorandum and Red-Herring Prospectus—Sections 2(19B), 60B Meaning of information memorandum demand for securities and assessment of prices, etc. information memorandum to public prior to the filing of prospectus. demand for the securities proposed to be issued by a company is elicited, and the price and the terms of issue for such securities are assessed, by means of a notice, circular, advertisement or document.

Prospectus

245

Red-herring prospectus prior to the opening of the subscription lists and the offer as before the opening of the offer.

, at least 3 days

the quantum of the securities offered. if the price is not mentioned, the number of shares and price bands will be mentioned. if neither price nor the number of shares is mentioned, the total issue size will be mentioned. same obligations as that of a prospectus.

Notice of variations highlighted as variations by the issuing company. individually intimated to the persons invited to subscribe to the issue of securities. applicants, it shall not encash such instruments unless the variation has been highlighted and intimated as above. cancel the cheques or stock invest. of intimation of variation.

Final prospectus

shall be entitled to refund of money paid along with interest @ 15%.

Deemed Prospectus—Section 64 Reasons for provision for deemed prospectus of shares or debentures to another company which acts as an issue house and further makes a public offering by their own document. intermediary shall be considered as a prospectus only. prospectus, and all rules as to the contents of a prospectus and liability as to omissions or misstatement shall apply accordingly.

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Law, Ethics and Communication

Deemed prospectus debentures was made to the issue house with a view to make public offering if: (a) The public offering was made within six months of allotment or agreement to allot shares or debentures to the issue house; or (b) The whole consideration had not been received by the company when the public offering was made by such issue house.

Additional disclosures

(b) Time and place where the contract for allotment of shares or debentures to the issue house can be inspected. making public offering are persons named as directors in the prospectus. least half of the partners (in case the issue house is a firm) or by their authorized agents.

Statement in Lieu of Prospectus—Section 70 When issued

failure of public issue, or the minimum subscription target is not achieved.

Provisions applicable prospectus on or with reference to its formation or which has issued such a prospectus but has not proceeded to allot any shares to public, shall not allot any of its shares or debentures unless it files a statement in lieu of prospectus at least 3 days before any allotment of shares. 2. Statement in lieu of prospectus shall be signed by every person named therein as a director or proposed director. 3. The contents and form of statement in lieu of prospectus shall be Schedule III. ` 10,000. 5. The civil and criminal liabilities applicable for any misstatement or omission in a statement in lieu of prospectus are same as that of a prospectus.

Prospectus

15.5

247

LIABILITY FOR MISSTATEMENT IN PROSPECTUS

Misstatement or Omission in Prospectus—Section 65 included in a prospectus shall be deemed to be untrue if the statement is misleading in the form and context in which it is included. (b) Where the omission from a prospectus of any matter is calculated to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included. or in any report or document attached to the prospectus and referred to in the prospectus.

Consequences of a Misstatement or Omission in Prospectus Against the company

.

Remedy against the Company on the faith of a prospectus enters into a contract (meaning a contract based on the utmost good faith). Therefore, if the prospectus contains any misstatement or misleading omission, the shareholder can rescind the contract. However, in order to rescind the contract, the following conditions need to be satisfied: 1. 2. 3. 4. 5.

There must be material misrepresentation or omission of fact. It must have induced the shareholder. The shareholder must have relied on such statement in the prospectus. The misrepresentation or omission must be misleading. The shareholder suffered a loss or damage due to such misstatement.

—In addition to rescission of contract, the shareholder can file a suit for compen sation for damages. This right is an independent and separate right from the rescission of contract. or initiates action after lapse of reasonable time. Case —Peek vs Gurney The right to claim damage from a company or its directors, etc. shall lie only if the person has purchased shares on the strength of a statement in prospectus. If a person buys shares from another shareholder or from open market, he cannot bring a claim for damages.

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Law, Ethics and Communication

Example A limited company issues a prospectus for the purposes of purchasing a tea estate in Assam. The prospectus contains an extract from an expert’s report mentioning number of tea plants and other relevant information. The expert’s report was found to be incorrect. It was held that any shareholder buying the shares on the basis of false information shall have the right to claim compensation from the company for any loss that he might have sustained in terms of the value of shares.

Civil Liability for Misstatement in Prospectus—Section 62 When does the liability arise? (a) Where there is an issue of prospectus for a public offering; and (b) The person aggrieved subscribed on the faith of prospectus; and (d) It is proved that the directors or persons authorizing issue of prospectus acted fraudulently.

Who is liable? (a) Director or proposed director or promoter or authorized agent (b) Expert—If he has made an untrue statement included in the prospectus consented to.

Defence of a person liable (a) He withdrew his consent before issue of prospectus and the prospectus was issued without his authority or consent. (b) If the prospectus was and he gave a public notice stating such unauthorized issue. (c) If after issue but before allotment, he on becoming aware of any untrue statement, withdrew his consent and gave a public notice of withdrawal and reasons. (d) If he had reasonable ground to believe, and did up to the time of the allotment of the shares or debentures believe, that the statement was true. (e) If the statement relates to a statement made by an expert or a report of expert, it was a correct and fair representation of such statement of expert or his report and that he had reasonable ground to believe, and did up to the time of the allotment believe, that the person making the statement was competent and the expert had given his consent to issue of prospectus u/s 58 the expert had not withdrawn consent before delivery of a copy of prospectus for registration or before allotment. (f) If the statement relates to a statement made by an official or a public document, it was a correct and fair representation of such statement of official or such document. defence (a) to (d) only.

Prospectus

249

Right of indemnity named so in the prospectus, has a right to be indemnified for all damages, costs and expenses for any liability incurred due to misstatement in the prospectus or for defending a suit or legal proceedings brought against him. excluding those without whose knowledge or consent the prospectus was issued.

Compensation to be contributed jointly contribution, as in cases of contract, from any other person who, if sued separately, would have been liable to make the same payment, unless the former person was, and the latter person was not, guilty of fraudulent misrepresentation.

Criminal Liability for Misstatement in Prospectus—Section 63 Liability ` 50,000 or both.

Defence of a person liable (a) the statement was immaterial or (b) he had reasonable ground to believe, and did up to the time of the issue of the prospectus believe, that the statement was true.

15.6 OTHER PENALTIES Penalty for Fraudulently Inducing Persons to Invest Money—Section 68 deceptive or misleading, or by any dishonest concealment of material facts, induces or attempts to induce another person to invest money in shares or debentures, shall be punishable with imprisonment for a term which may extend to 5 years, or with fine which may extend to ` 1,00,000 or both.

Penalty for Acquisition of Shares in Fictitious Names—Section 68A induces a company to allot shares in a fictitious name, shall be punishable with imprisonment for a term which may extend to 5 years. the company to any person should contain this liability prominently.

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Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

report giving the number of rubber trees in the estate. The report was inaccurate. Will any shareholder buying the shares of the company on the basis of the above representation have any remedy against the

] 4. With a view to issuing shares to the general public, a prospectus containing some false information was issued by a company. Mr. X received a copy of the prospectus from the company, but did not apply for allotment of any shares. The allotment of shares to the general public was completed by the exchange at a higher price which later on fell sharply. X sold these shares at a heavy loss. Mr. X claims damages from the company for the loss suffered on the ground the prospectus issued by the company ] of years. In fact it failed to disclose that the dividends stated in it were paid not out of revenue profits, allottee of shares wants to avoid the allotment on the ground that the prospectus did not disclose this ] of false statements in the prospectus. The director contends that the statements were prepared by 7. Mr. Beta applies for 200 shares in a public limited company in a fictitious name. Does he incur any

contained some important extracts from an expert report giving the number of teakwood trees and other

] 9. State the conditions whereunder the issuing of prospectus is not necessary under the provisions of the May 2011] ]

Prospectus

251

Hints and Answers vs

). However, in view

the prospectus. However, persons authorizing issue of prospectus can present defence that they relied

against the company. ( vs Gurney) 4. Same as answer to Question 3. 5. Yes. The prospectus contains misleading omission. (Rex vs Kylsant)

8. Same as answer to Question 2.

16

ALLOTMENT AND MEMBERSHIP IN COMPANY

CHAPTER

Learning Objectives After reading this chapter, you will understand: Procedure for allotment of shares in a company and refund of money to applicants Effect of an irregular allotment Rules relating to underwriting and brokerage commission Membership in a company and capacity to become a member Register and returns of members

16.1

ALLOTMENT OF SHARES

Agreement to Become Member—Section 41 agreed in writing

Minimum Subscription—Section 69 minimum subscription

120 days

Allotment and Membership in Company

253

refunded within 8 days 90% is not received within 60 days as on date of the closure of issue

Minimum Amount Payable on Application—Section 69(3) 5% of the nominal amount of the share. 25% of the nominal amount of the share `

Separate Bank Account—Section 69(4)

`

Day of Allotment—Section 72

date of opening of subscription list

` SEBI guidelines

254

Law, Ethics and Communication

Revocation of offer for shares—Section 72(5)

16.2

APPLICATION TO STOCK EXCHANGE

Allotment of Shares to be Dealt on Stock Exchange—Section 73

any of the stock exchanges any allotment made shall be void.

Refund of Application Money—Sections 73(2), 73(2A) refund the entire application money without interest within 8 days excess application money with interest @ 4% to 15% p.a `

Separate Bank Account—Sections 73(3), 73(3A)

Allotment and Membership in Company

`

16.3

EFFECT OF IRREGULAR ALLOTMENT

What is Irregular Allotment?—Section 71

Effect of Irregular Allotment u/s Section 71 allotment is voidable

Other Cases of Irregular Allotment

255

256

Law, Ethics and Communication

Table 16.1 Section

Summary of Provisions Relating to Irregular Allotment Nature of irregularity

Effect on allotment

Liability of company/director

`

`

`

`

`

Allotment and Membership in Company

16.4

RETURN OF ALLOTMENT

16.5

UNDERWRITING AND BROKERAGE COMMISSION

257

Power to Pay Underwriting Commission—Section 76

authorized by the company’s Articles. Articles, whichever is less.

brokerage

Power to Pay Brokerage Commission

258

Law, Ethics and Communication

16.6

MEMBERSHIP IN COMPANY

Definition of Member—Section 41 subscribers of the memorandum who agrees in writing

owner

Table 16.2

Distinction between a Member and a Shareholder

Basis of distinction

Member

Shareholder

Modes of Acquiring Membership subscribing to the Memorandum of Association agreeing to subscribe

Asthana

Allotment and Membership in Company

16.7

259

CAPACITY TO BECOME A MEMBER

Minor

A minor can however be a holder of fully paid shares by transfer or transmission. [S L Bagree Vs Britannia

Position on Attaining Majority

Company

after

Partnership Firm

Other Cases can become can become cannot become cannot become can become

260

Law, Ethics and Communication

cannot become

Termination of Membership

16.8

REGISTER AND INDEX OF MEMBERS

Register of Members—Section 150

`

Index of Members—Section 151

`

Allotment and Membership in Company

261

Register and Index of Beneficial Owners—Section 152A

Power to Close Register of Members or Debentureholders—Section 154 7 days previous notice aggregate 45 days

30 days at any one time `

Annual Return—Sections 159 to 161

Inspection of Registers—Section 163

`

Registers to be Evidence—Section 164

262

Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

May 2003] ` ` Nov 2005]

Nov 2004]

May 2003, Nov 2008] ` `

Nov 2010] `

Nov 2004]

Nov 2002]

Nov 2006]

Allotment and Membership in Company

`

263

`

`

Nov 2010]

Hints and Answers

17

SHARE CAPITAL

CHAPTER

Learning Objectives After reading this chapter, you will understand: � ���������������������������������������������������������� � ��������������������������������������� � ������������������������������������������������������������������������������������������������������ ����������������� � ��������������������������������������������������������������������������������������������������� � �������������������������������������������������������������������������������������������������������� � �������������������������� � ������������������������������������������������������������������������������������������������������ ��������������������������� � ����������������������������������������������������������������������

17.1

OVERVIEW OF SHARES

Definition of Share—Section 2(46)

` `

`

Share Capital

Nature of Shares—Section 82

Numbering of Shares—Section 83

Kinds of Share Capital—Section 86 two kinds

Characteristics of equity shares distinct from preference shares

Reserve Capital—Section 99

Shares Stock

265

266

Law, Ethics and Communication

17.2

ISSUE OF SHARE CERTIFICATES

Certificate of Shares—Section 84(1)

Effect of issue of certificate of shares

Examples 1. A obtains a share certificate fraudulently from a company. He sells the shares to B, who when applies for transfer the company refuses the transfer. It was held that the company must compensate B for loss sustained by acting on the faith of the share certificate issued by it. (Dixon vs Kennaway) 2. The company secretary issued a certificate for shares to A by forging signatures of directors on it. A or any subsequent holder cannot claim any title to such shares since the shares have not been issued under proper authority and an act of forgery does not grant any title. (Rubben vs Great Fingall Consolidated Co.) 3. C lends ` 10,000 to a company on a security of a certificate of shares issued by the company for 100 shares of ` 100 each fully paid up. The company goes in winding up. C cannot be included in the list of contributories since now the company cannot deny that the shares were not fully paid-up.

Share Capital

Issue of Duplicate Share Certificate—Section 84

` `

Procedure for Issue of Duplicate Share Certificate

Limitation of Time for Issue of Share Certificates—Section 113

`

Share Warrants—Section 114

267

268

Law, Ethics and Communication

Entry in register of members by holder of warrant—Section 115

`

17.3

VOTING RIGHTS OF SHAREHOLDERS

Voting Rights of Shareholders—Section 87 Equity shareholders

Preference shareholders

Explanation

Share Capital

Conditions Prescribed for Issue of Equity Shares with Differential Voting Rights

Rights of shareholders with differential voting rights

Alteration of rights of holders of special classes of shares—Sections 106–107

269

270

Law, Ethics and Communication

17.4

ISSUE OF SHARES AT PREMIUM

Securities Premium Account—Section 78

17.5

ISSUE OF SHARES AT DISCOUNT

Issue of Shares at Discount—Section 79

and

`

17.6

ISSUE OF SWEAT EQUITY SHARES

Meaning of Sweat Equity Shares

Share Capital

Sweat Equity Shares—Section 79A

17.7

PREFERENCE SHARE CAPITAL

Preference Share Capital—Section 85

Redeemable preference shares—Section 80

271

272

Law, Ethics and Communication

Redemption of preference shares—Section 80(1)

`

Capital redemption reserve account

17.8

FURTHER ISSUE OF CAPITAL

Rights Issue of Equity Shares—Section 81(1)

Share Capital

273

Right of Renunciation—Section 81(2)

Further Issue of Capital without Offering to Existing Members—Section 81(1A)

Cases where conditions of Rights Issue are not Applicable—Section 81(3)

vs

Issue of Convertible Debentures or Loans—Section 81(3)

Conversion of Debentures or Loans in Shares on Orders of Central Govt.—Sections 81(4) to 81(7), 94(A)

274

Law, Ethics and Communication

17.9

BUY-BACK OF SHARES

Restriction on Purchase of Own Shares—Section 77

Exceptions:

`

Buy-back of Shares—Section 77A Meaning of buy-back

Share Capital

Sources of buy-back

fresh issue

Conditions for buy-back

Board’s power to buy-back

Other formalities

275

276

Law, Ethics and Communication

`

Transfer to capital redemption reserve—Section 77AA

Prohibition for buy-back—Section 77AB

17.10 BONUS ISSUE, CALLS, ALTERATION, FORFEITURE & SURRENDER OF SHARES Issue of Bonus Shares

Share Capital

Calls on Shares—Section 91

Explanation

` `

vs

Power to Accept Uncalled Capital (Calls in Advance)—Section 92

277

278

Law, Ethics and Communication

Payment of Dividend in Proportion to Amount Paid-up—Section 93

Power of Limited Company to Alter Capital—Section 94

Notice to Registrar—Section 95

`

Notice of Increase in Authorized Capital—Section 97

Share Capital

`

Forfeiture of shares and reissue of forfeited shares

Effect of forfeiture

Reissue of forfeited shares

vs

Cancellation of forfeiture of shares

279

280

Law, Ethics and Communication

Surrender of Shares

Lien on Shares

17.11 REDUCTION OF SHARE CAPITAL Special Resolution for Reduction of Share Capital—Section 100

Examples 1. A share of ` 10 where only ` 7 is paid up, can be reduced to a share of ` 7 fully paid up, thereby extinguishing the liability in respect of uncalled capital. 2. A share of ` 10 fully paid up can be reduced to a share of ` 7 fully paid up, by refunding ` 3 to shareholder, thereby not only refunding the money in excess of the needs of the company but also extinguishing any further liability. 3. A share of ` 10 fully paid up can be reduced to a share of ` 7 partly paid up, by refunding ` 3 to shareholder, thereby refunding the money in excess of the needs of the company but keeping the liability in respect of uncalled money intact. 4. A share of ` 10 fully paid up can be reduced to a share of ` 7 (fully paid up or partly paid up) by writing off ` 3 which is lost (i.e. not represented by realizable assets in the company’s balance sheet)

Share Capital

Application to Court—Section 101

Court Order Confirming Reduction—Section 102

Registration of Court Order—Section 103

Liability of Members in Respect of Reduced Shares—Section 104 [Amount of share as fixed by minutes of reduction] – [Amount paid on share or as reduced] Exception

281

282

Law, Ethics and Communication

Penalty for Concealing Name of Creditor—Section 105

Cases Similar to Reduction of Capital

Table 17.1

Distinction between Reduction of Capital and Cancellation of Capital

Basis of distinction

Diminution or Cancelling of share capital

17.12 TRANSFER OF SHARES Transferability of Shares—Sections 82, 111A

Reduction of share capital

Share Capital

Requirements for Transfer of Shares—Sections 108, 110

Notice to Transferee—Section 110(2)

Rights of Transferee Pending Registration of Transfer—Section 206A

283

284

Law, Ethics and Communication

17.13 TRANSMISSION OF SHARES Transfer by Legal Representatives—Section 109

Nomination of Shares—Section 109A

Transmission of Shares—Section 109B

17.14 REFUSAL TO TRANSFER OF SHARES Refusal to Transfer of Shares in a Private Company—Section 111

Share Capital

` ` `

Common Grounds for Refusal to Transfer Shares in a Private Company

Refusal to Transfer of Shares in a Public Company—Section 111A

285

286

Law, Ethics and Communication

` ` ` 500

Rectification of register of members of public company—Section 111A

17.15 MISCELLANEOUS Certification of Transfers (Splitting of Transfer)—Section 112

Forged Transfer

Share Capital

287

Effect of forged transfer (when the transfer is procured by the first transferee)

vs

vs vs

Effect of forged transfer (when the transfer is procured by a subsequent transferee)

vs

Examples 1. A is an original holder of shares. B gets hold of his shares, forges A's signatures and applies for transfer of shares in his own name. The company processes the transfer and issues new certificate to B. A when comes to know of the forgery, complains to the company. The company shall have to restore the name of A as member. Further, the company is not liable to B since he himself is part of forgery. Also B is liable under general law for an unlawful act. 2. A is an original holder of shares. He gives his shares to a broker for selling who forges A's signatures on the transfer deed and hands it over to B who buys these shares from a broker in good faith. The company processes the transfer and issues new certificate to B. A when comes to know of the forgery, complains to the company. The company shall have to restore the name of A as member. Further, the company is not liable to B for any loss he might have sustained in buying such shares in good faith. B can claim damages from the broker under general law for the unlawful act. 3. A is an original holder of shares. He gives his shares to a broker for selling who forges the signatures of A on the transfer deed and hands it over to B who buys these shares from the broker in good faith. The company processes the transfer and issues a new certificate to B. B further sells the shares to C who applies for transfer of shares in his name. In the meantime, A comes to know of the forgery and complains to the company. The company shall have to restore the name of A as member. Further, the company is now liable to C for any loss he might have sustained in buying such shares relying on the certificate issued by it to B. The company can recover the amount paid to C from B, even though B himself acted in good faith.

288

Law, Ethics and Communication

Blank Transfer Deed

SELF-REVIEW QUESTIONS (Including Previous Years Examination Questions)

Share Capital

` ` `

`

` `

Hints and Answers vs

289

290

Law, Ethics and Communication

vs

vs

vs

`

PUBLIC DEPOSITS AND DEBENTURES

18 CHAPTER

Learning Objectives After reading this chapter, you will understand: Power of company to borrow and ultra vires borrowing Meaning of public deposit and conditions for acceptance of deposits from public Provisions relating to small investors Meaning of debentures and procedure for issue of debentures Procedure for registration of charge with the Registrar of Companies

18.1

POWER OF COMPANY TO BORROW

Power to Borrow

trading company has implied power

in the meeting of the board of directors

Ultra Vires Borrowings ultra vires:

292

Law, Ethics and Communication

ultra vires ultra vires ultra vires

18.2

PUBLIC DEPOSITS

Meaning of Deposit—Explanation to Section 58A any deposit of money includes any amount borrowed include issue of unsecured debentures.

shall not include

Exemption to Small-Scale Units all of the following conditions: `

`

Public Deposits and Debentures

Conditions for Acceptance of Deposits from Public or Members—Section 58A

prescribed rules; an advertisement the company is not in default in the repayment of any deposit Companies (Acceptance of Deposits) Rules, 1975 1. Minimum net owned funds

2. Limit on aggregate of deposits

3. Period of deposit 4. Rate of interest 5. Advertisement 6. Contents of advertisement

7. Declarations in advertisement –

8. Validity of advertisement 9. Maintenance of liquid assets

`

293

294

Law, Ethics and Communication

10. Application form for deposit 11. Receipt of deposit 12. No variation in terms 13. Premature repayment— 14. Nomination— 15. Prohibition on accepting deposits

Penalty for Contravening—Section 58A

` `

Failure to Repay Deposit suo motu,

Return of Deposit a return of deposits with ROC,

Register of Deposits register of deposits

Public Deposits and Debentures

295

Rate of Brokerage on Public Deposits

Statement in Lieu of Advertisement

18.3

SMALL INVESTORS

Provisions Relating to Small Depositors—Section 58AA `

shall not accept any deposit from any person

18.4

OFFENCES RELATING TO PUBLIC DEPOSITS

Offences U/S 58A, 58AA Cognizable—Section 58AAA

296

Law, Ethics and Communication

18.5

ISSUE OF DEBENTURES

Meaning of Debentures

Types of Debenture Pari-passu

pari-passu

Ranked

pari-passu pari-passu

1. 2. 3. 4.

Bearer Perpetual or irredeemable Naked Convertible (fully or partly)

Debentures with Voting Rights not to be Issued—Section 117

18.6

STEPS FOR ISSUE OF DEBENTURES

Debenture Trust Deed—Sections 117A, 118

Public Deposits and Debentures

to any member or debenture holder

`

Debenture Trustees—Section 117B Appointment of debenture trustees

Restriction on appointment as debenture trustee A person cannot be appointed as trustee

Functions of debenture trustees

Right to file petition to NCLT

297

298

Law, Ethics and Communication

Debenture Redemption Reserve Account—Section 117C

`

Liability of Debenture Trustees—Section 119

Perpetual Debentures—Section 120

Re-issue of Redeemed Debentures—Section 121

Public Deposits and Debentures

Specific Performance of Contract—Section 122

Remedies Available to Debentureholders

18.7

REGISTRATION OF CHARGES

Meaning of Charge—Section 124

Charges Required to be Registered—Sections 125, 127

Note:

299

300

Law, Ethics and Communication

Modification of charge

Consequences of non-registration—Section 125(1)

Process of registration—Sections 125, 134 within 30 days further 30 days

Notice of Charge—Section 126

Certificate of Registration—Section 132

Satisfaction of Charge—Sections 138, 140 paid or satisfied in full

Public Deposits and Debentures

301

Register of Charges at ROC—Sections 130, 131

Copy of Instrument and Register of Charges at Company—Sections 136, 143, 144 register of charges

without any payment on payment

Extension of Time or Rectification of Register of Charges—Section 141

302

Law, Ethics and Communication

Penalties—Section 142 ` `

Self-Review Questions (Including Previous Years’ Examination Questions)

May 2001, Nov 2005, May 2008

Nov 2007, Jun 2009

` Nov 2003 May 2010

Hints and Answers

General Meetings

19

303

GENERAL MEETINGS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Types of general meeting of a company and requisites for a valid meeting Rules relating to a notice to call a general meeting Ordinary and special business in a general meeting Quorum for a general meeting Procedure for conducting a general meeting (chairman, proxies and voting) Types of resolutions at a general meeting Minutes of a general meeting and inspection thereof � �������������������������������������������������������������

19.1

MEANING OF MEETING

Meeting

Requisites of a Valid General Meeting—Section 170 public company

private company requisites of a valid general meeting: 1. Proper authority 2. Proper notice 3. Quorum

304

Law, Ethics and Communication

4. Chairman 5. Conduct of meeting 6. Record of the proceedings

Types of General Meeting

19.2

AUTHORITY TO CALL A GENERAL MEETING

Proper Authority to Call a General Meeting 1. Board of Directors 2. Members 3. Central Government 4. Tribunal

19.3

NOTICE TO CALL A GENERAL MEETING

General Rules Relating to Notice Calling a Meeting

Length of Notice for Calling Meeting—Section 171 Not less than 21 clear days notice in writing

General Meetings

Note:

shorter notice (a) In case of AGM all the members entitled to vote (b) In case of any other meeting members holding 95% of voting power consent of members should be obtained in writing When a meeting is adjourned for 30 days or more

Contents and Manner of Service of Notice—Section 172

accidental omission

305

306

Law, Ethics and Communication

Bharat Bhushan vs HB Portfolio Leasing Ltd. Enclosures to the notice of meeting:

Ordinary and Special Business—Section 173(1) Ordinary Business—Section 173(1)(a)

Special Business Ordinary Business— Special Business

Explanatory Statement to be Annexed to Notice—Section 173(2)

1. Draft of full resolution proposed 2. All material facts 3. Nature of the concern or interest, if any, therein, of every director

time and place where such document can be inspected

19.4

QUORUM FOR A GENERAL MEETING

Quorum for Meeting—Section 174 minimum number of members required to be present in person

General Meetings

307

provided by the company’s Articles Unless the company’s Articles provide for a larger number 5 members personally present. 2 members personally present.

Rules Regarding Quorum Only members personally present can constitute quorum The representative of a body corporate personally present alone Preference shareholders are not counted Joint members are considered as one member A member present in more than one capacity is counted as such Where the number of members of a company fall below the quorum

One Member as Quorum

Where one person holds all the shares of a particular class meeting is called by an order of the Central Government u/s 167 or NCLT u/s 186 in person or by proxy

Consequences if Quorum is not Present—Sections 174 (3) and (4)

EGM called on requisition of members— stands dissolved Any other meeting: week

adjourned to the same day, same time, same place in the next such other day and at such other time and place as the Board may determine members present shall be a quorum

308

Law, Ethics and Communication

Note: Deptt. Letter no. 8/16(1)/61-PR Daimler Co. Ltd. vs Continental Tyre and Rubber Co., Jarvis Motors Harrow Ltd. vs Carabott

Proxy as Quorum

Daimler Co. Ltd. vs Continental Tyre and Rubber Co., Jarvis Motors Harrow Ltd. vs Carabott

Representation of Body Corporate, President/Governor at Meetings—Sections 187, 187A

including the right to vote by proxy

19.5

CONDUCT OF A GENERAL MEETING

Chairman of Meeting—Section 175 chairman of the board of directors

meeting itself elects a chairman

General Meetings

Unless the articles of the company otherwise provide

Proxies—Section 176 Meaning of proxy

Appointment of proxy

Instrument appointing proxy writing and signed

(General Commerce Vs Apparel Export Promotion Council) In case of joint holders

more than one proxy

309

310

Law, Ethics and Communication

Irrespective of any provision in the Articles minimum 48 hours before the meeting

proxy needs to be deposited with the company

`

Inspection of proxies inspecting proxies minimum 3 days in advance. starting 24 hours before

the notice

Revocation of proxy A proxy can be revoked at any time

Proxy at adjourned meeting also valid for the adjourned meeting

Rights and limits of proxy can attend the meeting no right to speak shall not be entitled to vote except on a poll A proxy can demand a poll A proxy can use his votes differently

Voting at Meetings—Sections 177 to 182 show of hands The chairman’s declaration of result of voting by show of hands is final shares on which calls are in arrears shares subject to lien no condition as to period of holding

Voting by poll—Sections 179, 183, 184, 185 A poll may be ordered suo motu by the chairman

suo motu

General Meetings

if the demand thereof (a) In case of public company having a share capital (b) In case of private company having a share capital

(c) In case of any other company before or on declaration of the result demand for poll ordered can be withdrawn

Time of taking poll—Section 180

19.6

RESOLUTIONS

Ordinary and Special Resolutions—Section 189

member or members `

311

312

Law, Ethics and Communication

Resolutions Requiring Special Notice—Section 190

Matters specified in the Companies Act requiring resolution by special notice:

Circulation of Member’s Resolution—Section 188

(i) In case of AGM (ii) In case of any general meeting

`

(i) In case of AGM

(ii) In case of any general meeting

`

General Meetings

313

Resolutions Passed at Adjourned Meetings—Section 191 be treated as having been passed on the date on which it was in fact passed no new business can be passed at an adjourned meeting.

Resolutions by Postal Ballot—Section 192A only in case of a listed public company

notice to all the shareholders

a draft resolution explaining the reasons on a postal ballot within a period of 30 days registered post AD or UPC. postage prepaid envelope an advertisement requisite majority

a scrutinizer

19.7

MINUTES OF MEETING

Minutes of Proceedings of General Meetings—Section 193 within 30 days of the conclusion of every meeting

314

Law, Ethics and Communication

4. In the event of death or inability

a fair and correct summary

chairman shall exercise an absolute discretion

Minutes to be Evidence—Section 194 be evidence of the proceedings recorded therein

Presumptions to be Drawn Where Minutes Duly Drawn and Signed—Section 195

Inspection of Minute Books of General Meetings—Section 196 kept at the registered office

minutes can be inspected by any member without any charge

`

General Meetings

315

Publication of Reports of Proceedings of General Meetings—Section 197

`

19.8

STATUTORY MEETING

Rules Regarding Holding of Statutory Meeting—Section 165 Nature of meeting

Section 165 applies only to a public company having share capital.

Time of Holding Statutory Meeting at least one month after but before expiry of six months from the date company is entitled to commence business

Notice of the Statutory Meeting & Enclosures 21 clear days explanatory statement statutory report

is also required to be sent to ROC

Conduct of Statutory Meeting

316

Law, Ethics and Communication

may be adjourned register of members

`

Statutory Report—Section 165(3) Contents of statutory report

Certification of statutory report at least 2 directors by auditors to be sent to ROC

19.9

ANNUAL GENERAL MEETING

Rules Regarding Holding of Annual General Meeting—Section 166, 210

First annual general meeting—Section 166

General Meetings

Subsequent Annual General Meeting—Section 166

Time and place of holding AGM

317

318

Law, Ethics and Communication

Power of Central Govt. to Call AGM—Section 167

Penalty for Default in Complying with Sections 166/167—Section 168 `

`

Consequences of Shorter Notice or Meeting Held Beyond Due Date

Murlidhar Aggarwal vs State of UP]

Hungerford Investment Trust Ltd. vs Turner Morrison & Co. Ltd.]

19.10 EXTRAORDINARY GENERAL MEETING Meaning of EGM

EGM on Requisition of Members—Section 169

requisition of specified number of members the matters for the consideration signed by the requisitionists deposited at the registered office

General Meetings

319

several documents specified number of members (i) In case of a company having share capital (ii) In case of any other company In case of joint-holders

EGM within 21 days and not later than 45 days

[LIC Vs Escorts Ltd.]

EGM by requisitionists must be held within 3 months The expenses on calling of the EGM deducted from the remuneration

Power of NCLT to Call EGM—Section 186 motion

on the application of any director

either of its own on application of any member

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

320

Law, Ethics and Communication

Nov 2005]

Nov 2003]

May 2006]

Nov 2006]

May 2008]

General Meetings

321

June 2009]

Nov 2004]

Nov 2005, Nov 2008]

Nov 2004]

May 2006]

322

Law, Ethics and Communication

Nov 2005]

May 2006]

May 2007, May 2006]

Nov 2009]

Nov 2007]

General Meetings

323

Nov 2008]

May 2007]

May 2005]

May 2010]

324

Law, Ethics and Communication

May 2010] May 2010]

Nov 2010]

Hints and Answers

East vs Bennet Brothers Ltd.

General Commerce vs Apparel Export Promotion Council

General Meetings

325

Life Insurance Corporation of India vs Escorts Ltd.

20

NATIONAL COMPANY LAW AND APPELLATE TRIBUNAL

CHAPTER

Learning Objectives After reading this chapter, you will understand: Constitution and power of the National Company Law Tribunal (NCLT) Eligibility of members of NCLT Constitution and power of the National Company Law Appellate Tribunal (NCLAT) Removal and suspension of members of NCLAT

20.1

CONSTITUTION OF NATIONAL COMPANY LAW TRIBUNAL

National Company Law Tribunal—Section 10FB National Company Law Tribunal

Eligibility of Members—Section 10FD judicial member technical member

National Company Law and Appellate Tribunal

Removal and Suspension of President or Members—Section 10FJ

Powers of Tribunal—Sections 10FM, 10FN, 10FO, 10FP review its own order to pass such an order rectify any mistake

delegate its powers

seek assistance

Appeal Against the Order of the NCLT—Section 10FQ

20.2

CONSTITUTION OF NATIONAL COMPANY LAW APPELLATE TRIBUNAL

National Company Law Appellate Tribunal—Section 10FR National Company Law Appellate Tribunal

327

328

Law, Ethics and Communication

Removal and Suspension of Chairperson or Members—Section 10FU

Appeal Against the Order of the NCLAT—Section 10GF

21

COMPANY LAW IN COMPUTERIZED ENVIRONMENT

CHAPTER

Learning Objectives After reading this chapter, you will understand: What is MCA-21 Project � ������������������������������������������������������������������������������ � �������������������������������������������������������������������������

21.1

MCA-21 PROJECT

Structure of MCA (Ministry of Company Affairs)

Overview of MCA-21 Project easy and secure access to MCA services versatile e-Governance

Key Components of MCA-21

330

Law, Ethics and Communication

Project Goals register a company easy access to relevant records 3. Professionals 4. Financial institutions proactive and effective compliance 6. Employees

Services Available on MCA-21

Benefits of MCA-21

file statutory documents

Company Law in Computerized Environment

21.2

331

E-FORMS AND E-FILING

E-Forms e-Forms filling the information electronically Life cycle of e-Forms dissemination of e-Forms re-entering data

eliminating

track the status of their e-Filing e-Form processing automatically assigned to the MCA staff

E-Filing

How to do e-Filing

Virtual front office (VFO)

Registrar’s front office (RFO)

332

Law, Ethics and Communication

Certified filing centres (CFC)

Process of E-Filing downloads the e-Form. fills the appropriate e-Form Corporate Identity Number (CIN) attaches the necessary documents

submit the duly signed documents electronically 7. Payments of fee

21.3

DIN AND DIGITAL SIGNATURES

Director Identification Number (DIN)

Company Law in Computerized Environment

333

Digital Signature Certificate (DSC)

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

May 2010]

Hints and Answers

Business Ethics

Part 2

Ethics

22. 23. 24. 25. 26. 27.

Business Ethics Corporate Governance Workplace Ethics Environment Ethics Ethics in Marketing Ethics in Accounting and Finance

335

22

BUSINESS ETHICS

CHAPTER

Learning Objectives After reading this chapter, you will understand: � ������������������������������������������������������������� Meaning of ethical dilemma and how to resolve Difference between ethics and morals How businesses can adopt ethical behaviour in their strategy

22.1

INTRODUCTION TO ETHICS

Meaning of Ethics

Social Sins

338

Law, Ethics and Communication

Sources of Ethical Standards 1. Utilitarian approach 2. Deontological Approach 3. Fairness or Justice Approach 4. Common good approach 5. The virtues approach

Business Ethics

Factors Influencing Ethical Behaviour Individual moral standards Influence of managers

Requirements of Business Ethics

Meaning of stakeholders

Business Ethics

Benefits of Business Ethics

22.2

ETHICAL DILEMMA

Meaning of Ethical Dilemma

How to Resolve Ethical Dilemma Ethics without sermon

339

340

Law, Ethics and Communication

(a) Define the problem

(b) Expected outcomes

(c) Decision-making and aftermath

22.3

MORALS VS ETHICS

Table 22.1 Basis

Morals Vs Ethics Moral

Ethics

Meaning Origin Owned by Related to Scope Expression Sources

22.4

ETHICAL INFLUENCE ON BUSINESS STRATEGY

Business Ethics

341

Code of Ethics

1. Employee Code of Ethics

2. Industry Code of Ethics 3. Professional Code of Ethics

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) May 2007] Nov 2007] Nov 2009] Nov 2009] Nov 2007] Nov 2008] June 2009] Jun 2009] Nov 2010] Nov 2010] Nov 2011] Nov 2011]

23

CORPORATE GOVERNANCE

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and characteristics of Corporate Governance Framework of Corporate Governance and role of various committees Meaning and areas of Corporate Social Responsibility (CSR) Need for CSR and factors impacting CSR Integration of CSR in business strategy MCA Guidelines on Corporate Governance and CSR Meaning of Global Reporting Initiatives (GRI) International CSR scenario

23.1

CORPORATE GOVERNANCE

Definition of Corporate Governance

Reflections on Corporate Governance

Meaning of Corporate Governance process of decision-making corporate fairness, transparency and accountability

Corporate Governance

formal system of accountability and control

Corporate governance is about commitment to values and ethical business conduct

Characteristics of Corporate Governance

Issues Addressed in Corporate Governance behaviour at the top level how the objectives of an organization are set and achieved non-executive directors, proper disclosure of financial information

Developments in Corporate Governance in India and Abroad

Enron and Worldcom Sarbanes Oxley Act

343

344

Law, Ethics and Communication

Clause 49 in the listing agreement

Framework of Corporate Governance Appointing non-executive directors. constraints on management power and ownership disclosure of financial information Ethics and/or social responsibility committees management policies and practices. Clause 49 of the listing agreement

Role of Committees in Corporate Governance 1. Board of Directors: 2. Audit Committee: 3. Compensation Committee: 4. Nomination Committee:

5. Investor Services Committee: 6. Corporate Management Committee: 7. Divisional Management Committee:

Corporate Governance

345

Benefits of Good Corporate Governance investor interest commitment of the board higher market valuation Example

Corporate Governance at Infosys

1. Satisfy the spirit of the law and not just the letter of the law. Corporate governance standards should go beyond the law. 2. Be transparent and maintain a high degree of disclosure levels. When in doubt, disclose. 3. Make a clear distinction between personal conveniences and corporate resources. 4. Communicate externally, in a truthful manner, about how the company is run internally. 5. Comply with the laws in all the countries in which we operate. 6. Have a simple and transparent corporate structure driven solely by business needs. 7. Management is the trustee of the shareholders’ capital and not the owner.

MCA Guidelines on Corporate Governance

23.2

CORPORATE SOCIAL RESPONSIBILITY

Meaning of Corporate Social Responsibility (CSR)

346

Law, Ethics and Communication

social obligation answerable to shareholders commercial success in ways that honour ethical values

Meaning of corporate citizenship

Areas of CSR (a) (b) (c) (d)

Economic responsibilities Legal responsibilities Ethical responsibilities Philanthropic responsibilities

Some common CSR Policies

Need for CSR 1. The iron law of responsibility 2. To fulfil long-term self-interest

3. To establish a better public image

regulation and control. national resources minimize environmental damage.

Corporate Governance

Factors Impacting CSR

Benefits of CSR brand image regulations and controls. ecological damage. financial performance. operating costs. customer loyalty. quality of work life. attract and retain employees. easier access to capital

Integration of CSR in Business Strategy and Decision-Making

established committees

347

348

Law, Ethics and Communication

MCA Guidelines on Corporate Governance

Core elements

Implementation guidance

23.3

GLOBAL REPORTING INITIATIVES (GRI)

What is GRI?

Establishment of GRI

Corporate Governance

349

Vision & Mission

GRI Sustainability Reporting Framework

Benefits of GRI benchmark

standardized approach

23.4

INTERNATIONAL DEVELOPMENTS IN CSR

The Global Reporting Initiative

AA1000

Social Accountability 8000

United Nations Global Compact

350

Law, Ethics and Communication

Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises

Benchmarks for Measuring Business Performance Principles for Global Corporate Responsibility

The Caux Round Table (CRT) Principles for Business

The Global Sullivan Principles

Asian-Pacific Economic Cooperation (APEC) Business Code of Conduct

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) Nov 2007] Nov 2008] Jun 2009] Nov 2010]

Corporate Governance

351

Nov 2007] May 2008] May 2007] May 2008] Nov 2009] May 2010] Nov 2010] May 2011] Nov 2011] Nov 2011]

24

WORKPLACE ETHICS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and importance of ethics at workplace How an ethical environment is created at workplace � ���������������������������������������� Discrimination and harassment at workplace

24.1

WORKPLACE ETHICS

Meaning of Workplace Ethics how one applies ethical values to work

(i) Individual moral standards (ii) Influence of managers and co-workers (iii) Opportunity to engage in misconduct

practised at the highest level fairness and honesty in dealings prohibition of any discrimination and harassment

Workplace Ethics

353

Importance of Workplace Ethics (Benefits of Workplace Ethics)

risk of employees making unethical decisions. report violations to outside regulatory authorities to recruit and retain top people. Diminished reputation Significant legal exposure

Measures to Ensure Ethics at Workplace (Creating an Ethical Environment) 1. Measures to ensure that employees are aware of their legal and ethical responsibilities: code of conduct communication environment cross-functional teams 2. Measures to provide a communication system for reporting of non-compliance by anyone fearlessly:

grievance policy 3. Measures to make ethics decisions in a fair and transparent manner:

atmosphere of trust 4. Measures to integrate ethics management with other management practices:

5. Regularly updating of policies and procedures

24.2

ETHICAL ISSUES AT WORKPLACE

1. Relationships with suppliers and business partners

354

Law, Ethics and Communication

2. Relationship with customers

3. Relationship with employees

4. Management of resources

Conflict of Interest

(a) Biased judgment (b) Direct competition (c) Misuse of position (d) Violation of confidentiality

Managing Conflict of Interest at workplace 1. 2. 3. 4. 5. 6. 7.

Objectivity Avoidance Alignment Disclosure Policies and Rules Independent evaluation and judgment Structural changes

24.3

DISCRIMINATION AND HARASSMENT

Meaning of Discrimination

Workplace Ethics

Discriminatory Practices in Workplace 1. Recruitment practices 2. Screening practices 3. Promotion and transfer practices 4. Condition of employment

5. Dismissal

Meaning of Harassment

Harassment at Workplace 1. Racial harassment

2. Sexual harassment

Sexual Harrassment

355

356

Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

May 2008] Jun 2009] May 2007] Nov 2008] Jun 2009, Nov 2010] Nov 2009] Nov 2010] May 2011]

May 2011] Nov 2011]

25

ENVIRONMENT ETHICS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning of environmental ethics Concept of sustainable development Effects of pollution and resource depletion Importance of conservation of natural resources � ����������������������������������������� Concept of green accounting

25.1

ENVIRONMENT ETHICS

carbon footprint Environmental ethics is a larger issue

practices that have built-in environmental consideration. minimize the use of natural resources and energy, environment-friendly Green Accounting

358

Law, Ethics and Communication

Business as Part of Ecological System

ecological ethics

25.2

SUSTAINABLE DEVELOPMENT bringing development without compromising the ability of

future generations

resources re-generation

positive approach to the environment.

Key Areas of Sustainable Development

Environment Ethics

25.3

POLLUTION AND RESOURCE DEPLETION the undesirable and unintended contamination of the environment the consumption of finite or scarce resources pollution is also a type of resource depletion

Main forms of pollution

Global Warming carbon dioxide,

Increase in global warming has caused the following complications

Ozone Depletion

359

360

Law, Ethics and Communication

Acid Rain

Need to Control Pollution

25.4

CONSERVATION OF NATURAL RESOURCES rationing of natural resources

Eco-friendly technologies

Environment Ethics

361

Conservation

25.5

BENEFITS OF ECO-FRIENDLY PRACTICES reduction in wastage and resources depletion corporate

performance Eco-friendly practices,

more savings create wealth

reduce damage to the environment competitive knowledge. sustainable development

25.6

GREEN ACCOUNTING

3Ps— Polluter, Pay, Principles

25.7

DEVELOPMENTS IN ENVIRONMENT PROTECTION IN INDIA

362

Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

[May 2008] Nov 2008] Nov 2008] Jun 2009] [May 2010] May 2010] [Nov 2010]

May 2007] Nov 2007] Nov 2008] May 2010] May 2011] Nov 2011]

Ethics in Marketing

26

ETHICS

IN

363

MARKETING

CHAPTER

Learning Objectives After reading this chapter, you will understand: Why ethics are required in marketing Initiatives for healthy competition and the Competition Law Concept of consumer welfare and public interest Law relating to consumer protection in India and objects of Consumer Protection Councils

26.1

NEED FOR ETHICS IN MARKETING

1. Public confidence in marketing Unethical practices such as misleading package labels, false claim in advertisements, infringements of well-established trademarks, etc. not only decline public confidence in marketing but also damage the reputation of all marketers. To reverse this situation, companies must set high ethical standards and enforce them in consumers’ interest as consumers are the lifeblood of business. 2. Government regulations Most of the governmental controls and limitations on marketing are the result of the management’s failure to live up to its ethical responsibilities at one time or the other. 3. Social power Marketing executives hold and use a great deal of social power as they influence market and speak out on economic issues. However, there are responsibilities tied to this power and if the marketers do not use their power in a socially acceptable manner, then that power will be lost in the long run. 4. Image of the organization Buyers often form an impression of an entire organization based on their contact with one person, and mostly that person represents the marketing functions.

26.2

HEALTHY COMPETITION

Meaning of Competition patronage in order to achieve a particular business objective, e.g. profit, sales or market share. [World Bank, 1999]

364

Law, Ethics and Communication

sell and barter, when, where and how, of whom and to whom he pleases. extract a high price. only way to protect the interest of the ultimate consumer.

Competition Policy and Law preservation and promotion of the competitive process. efficiency in the production and allocation of goods and services over a period of time through its effects on innovation and adjustment to technological change.

consumers’ demand at the lowest possible cost.

Competition Laws in the US and UK

foreign commerce. monopolize in the business by specifying practices that monopolists use to gain monopoly power.

preventing, restricting or distorting competitions which directly or indirectly fix prices, trading conditions, limit/control products, markets, and sources of supply.

Competition Law in India—Competition Act, 2002 History—Monopolies and Restrictive Trade Practices Act, 1969

(a) to prevent concentration of economic power to the common detriment and control of monopolies; (b) to prohibit monopolistic trade practices; and (c) to prohibit restrictive trade practices and unfair trade practices.

Ethics in Marketing

365

Present—Competition Act, 2002

The Competition Act, 2002, trade policy. The Competition Act overrides any other law and shall be in addition to, and not in derogation of, any other law for the time being in force. The objectives of the Competition Act, 2002 are: 1. to provide for establishment of a commission to prevent practice having adverse effect on competition. 2. to promote and sustain competition in the market. 3. to protect the interest of consumers. freedom of trade carried on by other participants in the market.

goods and services.

or association of persons shall enter into any agreement in respect of production, supply, distribution,

of this provision shall be void. (a) directly or indirectly determines purchase or sale prices; (b) limits or controls production, supply, markets, technical development, investment or provision of services; (c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way; and (d) directly or indirectly results in bid rigging or collusive bidding; shall be presumed to have an appreciable adverse effect on competition. (a) Tie-in arrangement

366

Law, Ethics and Communication

26.3

CONSUMER WELFARE

Consumer Interest and Public Interest different.

goods and services and various trade practices.

interest of consumers. For example, a farmer wants the price of goods he consumes to be as cheap as possible but wants the highest price for his produce.

UN Guidelines for Consumer Interests policy and provide for enhanced protection of consumers by enunciating various steps and measures around 8 themes

Consumer rights recognized by the UN guidelines can be used as touchstones for assessing the consumer welfare implications of the competition policy and law and to see how they help or obstruct the promotion of these rights.

26.4

CONSUMER PROTECTION IN INDIA

Consumer Protection Act, 1986

Ethics in Marketing

367

in nature.

Definition of Consumer under Section 2(1)(d) of the Consumer Protection Act, 1986

the buyer. purpose.

Definition of Consumer—Section 2(f) of Competition Act, 2002 (i) buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for a consideration paid or promised or partly paid or partly promised, or under any system of deferred payment when such use is made with the approval of such person, whether such purchase of goods is for resale or for any commercial purpose or for personal use; (ii) hires or avails of any services for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised, or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first-mentioned person whether such hiring or availing of services is for any commercial purpose or for personal use.

Difference between the definition of consumer under Competition Act, 2002 and Consumer Protection Act, 1986 or for resale or for any commercial purpose. services for resale or for any commercial purpose. Example A retailer was purchasing goods regularly from XYZ Ltd. for the purpose of resale. There were defects in the goods in one of the lots purchased and as a result the retailer suffered loss of his share in competition. The retailer sued the said company for this reason. The company contended that the goods were purchased for the purpose of resale and therefore it was not bound to compensate the loss. Is it a valid contention? Explain clearly the provisions of the Competition Act, 2002 in this regard. Answer Whether purchase of goods is for resale or for any commercial purpose or for personal use, the purchaser is a consumer under the Competition Act, 2002. Therefore, the contention of XYZ Ltd. is not valid and not tenable.

368

Law, Ethics and Communication

Consumer Protection Councils in India

objects of the consumer protection councils shall be to promote and protect the rights of the (i) Safety (ii) Information goods and services. (iii) Choice (iv) Hear consideration at appropriate terms. (v) Redress (vi) Education

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) May 2007] [May 2007, Jun 2009] May 2007] Nov 2007] [May 2008] Nov 2008] brief the merits and demerits of the above.

[May 2008]

in the goods in one of the purchased lots and as a result the retailer suffered loss of his share in competition. The retailer sued the said company for this reason. The company contended that the goods were purchased for the purpose of resale and therefore it was not bound to compensate the loss. [Nov 2008] executives.

[Nov 2009] Nov 2010] Nov 2011]

27

ETHICS

IN

ACCOUNTING AND FINANCE

CHAPTER

Learning Objectives After reading this chapter, you will understand: � � � � �

��������������������������������������������� ����������������������������������������������������������������� ������������������������������������������������������������������ ������������������������������������������������� ������������������������������������������������������������

27.1

IMPORTANCE OF ETHICS IN ACCOUNTING AND FINANCE

Potential Conflicts Faced by Finance and Accounts Professionals As consultant/auditor in public practice

As an employee

370

Law, Ethics and Communication

Reasons for Unethical Behaviour 1. Emphasis on short-term results

2. Ignoring small unethical issues

3. Economic cycles

4. Complex accounting rules

27.2

FUNDAMENTAL PRINCIPLES RELATING TO ETHICS IN FINANCE AND ACCOUNTING

Principle of Integrity

Principle of Objectivity

Principle of Confidentiality

Ethics in Accounting and Finance

371

Principle of Professional Competence and Due Care

Principle of Professional Behaviour

27.3

ETHICAL THREATS IN ACCOUNTING AND FINANCE

1. Self-interest threat— 2. Self-review threat— 3. Advocacy threat— 4. Familiarity threat— 5. Intimidation threat—

Table 27.1 Threat

Examples of ethical threats As an employee

As an auditor or consultant

Contd.

372

Law, Ethics and Communication

27.4

SAFEGUARDS TO REDUCE OR ELIMINATE ETHICAL THREATS

Safeguards Created by Profession, Legislation or Regulation

Ethics in Accounting and Finance

373

Safeguards in Work Environment

27.5

ETHICAL CONFLICT RESOLUTION

factors need to be considered

appropriate course of action

(a) Consult

document the detail obtain advice

withdraw

374

Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) Nov 2007] May 2008]

May 2007]

Nov 2007, May 2010]

May 2008] Jun 2009] May 2011] May 2011]

Essentials of Communication

375

Part 3

Communication

28. 29. 30. 31. 32. 33. 34.

Essentials of Communication Interpersonal Skills Group Dynamics Communication Ethics Corporate Culture Communication in Business Environment Legal Deeds and Documents

ESSENTIALS

28

COMMUNICATION

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning, directions, process and forms of communication and its importance Formal and informal communication Interdepartmental communication Medium of communication (verbal, non-verbal and written) Barriers to effective communication Planning and composing business messages

28.1

OF

COMMUNICATION AND ITS IMPORTANCE

Meaning of Communication

Directions of Communication

378

Law, Ethics and Communication

Fig. 28.1

Need for Communication

Process of Communication (i) (ii) (iii) (iv) (v) (vi) (vii)

Sender Encoding Message Channel Receiver Decoding Feedback

Essentials of Communication

Fig. 28.2

Forms of Communication

Fig. 28.3

379

380

Law, Ethics and Communication

Objectives of Communication

Importance of Communication

28.2

FORMAL COMMUNICATION

Advantages of Formal Communication

Essentials of Communication

Limitations of Formal Communication

28.3

INFORMAL COMMUNICATION OR GRAPEVINE

Meaning

people-oriented

Kinds of Grapevine Chains (a) Single Strand Chain (b) Gossip Wheel (c) Probability Chain (d) Cluster Chain

Factors Leading to Grapevine

issue-oriented

381

382

Law, Ethics and Communication

Fig. 28.4

Advantages of Grapevine

Limitations of Grapevine

Table 28.1

Differences between Formal and Informal Communication Formal Communication

Informal Communication

Essentials of Communication

28.4

INTERDEPARTMENTAL COMMUNICATION

28.5

COMMUNICATION MEDIUM

intra-personal interpersonal

Use of Different Communication Media (a) Interpersonal (b) Group communication (c) Public communication (d) Mass communication

Principles of Communication (7Cs)

Oral Communication

383

384

Law, Ethics and Communication

Written Communication

Table 28.2

Advantages of Oral and Written Communication Oral Communication

Table 28.3

Written Communication

Limitations of Oral and Written Communication Oral Communication

Non-Verbal Communication

Written Communication

Essentials of Communication

28.6

EFFECTIVE COMMUNICATION

Barriers to Communication

Semantic Barriers

Physical and mechanical barriers

Organizational barriers

Socio-psychological barriers

385

386

Law, Ethics and Communication

Semantics

Chronemics

Benefits of Effective Communication

28.7

BUSINESS COMMUNICATION

Parts of a Business Letter

Essentials of Communication

Layout of a Business Letter

Sample of a Business Letter in Full Block

387

388

Law, Ethics and Communication

Sample of a Business Letter in Semi Block

28.8

PLANNING BUSINESS MESSAGES

Steps in Planning of a Business Message

Checklist for Composing Business Messages Step 1—Organizing

Essentials of Communication

389

Step 2—Formulation

Sample of a Circular to Employees Insisting on Punctuality

To all employees

s

390

Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) Nov 2007] May 2008] May 2008] Nov 2008] Jun 2009] Jun 2009] Nov 2009] Nov 2010] Nov 2010] May 2011] May 2011] May 2011] Nov 2011] Nov 2011] Nov 2011]

29

INTERPERSONAL SKILLS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and principles of interpersonal communication Active listening and critical-thinking skills Concepts of emotional intelligence and emotional quotient

29.1

INTERPERSONAL COMMUNICATION

Principles of Interpersonal Communication is inescapable— is irreversible— is complicated—

is contextual. (a) (b) (c) (d)

Relational context Situational context Environmental context Cultural context

Functions of Interpersonal Communication

392

Law, Ethics and Communication

Problems in Interpersonal Communication

Tips for Improving Interpersonal Skills

29.2

ACTIVE LISTENING AND CRITICAL THINKING

Meaning of Active Listening

Fig. 29.1

Interpersonal Skills

Guidelines for Active Listening

Importance of Active Listening

Critical Thinking

To develop as a critical thinker, one must be motivated to develop the following attributes: 1. Open-mindedness 2. Well-informed 3. Experimental 4. Contextual 5. Reserved in making conclusions

393

394

Law, Ethics and Communication

29.3

EMOTIONAL INTELLIGENCE

Need for Emotional Intelligence

Emotional Intelligence

Meaning of Emotional Intelligence (EI)

Emotional Quotient (EQ)

Personal Competencies Associated with Emotional Intelligence—How You Manage Yourself Self-awareness 1. Emotional self-awareness

Interpersonal Skills

Fig. 29.2

2. Accurate self-assessment 3. Self-confidence

Self-management 1. 2. 3. 4. 5. 6.

Emotional self-control Transparency Adaptability Achievement Initiative Optimism

Social Competencies Associated with Emotional Intelligence—How You Manage Relationships Social awareness 1. Empathy

395

396

Law, Ethics and Communication

2. Organizational awareness 3. Service

Relationship management 1. 2. 3. 4. 5. 6. 7.

Inspirational leadership Influence Developing others Change catalyst Conflict management Building bonds Teamwork and collaboration

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) May 2007] Nov 2007] Jun 2009] May 2010] Nov 2010] Nov 2011]

30

GROUP DYNAMICS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and characteristics of groups Group dynamics and group personality Team roles � ������������������������������������� � ��������������������������������������

30.1

GROUPS

Meaning of a Group

1. Formal Groups 2. Informal Groups

Characteristics of a Group (a) (b) (c) (d)

Group Goals Group Structure Group Patterns of Communication Group Norms

398

Law, Ethics and Communication

(e) Group Climate

Group Dynamics or Characteristics of Group Personality

Types of Group in Organization Self-directed Teams Quality Circles Committees Task Force

30.2

TEAM ROLES

Self-oriented Roles 1. 2. 3. 4.

Controlling Withdrawing Attention seeking Diverting

Group Dynamics

Team Maintenance Roles 1. Encouraging 2. Harmonizing 3. Compromising

Task Facilitating Roles 1. Initiating 2. Information giving or seeking 3. Coordinating 4. Procedure setting

Leadership in a Group

Group Think

30.3

GROUP CONFLICTS

1. Expression 2. Perception

399

400

Law, Ethics and Communication

Managing Conflict

30.4

CONSENSUS BUILDING

Requirements of Effective Consensus Building

Process of Consensus Building

30.5

NEGOTIATING AND BARGAINING

Group Dynamics

401

Approach in Negotiation (Techniques) (a) (b) (c) (d)

Win-Lose Orientation Lose-Lose Orientation Compromise Win-Win Orientation

Rules of Negotiation

Process of Negotiation 1. Preparing 2. Arguing 3. Signalling 4. Proposing 5. Packaging 6. Bargaining 7. Closing and agreeing

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) May 2007] Nov 2007] Nov 2008] May 2011] May 2011] Nov 2011]

31

COMMUNICATION ETHICS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and importance of ethical communication Ethical dilemmas in communication Guidelines to handle communication dilemma

31.1

ETHICAL COMMUNICATION

Meaning of Ethical Communication

Components of Ethical Communication

Communication Ethics

Importance of Ethical Communication (Benefits or Advantages)

Factors Influencing Ethical Communication

31.2 1. 2. 3. 4. 5. 6. 7.

ETHICAL DILEMMAS IN COMMUNICATION

Secrecy Whistle-blowing Information leak Rumour and gossip— Lying Euphemisms Ambiguity

Guidelines to Handle Ethical Dilemmas in Communication Legal Considerations Moral Considerations—

403

404

Law, Ethics and Communication

31.3

ADVANTAGES OF ETHICAL COMMUNICATION

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) Nov 2011]

32

CORPORATE CULTURE

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning and elements of corporate culture Change management and communication of change Innovation and building innovation-friendly organization

32.1

MEANING OF CORPORATE CULTURE

Strong and Weak Culture

406

Law, Ethics and Communication

Elements of Corporate Culture 1. Vision, Mission and Value Statements 2. Control Systems 3. Organizational Structures 4. Power Structures 5. Symbols 6. Rituals and Routines 7. Stories and Myths

Organization Values

Example—Value Statements at IBM 1. Dedication to every client’s success. 2. Innovation that matters, for our company and for the world. 3. Trust and personal responsibility in all relationships.

Example—Vision, Mission and Value Statements of a Telecommunication Company Vision: To be a world-class communication company Mission: To invest in our employees Values: 1. We value people and their diversity. 2. We are performance driven. 3. We are customer focused. 4. We create shareholder value. 5. We are a model corporate citizen. 6. We act with integrity in everything we do.

Corporate Culture

32.2

CHANGE MANAGEMENT

Why People Resist Change? Fear of potential loss at personal level Fear of perceptions

Fear of Uncertainty

Acceptance of Change

Communication of Change

407

408

Law, Ethics and Communication

32.3

INNOVATION

Barriers to Innovation

Building Innovation-enabled Organization

Corporate Culture

409

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) Nov 2010]

410

Law, Ethics and Communication

33

COMMUNICATION IN BUSINESS ENVIRONMENT

CHAPTER

Learning Objectives After reading this chapter, you will understand: Drafting notices of meetings of company Drafting minutes of meetings of company Drafting corporate press release and announcements at stock exchanges

33.1

NOTICE OF AN ANNUAL GENERAL MEETING NOTICE OF AGM

Notice is hereby given that the _____ Annual General Meeting of the Members of XYZ Ltd. will be held on (Day and Date—Any day not being public holiday) _________, at (Place) the Registered Office of the Company at _________________, Chandigarh [Alternative—any other place in the local limits of where the Registered Office of the Company is situated] at (Time—Business hours) _____ a.m. to transact the following business: Ordinary Business: 1. To receive, consider and adopt the Audited Balance Sheet of the Company as on _________ and the Profit & Loss Account and Cash Flow Statement for the year ended on that date and Auditor’s and Directors’ Reports thereon. 2. To declare dividend for the year ending ___________. 3. To appoint a director in place of Mr. ________ who retires by rotation, and being eligible, offers himself for re-appointment. 4. To appoint ____________ Chartered Accountants, New Delhi as Statutory Auditors of the Company; to hold office from the conclusion of this annual general meeting until the conclusion of the next annual general meeting and to fix their remuneration. Contd.

Communication in Business Environment

411

Special business: 6. ………. Regd. Office _________________

For and on behalf of Board of Directors Chairman of the Meeting [Alternative— Secretary/Manager]

Date: Notes: 1. A MEMBER ENTITLED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE ON A POLL INSTEAD OF HIMSELF/HERSELF AND SUCH PROXY NEED NOT BE A MEMBER OF THE COMPANY. 2. PROXIES, IN ORDER TO BE EFFECTIVE, MUST BE RECEIVED AT THE REGISTERED OFFICE OF THE COMPANY, NOT LESS THAN 48 HOURS BEFORE THE COMMENCEMENT OF THE MEETING. A PROXY FORM IS APPENDED WITH THE ADMISSION SLIP. 3. Pursuant to Section 173 of the Companies Act, 1956, Explanatory Statement relating to special business is annexed to this Notice. 4. The Register of Members and the Share Transfer Books of the Company will remain closed from ________ to ____________, both days inclusive, in terms of the provisions of the Companies Act, 1956 and the listing agreement with the stock exchanges where the shares of the Company are listed, for the purpose of annual general meeting and for determining the names of the members eligible for dividend on equity shares, if declared at the meeting. 5. Members are requested to notify immediately change of address, if any, to the Company’s Registered Office. While communicating to the Company, please quote the folio number. 6. Shareholders desirous of obtaining any information concerning the accounts and operations of the Company are requested to address their questions to the Company’s registered office, so as to reach at least 5 days before the date of the meeting so that the information may be made available at the meeting to the best extent possible.

33.2

MINUTES OF THE ANNUAL GENERAL MEETING MINUTES OF ANNUAL GENERAL MEETING

___ Annual General Meeting held on __________ (Day and Date) ________ (Place) at ________ (Time) Present: 1. ___________ (Chairperson) 2. ___________ (Directors) 3.____________ (Number of Members in person) 4. ____________(Number of Members in proxy) 5.____________ (Representative of Auditors) 6.____________ (Secretary) 1. Notice The notice convening the meeting was read by the Secretary. Contd.

412

Law, Ethics and Communication

2. Director’s Report and Accounts With the consent of the members present, the Director’s Report and Accounts having already been circulated to the members were taken as read. 3. Auditors’ Report The Auditors’ Report was read. 4. Adoption of Directors’ Report, etc. The Chairman then invited queries from the members present on the Director’s Report, Accounts and Auditors’ Report, but there was no query. Thereafter, the Chairman proposed the following resolution which was seconded by __________. “RESOLVED that the Directors’ Report, audited Balance Sheet as on ________ and Profit and Loss Account and Cash Flow Statement for the year ended _________ and Auditors’ Report thereon be and the same are hereby received, considered and adopted.” Carried unanimously. 5. Dividend Proposed by _________ (Member) Seconded by _________ (Member) “RESOLVED that the dividend as recommended by the Board of Directors for the year ended _________ at the rate of Rs___ per share on the equity share capital of the Company, subject to deduction of tax at source be and is hereby declared for payment to those shareholders whose names appeared on the Register of Members as on ________ .” Carried unanimously. 6. Directors Proposed by _________ (Member) Seconded by _________ (Member) “RESOLVED that Shri ________ who retires by rotation and is eligible for reappointment to and is hereby re-appointed a director of the Company.” Carried unanimously. 7. Auditors Proposed by _________ (Member) Seconded by _________ (Member) “RESOLVED that M/s ___________ Chartered Accountants, be and are hereby appointed Auditors of the Company to hold office from the conclusion of this meeting until the conclusion of the next Annual General Meeting at a remuneration of ` _______ Carried unanimously. The meeting closed with a vote of thanks to the Chair. Date : ____________ Chairman Place: ____________

Communication in Business Environment

33.3

413

NOTICE OF STATUTORY MEETING NOTICE OF STATUTORY MEETING

Notice is hereby given that in pursuance of Section 165 of the Companies Act 1956, the Statutory Meeting of the Company will be held at the Registered Office of the company at ________________ on_____________(date) at __________ (time) to consider and adopt the Statutory Report and to discuss any other matter pertaining to the formation of the company. A copy of the Statutory Report is annexed to this Notice for the information of the members. Regd. Office _________________

By the order of the Board Company Secretary/Director

Date: Notes: 1. A MEMBER ENTITLED TO ATTEND AND VOTE AT THE MEETING IS ENTITLED TO APPOINT A PROXY TO ATTEND AND VOTE ON A POLL INSTEAD OF HIMSELF/HERSELF AND SUCH PROXY NEED NOT BE A MEMBER OF THE COMPANY. 2. PROXIES, IN ORDER TO BE EFFECTIVE, MUST BE RECEIVED AT THE REGISTERED OFFICE OF THE COMPANY, NOT LESS THAN 48 HOURS BEFORE THE COMMENCEMENT OF THE MEETING. A PROXY FORM IS APPENDED WITH THE ADMISSION SLIP.

33.4

MINUTES OF STATUTORY MEETING MINUTES OF STATUTORY MEETING

Statutory Meeting held on __________ (Day and Date) ________ (Place) at ________ (Time) Present: 1. ___________ (Chairperson) 2. ___________ (Directors) 3. ____________ (Number of Members in person) 4. ____________(Number of Members in proxy) 5. ____________ (Secretary) 1. Notice The notice convening the meeting along with Statutory Report was read by the Secretary. The Chairman apprised the members about the working of the Company and reviewed the position since its incorporation. The Statutory Report was discussed by the members. After discussions, the following resolutions were passed. 2. Modification of contract Proposed by _________ (Member) Seconded by _________ (Member) “RESOLVED that the modifications made in the contracts as set out in the Statutory Report be and are hereby approved.” Carried unanimously. Contd.

414

Law, Ethics and Communication

3. Statutory Report Proposed by _________ (Member) Seconded by _________ (Member) “RESOLVED that the Statutory Report of the Company laid before the members be and is hereby approved and adopted.” Carried unanimously. The meeting closed with a vote of thanks to the Chair. Date : ____________ Chairman Place: ____________

33.5

NOTICE OF FIRST BOARD MEETING NOTICE OF FIRST BOARD MEETING

Notice is hereby given that the First Meeting of the Board of Directors of XYZ Ltd. will be held on (Day and Date—Any day) _________, at (Place) the Registered Office of the Company at _________________, Chandigarh [Alternative—any other place fixed by the Board] at (Time) _____ a.m. To transact the following business: Agenda: 1. To appoint the chairman of the meeting 2. To produce and take note of the Certificate of Incorporation, Memorandum and Articles of the Company 3. To note first director of the Company 4. To take note of/decide the situation of the registered office of the Company 5. To appoint auditors of the Company 6. To approve the accounting year of the Company 7. To approve minutes to be kept in loose leaf binder 8. To adopt common seal of the Company 9. To delegate power for obtaining PAN/TAN 10. To approve opening of bank account of the Company 11. To approve the preliminary expenses 12. To consider any other matter with the approval of the Chair. For and on behalf of Board of Directors Company Secretary Date: Place:

Communication in Business Environment

33.6

415

NOTICE OF ANY SUBSEQUENT BOARD MEETING NOTICE OF BOARD MEETING

Notice is hereby given that a Meeting of the Board of Directors of XYZ Ltd. will be held on (Day and Date—Any day) _________, at (Place) the Registered Office of the Company at _________________, Chandigarh [Alternative—any other place fixed by the Board] at (Time) _____ a.m. To transact the following business: Agenda: 1. Confirmation of the minutes of the previous Board Meeting held on________. 2. Discussion of the matter arising out of the minutes. 3. To co-opt Shri P as an Additional Director of the Company. 4. To approve buy-back of 10% of the equity shares of the Company. 5. To fix record date for the purpose of interim dividend. 6. To approve interim dividend @ ___ on the equity shares. 7. To approve transfer of shares lodged from ________ to _______. 8. To consider any other matter with the permission of the Chairman. For and on behalf of Board of Directors Company Secretary Date: Place:

33.7

MINUTES OF FIRST BOARD MEETING MINUTES OF FIRST BOARD MEETING

Proceedings of the First Meeting of Board of Directors of XYZ Ltd. held on __________ (Day and Date) ________ (Place) at ________ (Time) Present: 1. ___________ (Director) 2. ___________ (Directors) 3. ____________ (Director) 4. ____________(Director) 5. ____________ (Company Secretary) 1. Chairman of the Meeting Shri P, Director, was unanimously elected as the Chairman of the meeting. Shri P gave a warm welcome to all the Directors present at the First Board Meeting of the Company. As the quorum was complete, the Chairman called the meeting to order. Contd.

416

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2. Certificate of Incorporation, Memorandum and Articles of Company The Chairman placed before the Board a copy of the Certificate of Incorporation of the Company along with a copy of the Memorandum and Articles of Association of the Company as registered with the Registrar of Companies. The Board took note of the same and requested the Chairman to get the Memorandum and Articles of Association of the Company printed in sufficient quantity and to keep the same in his safe custody. 3. First Directors of the Company The Chairman placed before the Board a copy of Form No. 32 as filed with the Registrar of Companies. The Board noted the names of the first Directors of the Company. The Board then passed the following resolution unanimously: “RESOLVED THAT the following persons being the subscribers of the Memorandum and Articles of Association of the Company shall constitute the first Board of Directors of the Company: (1) ……………….. (2) ……………….. (3) ……………….. (4) ………………..” 4. Registered Office of the Company The Chairman placed before the meeting Form No. 18 filed with the Registrar of Companies, showing the situation of the Registered Office of the Company at ………………. and the following resolution was passed: “RESOLVED THAT the Registered Office of the Company be situated at …………………… with effect from the date of incorporation of the Company. RESOLVED FURTHER THAT name plates be affixed at the registered office and that the company’s name and the address of the Registered Office be used or mentioned in legible characters in the letterheads, official publications, documents, etc. pursuant to the provisions contained in Section 147 of the Companies Act, 1956.” 5. Appointment of First Auditors of the Company The Chairman informed the Board that the consent had been received from M/s……………………, Chartered Accountants, vide a letter received by the Company intimating that in case of their appointment as the First Auditors of the Company, the same would be in accordance with the limits specified in Section 224(1B) of the Companies Act, 19533. The Board noted the same and the following resolution was passed: “RESOLVED UNANIMOUSLY THAT pursuant to Section 224 (1B) of the Companies Act, 1956, …………………………., Chartered Accountants, having their office at, …………… be and are hereby appointed as the first auditors of the Company to hold office till the conclusion of the first annual general meeting. RESOLVED FURTHER THAT Shri ……………………. Director of the Company be and is hereby authorized to discuss and settle the remuneration to be paid to the first auditors of the Company.” 6. Books of Accounts The Chairman suggested that the financial year be adopted as the accounting year of the Company. After due discussion, the Board passed the following resolution: “RESOLVED THAT the first accounting/financial year of the Company be a period commencing from the date of incorporation, ………………. to 31st March, …….. (both days inclusive) & that the Contd.

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subsequent accounting/financial year(s) be the period of twelve months commencing on 1st April every year to 31st March (both days inclusive) of subsequent year until otherwise decided by the Board in this regard.” 7. Minutes in loose leaf binder After discussion, the following resolution was passed unanimously: “RESOLVED THAT the proceedings of the meetings of the Board of Directors, Committee of Directors (if any) and general meetings of the members of the Company be kept in loose leaf binders with locking device and be consecutively numbered, dated and initialled/signed by the Chairman of the same meeting or of the next meeting.” 8. Adoption of Common Seal of the Company The Common Seal of the Company was produced before the meeting and approved. The following resolution was passed: “RESOLVED THAT the Seal, as submitted to this meeting, an impression of which has been affixed in the margin of these minutes be and same is hereby adopted as Common Seal of the Company and that the Common Seal be kept in safe custody of Shri …………., Director of the Company, who shall maintain a seal register in which details of all documents sealed shall be entered.” 9. Delegation of Authority The Board unanimously passed the following resolution: ”RESOLVED THAT consent of the Board of Directors be and is hereby given for getting Permanent Account Number (PAN)/TAN from Income Tax Authority and getting the Company registration with any other authority. RESOLVED FURTHER THAT Shri …………. and Shri ………………, Directors of the Company, be and are hereby authorized to sign, execute and file all necessary applications, returns, forms, agreements, undertakings, receipts and all other documents relating to Income Tax, banks and other statutory or other authority as may be required by the various laws for the time being in force in India. RESOLVED FURTHER THAT Shri …………. and Shri ………………, Directors of the Company, be and are hereby authorized to appoint any person or attorney to appear before various authorities on behalf of the Company and to do all acts, deeds, matters and things in connection with above mentioned matters as may be considered necessary on behalf of the Company.” 10. Opening of Bank Account It was suggested by the Chairman that a current banking account be opened in the name of the Company with State Bank of India, ….. branch for facilitating the business transactions of the Company. The matter was discussed and the following resolution was passed: “RESOLVED THAT a current banking account with State Bank of India, ………….. branch be opened by the Company and Shri …….. and Shri …….., Directors of the Company, be and are hereby authorized to sign application form and other papers as may be required for opening the account. RESOLVED FURTHER THAT Shri …….. and Shri …….., Directors, are individually authorized to sign or accept all cheques, bills of exchange, promissory notes and other negotiable instruments. RESOLVED FURTHER THAT the bank be and is hereby authorized to honour all cheques, drafts, bills of exchange, promissory notes and other negotiable instruments signed, drawn, accepted, or made on behalf of the Company by the above mentioned directors and officers of the Company whether the same be overdrawn or not relating to the transactions of the Company. Contd.

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RESOLVED FURTHER THAT the bank is hereby directed to accept credits into the account only from the Company and no outside cheques should be allowed to be credited into the account.” 11. To approve preliminary expenses The Chairman placed before the Board a statement showing the details of the expenses incurred by the Company in connection with its registration, etc. prior to the date of its incorporation. After due scrutiny, it was thereupon unanimously resolved as under: “RESOLVED THAT the Preliminary Expenses of ` 30,000 incurred by the promoters/subscribers in connection with the incorporation of the Company as per the statement placed before the meeting be and are hereby approved and the same be reimbursed by the Company.” There being no other business to transact, the meeting concluded with a vote of thanks to the Chair. Date: ____________ Chairman Place: ____________

33.8

CHAIRMAN’S SPEECH Contents of Chairman’s Speech

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Welcome Address Financial Performance, Significant Achievements of the company Return on Shareholders’ Wealth Current Business Environment, Opportunities, Challenges, Risks & Concerns Business Strategies, Forward-looking Statements, Controls, Growth Drivers Company’s Market Share and Contribution Research and Development Human Resource Development Awards & Recognition Corporate Social Responsibility (Health & Safety, Conservation of Natural Resources, Community Development) 11. Corporate Governance 12. Concluding Remarks

33.9

CORPORATE PRESS RELEASE

Sample Press Release—ICAI Union Budget The ICAI welcomes the Union Budget presented by the Hon’ble Finance Minister Shri Pranab Mukherjee, which can be termed as a relief-oriented budget. The Budget skillfully balances the need to step up the economic growth on one side, checks inflation on the other, and also addresses the socio-economic needs of the nation. Contd.

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419

The ICAI welcomes the liberal FDI policy, listing of PSUs, liberal licensing policy for opening of banks and licence to NBFCs to act as bank. The increase of minimum personal taxation slab of 10% up to ` 5.00 lakh will pave the way for better tax compliance and revenue generation for the Government. The introduction of SARAL II Form will enable the small tax payers to file their return without difficulty. The relief of ` 20,000 under 80 CCE would suitably boost infrastructure sector while simultaneously providing tax relief. The ICAI welcomes the reiteration of timelines for implementation of the Direct Tax Code and Goods and Service Tax. Indirect Tax The increase in Central Excise Rates by 2% would augment tax revenues while bringing convergence with GST rates. Procedural reforms in placing reliance on CA’s certificates for input credits and amendment in demand provision would reduce litigation and give widespread relief. Expansion of coverage, especially in the health sector, and retrospective amendment regarding renting of immovable properties and training may require reconsideration. The ICAI is glad that the Government has accepted the suggestions forwarded by the Institute in different areas.

Sample Press Release—ICAI Results of Examination The Institute of Chartered Accountants of India (ICAI) today announced the results of Chartered Accountants Final and Final (New Course) Examinations and Common Proficiency Test (Paper Pencil Mode) held in November/December, 20XX. The curriculum of the Chartered Accountancy Course has been designed, developed and maintained so that the members of the profession can become the valued trustees of the world-class financial competence, good governance and competitiveness. The making of a CA ensures a very deep-rooted knowledge coupled with a commitment to work hard. Since December 1949, the Chartered Accountancy Examination is held twice a year. The toppers of Chartered Accountants Final and Final (New Course) Examinations held in November, 20XX are from cities like Kochi, Nasik, Coimbatore and Secunderabad. The toppers of Common Proficiency Test (Paper-Pencil Mode) held on 13th December, 20XX are from cities like Rajahmundhry and Vijaywada. This shows that even the countryside regions are also not untouched by the reach of this profession. A Chartered Accountant, or ‘CA’ as is commonly known, is a professional who has undergone high standards of theoretical education and practical training, and, in the process, has passed final examination in Chartered Accountancy conducted by the Institute of Chartered Accountants of India (ICAI) and has been enrolled as its member. He is a well-rounded professional—well-versed in the subjects of Accountancy, Auditing, Management, Accountancy, Taxation, Information Technology, Corporate and Commercial Laws, Financial Management, General Management and the like areas.

420

Law, Ethics and Communication

Sample Press Release —ICAI Formation of Directorate of Accounting Technicians (ATs) The Executive Committee of the Institute of Chartered Accountants of India (ICAI) at its meeting held on 8th June 20XX has decided to approve formation of a Directorate of Accounting Technicians (ATs) within ICAI to provide a singular and unified focus on the development of Accounting Technicians as an independent certification amongst all stakeholders. The Directorate would work towards bringing the eligible candidates under the Accounting Technicians Umbrella and would provide for their regulation and development for the benefit of the industry. This certification programme would immensely benefit the small- and medium-sized enterprises (SMEs) and all those who are looking for rendering of specialized accounting services other than the audit and assurance function. The certification by a premier accounting body like ICAI would give the added stamp of authority to the holder of such Accounting Technicians certificates.

33.10 CORPORATE ANNOUNCEMENT AT STOCK EXCHANGES General Format Scrip Code: Company: Subject: Announcement: Attachments:

Sample Announcements at BSE Scrip Code: 507685 Company: Wipro Ltd Subject: Wipro–Allotment of Equity Shares Announcement: Wipro Ltd has informed BSE that Administrative Committee of the Company’s Board of Directors vide circular resolution dated March 03, 2010 resolved: 1. To issue and allot 81942 equity shares of ` 2/- each pursuant to exercise of the stock options by the eligible employees under Restricted Stock Unit Plan 2004 and Restricted Stock Unit Plan 2005. 2. Allotted 8668 equity shares of par value of ` 2/- to JP Morgan Chase Bank, the Company’s depository as underlying shares in respect of ADRs to be issued and allocated to the purchasers, pursuant to the exercise of the stock options granted to the employees under the Company’s ADS Restricted Stock Unit Plan-2004. Scrip Code: 517214 Company: Spice Mobiles Ltd Subject: Spice Mobiles—Outcome of Board Meeting Announcement: Spice Mobiles Ltd has informed BSE that the Board of Directors of the Company at its meeting held on March 04, 2010, approved the following matters by passing resolutions through circulation: Contd.

Communication in Business Environment

421

1. Revised Scheme of Amalgamation of Spice Telemeters Pvt. Ltd. with Spice Mobiles Ltd. through a Scheme of Amalgamation. 2. Raising of capital through Issuance of FCCB, GDR, QIP or other equity linked securities or securities convertible into equity, up to ` 700 crores subject to shareholders and other necessary approvals. Scrip Code: 500472 Company: SKF India Ltd Subject: SKF India Fixes Book Closure for Dividend & AGM Announcement: SKF India Ltd has informed BSE that the Register of Members & Share Transfer Books of the Company will remain closed from April 07, 2010 to April 13, 2010 (both days inclusive) for the purpose of Payment of Dividend and 49th Annual General Meeting (AGM) of the Company to be held on April 23, 2010. Scrip Code: 505744 Company: Federal-Mogul Goetze (India) Ltd Subject: Federal Mogul — Shifting of Registered Office Announcement: Federal-Mogul Goetze (India) Ltd has informed BSE that the Board of Directors of the Company at its meeting held on February 27, 2010, has approved the shifting of the Registered Office of the Company from A-26/3, Mohan Co-operatives Industrial Estate, New Delhi–110044 to 7870-7877, G-I, Roshanara Plaza Building, Roshanara Road, Delhi–110007. Scrip Code: 523371 Company: Mawana Sugars Ltd Subject: Mawana Sugars—Change in Directorate Announcement: Mawana Sugars Ltd has informed BSE that Mr. D. C. Mittal, Director of the Company, has retired by rotation from the Board of Directors of the Company from the date of the Annual General Meeting of the Company held on February 25, 2010. Scrip Code: 524000 Company: Magma Fincorp Ltd Subject: Magma Fin—Resignation of CFO Announcement: Magma Fincorp Ltd has informed BSE that Mrs. Anju Madeka has resigned from the organization as Chief Financial Officer (CFO) with effect from February 28, 2010. Scrip Code: 531404 Company: Zicom Electronic Security Systems Ltd Subject: Zicom Elect—Board Meeting on Mar 05, 2010 Announcement: Zicom Electronic Security Systems Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on March 05, 2010, to consider and decide on the developments involving strategic changes in operations/business of the Company.

422

Law, Ethics and Communication

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions) 1. Draft a notice for ABC’s Annual General Meeting with four ordinary businesses. [May 2007] 2. The Third Annual General Meeting of ABC Limited was held on 28th September, 2007. Several businesses were transacted at the meeting including the adoption of annual accounts for the year ended 31st March, 2007. The meeting was attended by 30 members in person and 5 members in proxy. Draft the minutes of the Annual General meeting indicating how shall the adoption of accounts, being one of the businesses transacted at the meeting, be recorded. [Nov 2007] 3. The Board of Directors of Prakash Traders Private Limited proposes to convene an Extraordinary General Meeting for changing the name of the company to Prakash International Private Limited. Draft the notice for calling the Extraordinary General Meeting of the Members. [May 2008] 4. Draft a notice for calling the Board of Directors meeting of M/s. MN Limited where Mr. ` is co-opted as an Additional Director and also to consider buy-back of company’s equity shares to an extent of 10% of issued share capital. [May 2008] 5. As a secretary of AB Forgings Ltd., draft a notice of a board of directors meeting to consider any five items as agenda of the meeting to be held on November 15, 2008 at the registered office of the Company at Mysore. [Nov 2008] 6. ABC Ltd. wants to hold its Annual General Meeting on 15th December, 2008 to discuss the matters relating to ordinary business. Draft a notice along with notes in brief for calling annual general meeting of its shareholders. [Nov 2008] 7. TKR Limited wants to hold its statutory meeting on 20 December, 2009 to discuss the matters relating to the formation of the company and incidental matters thereto. Draft a notice along with notes in brief for calling statutory meeting of the company. [Nov 2009] 8. The Fifth Annual General Meeting of the shareholders of Devrishi Limited was held on 20 August, 2009 at its registered office at Mumbai. 55 shareholders attended the meeting in person and 6 shareholders in proxy. Several ordinary businesses regarding adoption of audited balance sheet, declaration of dividend, appointment and re-appointment of directors and auditors were transacted at the meeting. Draft the minutes of the Fifth Annual General Meeting of the shareholders of Devrishi Limited. [Nov 2009] 9. The statutory meeting of PQR Limited was held on 20th January, 2010 at its registered office at Kolkata. As a secretary of the company, draft the minutes of the statutory meeting of the shareholders of the company. [May 2010] 10. MNP Limited was incorporated in September, 2010. Now the company wants to hold its first meeting of the Board of Directors. Draft a notice of the said meeting along with agenda. [Nov 2010]

34

LEGAL DEEDS AND DOCUMENTS

CHAPTER

Learning Objectives After reading this chapter, you will understand: Meaning of legal deeds and documents Drafting various types of deeds in a partnership Drafting a power of attorney (contract of agency) Drafting a lease deed � ��������������������������������������� Drafting a gift deed Preparing an annual report of the company

34.1

MEANING OF DOCUMENT, INSTRUMENT AND DEED

Document

Instrument

Deed

424

Law, Ethics and Communication

34.2

PARTNERSHIP DEED

Contents of a Partnership Deed

Legal Formalities Relating to Partnership Deed

Sample Partnership Deed PARTNERSHIP DEED

Contd.

Legal Deeds and Documents

425

` `

`

Contd.

426

Law, Ethics and Communication

Sample Partnership Retirement Deed PARTNERSHIP RETIREMENT DEED

Alternative

Contd.

Legal Deeds and Documents

427

Sample Partnership Reconstitution Deed PARTNERSHIP RECONSTITUTION DEED

y

Sample Partnership Dissolution Deed PARTNERSHIP DISSOLUTION DEED

Contd.

428

Law, Ethics and Communication

ALTERNATIVE 2: SALE OF FIRM BUSINESS TO COMPANY

Sample Sub-Partnership Deed SUB-PARTNERSHIP DEED

Contd.

Legal Deeds and Documents

34.3

429

POWER OF ATTORNEY

Contents of a Power of Attorney

Special Power of Attorney

General Power of Attorney

Sample Power of Attorney to Appear before Income Tax Authorities POWER OF ATTORNEY

Sample Power of Attorney to Appear before the Registrar of Companies POWER OF ATTORNEY

Contd.

430

Law, Ethics and Communication

Sample General Power of Attorney GENERAL POWER OF ATTORNEY

Contd.

Legal Deeds and Documents

34.4

431

LEASE DEED

Meaning and Contents of Lease Deed

Sample Lease Deed LEASE DEED

Contd.

432

Law, Ethics and Communication

`

SCHEDULE

Contd.

Legal Deeds and Documents

433

`

34.5

AFFIDAVIT

Meaning of Affidavit

Sample Affidavit (for Transmission of Shares) Affidavit for Transmission of Shares `

Contd.

434

Law, Ethics and Communication

VERIFICATION

34.6

INDEMNITY BOND

Meaning of Indemnity Bond

Sample Indemnity Bond (for Issue of Duplicate Interest/Dividend Warrant) INDEMNITY BOND `

Subject:

Contd.

Legal Deeds and Documents

435

Sample Indemnity Bond (for issue of duplicate share certificate) INDEMNITY BOND

`

`

Contd.

436

Law, Ethics and Communication

34.7

GIFT DEED

Meaning of Gift Deed

Sample Gift Deed of Immovable Property DEED OF GIFT OF IMMOVABLE PROPERTY

` Contd.

Legal Deeds and Documents

Sample Gift Deed of Money DEED OF GIFT OF MOVABLE PROPERTY `

34.8

ANNUAL REPORT

Contents of an Annual Report Mandatory information

437

438

Law, Ethics and Communication

Other information included customarily

Mandatory information

SELF-REVIEW QUESTIONS (Including Previous Years’ Examination Questions)

May 2007 May 2007

Nov 2007 May 2008 Nov 2008

Legal Deeds and Documents

439

Jun 2009

Jun 2009

[Nov 2009

[May 2010 May 2010

Nov 2010 Nov 2010

Model Test Paper 1

Appendix 1. Model Test Paper 1 2. Model Test Paper 2

441

Model Test Paper 1

443

MODEL TEST PAPER 1 (CA PCC/IPCC) (with suggested answers) Total No. of Questions: 7 Time Allowed: Three Hours Maximum Marks: 100

Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. 1. (a) Reliant Industries Limited passed an ordinary resolution at a general meeting of members to buy-back 30% of its Equity Share Capital. The articles of the Company empower the company for buy-back of shares. The company further decided that the payment for buy-back be made out of the proceeds of the company’s earlier issue of equity shares. Explain the provisions of the Companies Act, 1956, and state the sources through which the buy-back of the company’s own shares be executed. Examine the following: 5 (i) Whether company’s proposal is in order? (ii) Would your answer be still the same in case the company instead of 30% decide to buy-back only 20% of its Equity Share Capital? (b) (I) State with reasons whether the following statements are correct or incorrect:

2¥1

(i) In a contract of guarantee, forbearance by the creditor to sue the Principal Debtor discharges the surety. (ii) A pledge of documents of title to goods by a mercantile agent is a valid pledge. (II) Pick up the correct answer from the following and give reasons:

2¥1

(a) If time is the essence of a contract and there is a failure to perform the contract by the specified time, the contract 1. Becomes voidable at the option of the promisee 2. Becomes unenforceable 3. Becomes void 4. Remains valid (b) A contingent contract is 1. Valid 2. Void 3. Voidable 4. Illegal

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Law, Ethics and Communication

(c) A Promissory-note drawn jointly by X, a minor and Y, a major is 1. Void 2. Valid but not negotiable 3. Valid but can be enforced only against Y 4. None of the above (c) 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: 5 (i) Whether D can sue the prior parties of the bill, and (ii) Whether the prior parties other than D have any right of action inter se? Give your answer in reference to the provisions of Negotiable Instruments Act, 1881. (d) What is meant by Anticipatory Breach of Contract?

5

2. (a) Can an establishment that is covered under Payment of Bonus Act, 1965, pay bonus on the basis of unit-wise profitability? State the circumstances when it can do so. 8 (b) Explain some key issues in corporate governance. 8 3. (a) Explain the provisions of the Payment of Gratuity Act, 1972, relating to ‘forfeiture’ of the amount of gratuity payable to an employee. 8 (b) Why is organisation wide change difficult to accomplish? 8 4. (a) Explain the effects of irregular allotment under the Companies Act, 1956. 8 (b) What are the various ethical threats faced by an accounting and finance professional working as an employee of a company? 4 (c) “Effective listening is an essential skill for managers.” Explain. 4 5. (a) What are the differences between ‘negotiability’ and ‘assignability’ under the Negotiable Instruments Act, 1881? 8 (b) Examine the importance of business ethics in the present corporate environment. 4 (c) “Written communication is indispensable to an organisation.” Comment. 4 6. (a) Explain clearly the meaning of Lifting the Corporate Veil, as applicable in case of companies incorporated under the Companies Act, 1956. Under what circumstances, the ‘veil’ of a company can be lifted by the court? 8 (b) Explain the term ‘sustainable development’ with reference to pollution and conservation of natural resources. 4 (c) A leader is indispensable for group discussion. Do you agree? 4 7. (a) Is the amount standing to the credit of a member of the Provident Fund attachable in the execution of decree or order of the court? Examine the law, on this point, laid down in the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. 4 (b) How can a person acquire membership of a public company? Explain in brief, whether shareholders and members are similar? Illustrate whether a limited company can become partner in a partnership firm? 4 OR The Board of Directors of a company decides to pay 5% of issue price as underwriting commission to the underwriters. On the other hand, the Articles of Association of the company permit only 3%

Model Test Paper 1

445

commission. The Board of Directors further decides to pay the commission out of the proceeds of the share capital. Are the decisions taken by the Board of Directors valid under the Companies Act, 1956? 4 (c) What are the initiatives that have been taken in the Indian context towards maintaining and promoting healthy competition? 4 OR List the benefits of eco-friendly business practices. 4 (d) How would you guide someone who wants to improve his active listening skills? 4 OR You have to write an effective business letter. Answer the following questions: (i) How many styles are often used? (ii) What are the main differences among them?

Suggested answers 1. (a) A company can purchase its own shares or other specified securities. However, such buy-back can be made out of: (i) Section d—its free reserves; or (ii) the securities premium account, or (iii) Section d—the proceeds of any shares or other specified securities. Buy back of any kind of other specified securities cannot be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities [Section 77A(i) of Companies Act, 1956]. In accordance with the provisions of Section 77A of the Companies Act, 1956, the company deciding for buy back of shares must pass a special resolution in a general meeting of its members authorizing the company for the buy back. Secondly, the buy back should be for an amount equal to or less than 25% of the total paid-up capital and free reserves of the company. Therefore, as per the details given in the question: (i) The company’s proposal for buy-back is not in order as it has passed only an ordinary resolution and the percentage of 30% buy-back is in violation of the provisions of Section 77A of Companies Act, 1956. (ii) Although the percentage of buy-back is now 20% which is not violating the provisions of Section 77A but since the resolution passed by the company is an ordinary resolution and not special resolution, therefore the proposal is still not in order. (b) (I) (a) Incorrect: According to Section 137 of Indian Contract Act, 1972, the surety is not discharged in such a case. (b) Correct: It is one of the statutory exceptions to the general rule that a valid pledge can be created only by the owner. (Section 178 of the Indian Contract Act, 1872) (II) (a) – (1) If time is the essence of the contract it must be performed within a reasonable time otherwise it becomes voidable at the option of the promisee. (b) – (1) Contingent contract is a contract to do or not to do something, if some event collateral to such contract does or does not happen.

446

(c)

(d)

2. (a)

(b)

Law, Ethics and Communication

I – (3) A minor can draw a promissory note to bind all parties except himself (Section 26 of the Negotiable Instruments Act, 1881). Section 43 of the Negotiable Instruments Act, 1881 provides that 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. 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. In the given question, since the bill originally drawn and accepted without consideration has ultimately been transferred to D for value, therefore as per Section 43 of N.I. Act, D can sue any of the prior parties i.e. A, B or C. However, since amongst A, B, C the bill was drawn and accepted without consideration, the prior parties before D, i.e., A, B and C, have no right of action inter se. Anticipatory breach of contract occurs when the promisor refuses altogether to perform his promise and signifies his unwillingness even before the time for performance has arrived. In such a situation, the promise can claim compensation by way of loss or damage caused to him by the refusal of the promisor. For this, the promisee need not wait till the time stipulated in the contract for fulfilment of the promise by the promisor is over. Ordinarily as per the provisions of Section 3 of Payment of Bonus Act, where an establishment consists of different departments or undertakings or has branches whether situated at the same place or in different places, all such departments or undertakings or branches are to be treated as parts of the same establishment. However, if, for any accounting year, a separate balance sheet and profit and loss account are prepared and maintained in respect of any such departments, etc., then such department, undertaking or branch shall be treated as separate establishments for the purpose of calculation of bonus for that year, unless such department, etc., were immediately prior to the commencement of that accounting year, treated as part of the establishment for the purpose of computation of bonus. Therefore, if the establishment is covered under above exception only then it can pay bonus on the basis of unit-wise profitability. Corporate governance is concerned with structures and processes for decision-making, accountability, control and behaviour at the top level of organisations. It influences how the objectives of an organisation are set and achieved, how risk is monitored and assessed and how performance is optimized. Corporate governance has an important role to play as an instrument of investor protection. Generally, corporate governance measures include appointing non-executive directors, placing constraints on management power and ownership concentration, as well as ensuring proper disclosure of financial information and executive compensation. The traditional governance model positions management as accountable solely to investors (shareholders). But now it is accepted that constituents other than shareholders, viz. employees, trade unions, customers, suppliers, local community, government, and competitors, are also affected by corporate activity, and that the corporation must, therefore, be answerable to them. Corporate governance is getting a focused attention for satisfying the divergent interests of the stakeholders of a business enterprise, especially after the corporate scandals and loss of shareholder value at Enron and several other large companies in 2002 and 2003, which focused more attention

Model Test Paper 1

447

on the issue of shareholder rights, calling for greater transparency and accountability and enhancing corporate reporting and disclosure. The scandals led to numerous corporate governance reforms, including passage of the Sarbanes– Oxley Act and the adoption of new listing requirements by the New York Stock Exchange in the United States. Other countries, including India, have introduced similar legal requirements. In February 2000, based on the recommendation of Kumar Mangalam Birla Committee, SEBI specified principles of corporate governance and introduced a new Clause 49 in the listing agreement of stock exchanges, which was amended in October 2004 in alignment with the recommendations of the Narayana Murthy Committee. 3. (a) The gratuity payable to an employee can be forfeited only in the circumstances provided for under Section 4(6) of Payment of Gratuity Act, 1972. The gratuity of an employee whose service have been terminated for any act, wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused. Also, the gratuity payable to an employee may be wholly or partially forfeited if the services of such employee have been terminated for (i) his riotous or disorderly conduct or any other act of violence on his part or (ii) any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment. (b) Introducing change in any organisation is very difficult as the people in the organisation are going to find reasons to resist change for various reasons such as: 1. Potential loss on a personal level—security, friends and contacts, money, freedom, pride and satisfaction, responsibility, authority, good working conditions and status. 2. Maintaining Status Quo—change not needed—status quo is working fine. 3. Proposed change does more harm than good. 4. Lack of respect for person responsible for the change. 5. Objectionable way of implementing the change. 6. Negative attitude towards the organization before the change. 7. No opportunity to have input into change. 8. Change perceived as implying personal criticism. 9. Change simply adds more work and confusion. 10. Change requires more effort than to keep status quo. 11. Bad timing of the change. 12. A desire to challenge authority. 13. Hearing about the change second hand. Resistance to change may take many forms from outright objection or refusal to co-operate to other subtler forms of resistance such as go-slow or non-implementation. While introducing any change, it is helpful to have an understanding of why people resist change, because understanding this allows one to plan communication strategies to reduce resistance from the beginning. 4. (a) Meaning of irregular allotment—If the shares are allotted by company violating the provisions of Sections 69 and 70 (i.e. without receiving the minimum subscription and without filing a prospectus

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or statement in lieu of prospectus to the Registrar before the allotment), such an allotment is called an irregular allotment. As per the provisions of Section 71 of Companies Act, any applicant who has been allotted shares under an irregular allotment can avoid the same provided he does so by serving a notice on the company within the following time limits: (a) where the allotment was made before the statutory meeting—within 2 months after the holding of statutory meeting of the company and not later; or (b) where no statutory meeting is required to be held by the company—within 2 months after the date of allotment and not later; or (c) where the allotment was made after the statutory meeting—within 2 months of allotment and not later. Any irregular allotment shall be voidable despite the fact that the company is in the course of being wound up. Furthermore, Section 71(3) makes every director of a company, who knowingly contravenes or authorizes the contravention of any of the provisions of Section 69 or Section 70 with respect to allotment, liable to compensate the company and the allottee for any loss, damages or costs which they have sustained or incurred thereby. However, the proceedings for such compensation can only be taken within 2 years from the date of allotment. (b) The dynamic environment in which businesses operate today may usher a broad range of circumstances because of which compliance to principles of integrity, objectivity, confidentiality and professional competence and due care in case of a finance and accounting professional working as an employee may be threatened. Such threats can be classified as: Financial interests, incentive compensation arrangements, inappropriate use of corporate assets, employment security threats, and so on. Business decisions or data is reviewed by same professional who is responsible for preparing that data or taking such decisions. Promoting employing organisation’s position compromising objectivity Benefiting an immediate or close family member by influencing financial or non-financial reporting or business decisions, acceptance of a gift or preferential treatment Threat of dismissal, replacement of a close or immediate family member over a disagreement on professional area of expertise or decision-making. (c) Listening skills are essential for a manager. It provides information that helps managers in doing their own jobs well. It also helps to build strong personal relationships and advancement in their careers. According to a research, an average manager in general spends only 9% of his/her time in writing, 16% in reading, 30% in speaking and 45% in listening. Poor listening may lead to serious communication problems resulting in incomplete information and poor retention. The manager may not be effective if this keeps on happening. Many managers are so used to helping people solve problems that their first course of action is to begin brainstorming solutions and giving advice instead of listening with full attention directed toward understanding what the co-worker or staff member needs. If one does not listen, a great deal of vital information necessary for effective people management and decision-making would be missed. In addition, appropriate response would not be possible.

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5. (a) Following are the differences between negotiability and assignability: (i) The assignee does not acquire the right of a holder in due course on the other hand in negotiability, the transferee acquires all the rights of a holder in due course. (ii) In negotiation, notice of transfer is not necessary whereas in assignment of chose in action, notice of assignment must be served by the assignee on his debtor. (iii) In negotiation, consideration is presumed but in case of transfer by assignment, consideration must be proved. (iv) Negotiation requires either delivery only in the case of ‘bearer’ instrument, or endorsement and delivery only in the case of ‘order instrument’. Whereas in case of an assignment, Section 130 of the Transfer of Property Act requires a document to be reduced into writing and signed by the transferor. (v) Endorsement does not require payment of stamp duty whereas negotiation requires payment of stamp duty. (b) In general, language ethics mean good behaviour. We feel an obligation to consider not only our own personal well-being, but also that of others and of human society as a whole. Business ethics refer to the principles and standards that encompass acceptable business behaviour. This behaviour is defined by its shareholders, customers, employees, competitors, suppliers, government regulators, interest groups and general public. Being ethical in business requires acting with an awareness of: (a) The need for complying with rules, such as the laws of the land, the customs and expectations of the community, the principles of morality, the policies of the organization and such general concerns as the needs of others and fairness. (b) How the products and services of an organization, and the actions of its members, can affect its employees, the community and society as a whole, either positively or negatively. In the present corporate scenario of constant change and global competition, ‘ethics’ is an important factor because it builds trust and confidence in business relationships and a positive image of the company. Ethics programmes cultivate strong teamwork and productivity, support employee recruitment, retention and growth. Unethical actions may result in negative publicity, declining sales and even legal action as demonstrated by the recent corporate scandals leading to the downfall of giant corporations like Enron and Satyam. Following are the benefits of pursuing good business ethics: (i) (ii) (iii) (iv) (v) (vi) (vii)

Helps in building better society Better change management during various economic cycles Strong teamwork and greater productivity Enhanced employee growth Compliance with legal requirements governing personnel policies Lower offences and fines Better value management associated with quality management, strategic planning and diversity management (viii) Stronger public image (c) Written communication provides permanent records which can be checked for accuracy or legal defence. It also promotes uniformity of policy and procedure and builds up proper guidelines for

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the working of the organisation besides building its image. Following are the advantages of written communication in an organisation: (i) (ii) (iii) (iv) (v) (vi)

Better for complex and difficult subjects, facts and opinions Better for keeping records of messages exchanged Provides opportunity to refer back Can be read at receiver’s convenience or pleasure Can be revised before transmitting Can be circulated

6. (a) A company in the eyes of law is regarded as an entity separate from its members. It has an independent corporate existence. Any of its members can enter into contracts with the company in the same manner as any other individual can and he cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The company’s money and property belong to the company, ) and not to the shareholders. ( Further, from the juristic point of view, a company is a legal person distinct from its members. It has its own corporate personality. This principle is referred to as ‘corporate veil’. The Courts in general consider themselves bound by this principle. The effect of this principle is that company has a corporate personality which is distinct from its members. However, if this veil of corporate personality is found to be used blatantly as a cloak for fraud or improper conduct, Courts can break through or lift the corporate veil or disregard the corporate personality of the company to find out the real beneficial owners of all the corporate property. The circumstances or the cases in which the Courts have disregarded the corporate personality of the company are as follows: 1. Protection of revenue Where an assessee in order to evade tax, divided his assets in four private companies and the income was handed back to him as loan, it was held that such an arrangement cannot be allowed. (Sir Dinshaw Manechjee Petit) 2. Prevention of fraud or improper conduct Where an employee was prohibited from soliciting firms’ clients, he formed a private company with his wife and another employee as Directors to achieve the same objective, it was held that such conduct cannot be allowed in the garb of formation of a company. (Gilford Motor Co. vs Horne) 3. Avoidance of specific performance under a contract Where a person in order to evade specific performance of a sale contract transferred a piece of land to a private company formed, held that such a façade was for avoidance of his liability under a contract. (Jones vs Lipman) 4. Enemy character of company Where a company was formed in UK for selling tyres made in Germany, and all its directors were German, during break of world war in 1914, it was held that the company was alien enemy even if it formed and working in UK. (Daimler Co. Ltd. vs Continental Tyre & Rubber Co. GB Ltd.) 5. Economic or other offences Where a company had violated the Central Excise and Salt Act, the court held that the veil of corporate entity could be lifted by adjudicating authorities to find out which of the directors was responsible for evasion of excise duty. (Santanu Ray vs Union of India) 6. Avoidance of welfare legislations Where it was found that the sole purpose of formation of a company was to reduce the amount payable as bonus to workmen, the Supreme Court upheld the piercing of corporate veil. (Workmen of Associate Rubber Industry Ltd. vs Company)

Model Test Paper 1

451

7. Where company is mere sham or cloak Where a promoter formed several companies to defraud its depositors, the Supreme Court regarded all companies as one entity. (DDA vs Skipper Construction Co. Pvt. Ltd.) 8. Protecting public policy The Courts invariably lift the corporate veil or disregard the corporate personality of a company to protect the public policy and prevent transactions contrary to public policy. (Connors vs Connors Ltd.) (b) Sustainable development refers to maintaining development over time. Sustainable development refers to development that meets the needs of the present without compromising the ability of future generations to meet their own needs. A nation or society should satisfy its requirements—social, economic, environmental and others—without jeopardizing the interest of future generations. There is no economic growth without ecological costs. High economic growth means high rate of extraction, transformation and utilization of non-renewable resources. One must realize that increased development and higher GNP are related to environmental damage and resource depletion. Therefore, an element of resource regeneration and positive approach to environment have is to be incorporated in developmental programmes. Business, industry and multinational corporations have to recognize environmental management as the priority area and a key determinant to sustainable development. (c) Groups need effective leadership to achieve their goals. A leader helps in maintaining a participative environment, smooth flow of discussions, keeping planned agenda on track, prevent chaos. There are different leadership styles, which are also determined by the extent of participation of group members. A person can be in-charge of a group without exhibiting any apparent leadership qualities but controlling a group by simply direction and motivation. The leader helps the discussion to flow smoothly and keep the planned agenda on track by moderating diverse views, resolving differences and helping the group to reach logical conclusions in an unanimous way. In the absence of a leader, the whole activity may become chaotic. 7. (a) According to Section 10 of Employees Provident Fund and Miscellaneous Provisions Act, 1952, the amount standing to the credit of any member in the fund or of any exempted employee in a provident fund shall not in any way be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any court in respect of any debt or liability incurred by the member or the exempted employee, and neither the official assignee appointed under the Presidency Towns Insolvency Act nor any receiver appointed under the Provincial Insolvency Act shall be entitled to or have any claim on any such amount. The amounts standing to the credit of aforesaid categories of persons at the time of their death and payable to their nominees under the scheme or the rules vest in nominees, and the amount shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee and shall also not be liable to attachment under any decree or order of any court. (b) A person may become a member of the company in any one of the following ways: 1. By subscribing to the memorandum of association and on the registration of the company getting their names entered as members on the register of members [Section 41]. 2. By making an application to company for purchase of its shares and on valid allotment of shares the name of the shareholder is entered in the register of members [Section 41(2)]. 3. When a director of a public company takes or signs an undertaking to take and pay for his qualification shares [Section 266(2)].

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4. On purchase of shares of a company from any other person and getting them registered with the company, the transferee becomes the member of the company. 5. The legal heirs of a deceased member/shareholder can be registered as a member of the company on the basis of the succession certificate. In common parlance, ‘member’ and ‘shareholder’ are used synonymously. However, these two words can be differentiated on the following grounds: 1. A registered member may not be a shareholder, since a company may not be having share capital. For example, a company limited by guarantee and not having a share capital, does have members but not shareholders. But a registered shareholder is a member, since his name appears in the Register of Members maintained by the company. 2. A person who owns a share warrant (bearer), is not a member since his name does not appear in the Register of Members maintained by the company. He is a shareholder only [Section 115(1)]. 3. A legal representative of a deceased member is a shareholder but not a member, till he applies for registration and his name is entered in the Register of members.

Answer to second alternative According to Section 76 of the Companies Act, 1956, the payment of commission should be authorized by the articles and the amount of commission should not exceed 5% of the price at which the shares have been issued or the amount/rate authorized by the articles whichever is less. In case of debentures, the maximum amount allowed is 2.5%. Therefore, in the given question, the Board of Director’s decision to pay 5% is not valid, since the payment cannot exceed 3% as provided in the Articles of the company. However, the Board can decide to pay the commission out of capital since underwriting commission can be paid both out of capital as well as out of profits. (c) In India, the law for promoting healthy competition in business was introduced way back in 1969. Based on recommendations of Monopolies Enquiry Commission, 1965, MRTP Act was enacted in 1969 and MRTP Commission was set up in 1970. The objectives of the MRTP Act were to prevent concentration of economic power to the common detriment and control of monopolies; to prohibit monopolistic trade practices; and to prohibit restrictive trade practices and unfair trade practices. After the adoption of economic reforms programme, Central Government appointed a committee under the chairmanship of S.V.S. Raghvan which submitted its report in May 2000, proposing scrapping the MRTP Act and enactment of a new Competition Law. The Competition Act, 2002, which passed on 13th January, 2003, is a step towards harmonizing international trade policy. The Competition Act overrides any other law and shall be in addition to, and not in derogation of, any other law for the time being in force. This Act extends to the whole of India except the State of Jammu and Kashmir. The central economic goal of the Competition Act is the preservation and promotion of the competitive process. The objective of the Competition Act is: 1. To provide for establishment of a commission to prevent practice having adverse effect on competition 2. To promote and sustain competition in market

Model Test Paper 1

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3. To protect the interest of consumers 4. To ensure freedom of trade carried on by other participants in markets

Answer to second alternative Business and industry are closely linked with environment and resource utilization. Production process and strategy for eco-friendly technologies throughout the product life cycle and minimization of waste can play a major role in protecting the environment and conservation of resources. Business, industry and multinational corporations have to recognize environmental management as the priority area and a key determinant to sustainable development. The benefits of adopting eco-friendly practices are as follows: 1. The goals of reduction in wastage and resources depletion can be achieved. 2. Environmental issues can be incorporated in the process of developing a product improves corporate performance. 3. Eco-friendly practices results in more savings, e.g., process of recycling of the waste. 4. Business firms will be able to create wealth if they respond to the challenges of sustainable development as unsustainable products will become obsolete. 5. Proper environmental costs can be reflected with the help of green accounting system and even consumer would adjust market behaviour in a way that would reduce damage to environment. 6. Business firms using eco-friendly practices will gain competitive knowledge. 7. Sound management of wastes is among the major environmental issues maintaining the quality of environment and achieving sustainable development. (d) Guidelines for Active Listening: 1. Pay attention to speaker and stop doing other things to avoid any distraction. 2. Understand the other persons’ concerns and intentions. 3. Be interested in what the person is saying and if required take notes. 4. Pay attention to non-verbal cues of speaker; look at gestures and body language. 5. Reconfirm what the person has said and what has been understood. 6. Wherever required, ask questions to clarify any doubt and also to be alert. 7. Do not cloud the perception of what is being said by your own feelings and opinions.

Answer to second alternative Three styles are generally used: full block, modified block and semi-block. The main difference amongst these three styles are: (a)

All lines including date line are set flush with the left margin. Paragraph is not indented.

(b)

Date line is flush with right margin. Inside address, salutation, reference lines and paragraphs set flush with the left margin. Paragraph is not indented. Complimentary close and signature are aligned with the date. (c) Date line, inside address and salutation are set flush with the left margin. Each paragraph is indented. Complimentary close and signature line are to the right of the page.

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MODEL TEST PAPER 2 (CA PCC/IPCC) (with suggested answers) Total No. of Questions: 7 Time Allowed: Three Hours Maximum Marks: 100

Question No. 1 is compulsory. Attempt any five questions from the remaining six questions. 1. (a) Briefly discuss the provisions relating to constitution of National Company Law Tribunal and National Company Law Appellate Tribunal. 5 (b) (I) State whether the following statements are correct or incorrect: 2¥1 (i) A minor cannot be appointed as an agent. (ii) Where there are co-sureties, a release by the creditor of one of them does not discharge the others. (II) Pick up the correct answer from the following: (a) In case of void agreements, collateral transactions are (i) Also void (ii) Unenforceable (iii) Not affected (iv) Illegal

3¥1

(b) A contract of insurance is (i) Contingent contract (ii) Wagering agreement (iii) Contract of guarantee (iv) Unilateral agreement (c) ‘X’ signs the instrument in the following manner. State the instrument that cannot be considered as promissory note: (i) I promise to pay Y or order ` 5,000. (ii) I acknowledge myself to be indebted to Y ` 5,000 to be paid on demand, for value received. (iii) I promise to pay Y ` 5,000 after three months. (iv) I promise to pay Y ` 5,000 seven days after my marriage with Z. (c) ABC Limited received a cheque for ` 25,000 from one of its customers. After a week of depositing the cheque with its bankers, the company came to know that the proceeds were not credited to its bank account due to some ‘defects’. What can be the possible defects due to which a cheque cannot be collected? 5

Model Test Paper 2

455

(d) A, B and C are partners in a firm. They jointly promise to pay ` 1,50,000 to X. Later on, C became insolvent and his private assets are sufficient to pay only 1/5th of his share of debts. A is compelled to pay the whole amount to X. Examining the provisions of the Indian Contract Act, 1872, decide the extent to which A can recover an amount from B. 5 2. (a) State with reasons whether the following persons are entitled to receive bonus under the Payment of Bonus Act, 1965: 6 (i) An apprentice under the Apprentice Act (ii) A probationer (iii) An employee employed through contractors on building operations (iv) A retrenched employee (v) A dismissed employee reinstated with back wages (vi) A piece-rated worker (b) State the provisions of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, regulating the quantum of contribution to be made by the employer and employee to the provident fund. Is it possible for an employee to increase the amount of his contribution to the provident fund more than the minimum contribution as statutorily prescribed? 5 (c) What is meant by ‘corporate governance’? State the major ‘characteristics’ of good corporate governance. 5 3. (a) X was an employee of ABC Ltd. The whole of the undertaking of ABC Ltd. was taken over by a new company PQR Ltd. The services of X remained continuous in the new company. After serving for one year, X met with an accident and became permanently disabled. X applied to the new company for the payment of gratuity. The company refused to pay gratuity on the ground that X has served only for a year in the company. Examine the validity of the refusal of the new company in the light of the provisions of the Payment of Gratuity Act, 1972. 8 (b) What is meant by ‘critical thinking’? How shall you develop critical thinking? 8 4. (a) Modi Industries Ltd. convened its Board of Directors meeting on 1st August, 2011. During the course of the meeting, the date for calling Annual General Meeting was discussed but no decision could be taken on it in the meeting. However, the Secretary of the company issued the notice for calling the Annual General Meeting of the shareholders without taking any authorization from the Board of Directors. State who is the proper authority to issue the notice for calling the Annual General Meeting and to whom such notice is to be given. 8 (b) How can a company create sound ethical environment in order to avoid corporate scandals? 4 (c) As a secretary of Indo-German Tractors Ltd., draft a notice of a board of directors meeting to consider any five items as agenda of the meeting, to be held on 15th September, 2011, at the registered office of the Company at Indore. 4 5. (a) Explain as to why the combination of ‘Not negotiable’ with ‘Account payee’ crossing is considered as the safest form of crossing a cheque. 8 (b) What is meant by ‘environmental ethics’? How does their non-adoption leads to three Ps, viz.. Polluter, Pay and Principles? Explain. 4 (c) What do you understand by ‘group conflicts’? How can these be managed effectively? 4

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6. (a) What is E-filing? List at least six advantages of E-filing under MCA 21. 8 (b) Explain in brief the measures to ensure ethics in the workplace. 4 (c) What is meant by ‘emotional intelligence’ and ‘emotional quotient’? State any three social competencies associated with emotional intelligence. 4 7. (a) Describe in brief the mode of transfer of balance to the credit of Provident Fund Account of an employee leaving one organization and joining another, to the new employer under the provisions of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. 4 (b) A charge requiring registration with Registrar of Companies was created on 1st February, 2011 by XYZ Limited. The Secretary of the Company realized on 15th March, 2011 that the charge was not filed with the Registrar. State the steps to be taken by the Secretary to get the charge registered with the Registrar. 4 (c) Explain the role played by different committees in regulating the ‘corporate governance’. 4 (d) Draft a ‘Power of Attorney’ by subscribers of Memorandum of Association of the Company authorizing a Chartered Accountant to appear before the Registrar of Companies to do the needful for the purpose of incorporation of the company. 4

Suggested answers 1. (a) The Central Government is empowered, under Section 10FB of the Companies Act, 1956, to constitute a National Company Law Tribunal (NCLT) to exercise and discharge such powers and functions as may be conferred on it by or under the Companies Act or any other law for the time being in force. According to Section 10FC, the structure of NCLT shall be: (a) President—Judge of a High Court (b) Members not exceeding 62—Judicial and Technical Members to be appointed by the Government by notification in the official gazette. The term of office of President and Members shall be 3 years and shall be eligible for re-appointment. The retiring age of President shall be 67 years and that of Member shall be 65 years. An appeal shall lie against the order of NCLT to National Company Law Appellate Tribunal within a period of 45 days from the date of receipt of the order of NCLT, or such extended time as allowed by Appellate Tribunal. The Central Government is empowered, under Section 10FR of the Companies Act, 1956, to constitute a National Company Law Appellate Tribunal (NCLAT) for hearing appeals against the orders of NCLT. According to Section 10FR, the structure of NCLAT shall be: (a) Chairperson—Judge of Supreme Court or Chief Justice of a High Court (b) Members not exceeding 2 A Member of the Appellate Tribunal shall be a person of ability, integrity and standing having special knowledge of, and professional experience of not less than 25 years in science, technology, economics, banking, industry, law, matters relating to labour, industrial finance, industrial management, industrial reconstruction, administration, investment, accountancy, marketing or any other matter, the special knowledge of, or professional experience in which, would be in the opinion of the Central Government useful to the Appellate Tribunal. The term of office of Chairperson and Members shall be 3 years and shall be eligible for reappointment.The retiring age of President shall be 70 years and that of Member shall be 67 years.

Model Test Paper 2

(b) (I)

457

(i) Incorrect. According to Section 184 of Indian Contract Act, 1872, any person can become an agent but a minor is not responsible to the principal. (ii) Correct. Section 138 of Indian Contract Act, 1872 lays down this rule.

(II) (a) (iii) Not affected. (b) (i) Contingent contract. (c) (iv) I promise to pay, B ` 5,000/- seven days after my marriage with Z. (c) A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in electronic form. Possible defects in a cheque which can lead to its non-collection can be:

(d) When two or more persons make a joint promise, the promisee may in the absence of express agreement to the contrary, compel anyone or more of such joint promisors to perform the whole of the promise. In such a situation the performing promisor can enforce contribution from other joint promisors [Sec. 43 of Indian Contract Act]. If anyone or more joint promisors make default in such contribution, the remaining joint promisors must bear the loss arising from such default on equal shares. Therefore, in given question, A is entitled to receive the following amounts: (a) from C’s assets—Rs 10,000 (1/5th of ` 50,000 being C’s 1/3rd share of total debt) (b) from B—Rs 70,000 (Rs 50,000 being his own share + Half of the total loss of ` 40,000 due to C’s insolvency) 2. (a)

(i) An Apprentice under the Apprentice Act is not entitled to bonus, as specifically excluded from the definition of ‘Employee’ under section 2(13). (ii) A probationer is an employee and as such is entitled to bonus provided he has worked in the establishment for not less than 30 working days in the accounting year (Section 8). Confirmation of the employee is not a necessary requirement. (iii) An employee employed through contractors on building operations is entitled to bonus w.e.f. 27.10.2007. (iv) A retrenched employee is eligible to get bonus provided he has worked for minimum qualifying period. (East Asiatic Co. (P.) Ltd. vs Industrial Tribunal).

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(v) A dismissed employee reinstated with back wages is entitled to bonus (Gammon India Ltd. vs Niranjan Das). (vi) A piece-rated worker is entitled to bonus (Mathuradas Kani vs L.A. Tribunal AIR). (b) Section 6 of the EPF and MP Act, 1952, regulates contribution to Provident Fund Scheme established under the Act. The employer’s contribution shall be 10% of the basic wages, dearness allowance and retaining allowance, if any. The employee’s contribution shall be equal to the contribution payable by the employer in respect of him. Dearness allowance includes cash value of any food concession allowed to the employees. Retaining allowance means the sum paid for retaining the service, when the factory is not working. The Central Government may by notification make the employer’s contribution equal to 12% for certain establishments class of establishment. The above rule will prevail irrespective of whether the employer employs the person directly or through contractor. An employee can at his will voluntarily contribute, beyond 10% or 12%. But the employer shall not be under an obligation to pay any contribution over and above his contribution payable under Section 6 of the said Act. (c) ‘Governance’ means the process of decision-making and the process by which decisions are implemented. Corporate governance can be defined as the formal system of accountability and control for ethical and socially responsible organisational decisions and use of resources. Accountability relates to how well the content of workplace decisions is aligned with the organisations strategic direction. Control involves the process of auditing and improving organisation decisions and actions. Good corporate governance has the following major characteristics: (i) Participatory (ii) Consensus oriented (iii) Accountable (iv) Transparent (v) Responsive (vi) Effective and efficient (vii) Equitable and inclusive; and (viii) Follows the rule of law 3. (a) According to Section 4(1) of the Payment of Gratuity Act, 1972, gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years on his superannuation, or, on his retirement or resignation or on his death or disablement due to accident or disease. The condition of the completion of five years of continuous service is not essential in case of the termination of the employment of any employee due to death or disablement for the purpose of this section. Disablement means such disablement as incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement. In the given question, X is entitled to recover gratuity after becoming permanently disabled, and continuous service of five years is not required in this case. Hence, the company cannot refuse to pay gratuity on the ground that he has served only for a year.

Model Test Paper 2

459

(b) Critical thinking is the discipline of rigorously and skilfully using information, experience, observation and reasoning to guide one’s decisions, actions and beliefs. Critical thinking refers to the act of questioning every step of the thinking process, for example, have you considered all the facts, have you tested your assumptions, is your reasoning sound, can you be sure your judgment is unbiased, is your thinking process logical, rational and complete, and so on. To develop as a critical thinker, one must be motivated to develop the following attributes: 1. Open-minded: Readiness to accept and explore alternative approaches and ideas. 2. Well-informed: Knowledge of the facts and what is happening on all fronts. 3. Experimental: Thinking through ‘what if’ scenarios to create probable options and then test the theories to determine what will work and what will not be acceptable. 4. Contextual: Keeping in mind the appropriate context in the course of analyses, apply factors of analysis that are relevant or appropriate. 5. Reserved in making conclusion: Knowledge of when a conclusion is a ‘fact’ and when it is not; only true conclusions support decisions. 4. (a) The Annual General Meeting of a company can be called by a proper authority, which is Board of Directors of the company. It cannot be called by any individual director or some of the directors or by Company Secretary. Therefore, in the given case, the secretary of Modi Industries Ltd. is not authorized to call Annual General Meeting of the company. However, a notice that has been so issued without authority may be ratified by the Board of Directors before the Annual General Meeting. Notice of AGM must be in writing and should be given to: (a) Every member of the company (b) In case of insolvent member, to his assignee (c) In case of deceased member to his representative (d) Company’s Auditors (e) A legally entitled representative (f) In case of joint holders, that joint holder whose name is first in the register of members or in record of depository (g) Stock exchange, in case the company is a listed company In addition to the above, the copy of notice is to be sent to financial institutions, foreign collaborators, and trustees for holders of debentures, if company has entered into any agreement with them, which may provide for sending of notices of general meeting to them. (b) A sound ethical environment in a company may be created and corporate scandals may be avoided by adopting the following methods: 1. Ensuring that employees are aware of their legal and ethical responsibilities. 2. Providing a communication system between the management and employees so that anyone in the company can report fraud and mismanagement without the fear of being reprimanded. 3. Ensuring fair treatment to those who act as whistleblowers. 4. Rewarding and appreciating employees for their ethical behaviour so that examples can be created for others to follow.

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(c)

Indo-German Tractors Ltd. Regd. Office: ____________ Indore. Date: 1st September, 2011 Notice for Meeting of Board of Directors Dear Sir/Madam, This is to inform you that a meeting of the board of directors will be held on 15th Septmeber, 2011, at the Registered Office of the company, --------, Indore at 10.30 AM to consider the following: 1. To approve the minutes of the last meeting 2. To consider matters arising out of the minutes 3. To approve the annual accounts of the company for the financial year 2010–11. 4. To sanction an interim dividend @ 10% (tax free) on the equity shares of ` 10 each 5. To approve transfer of shares 6. To approve the date and venue for the Annual General Meeting of the company 7. To consider any other matter with the permission of the chair Yours faithfully Company Secretary

5. (a) The general rule of negotiable instruments is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. However, according to Section 130 of the Negotiable Instruments Act, 1881, a person who takes a cheque bearing ‘not negotiable’ crossing shall not have, and shall not be capable of giving a better title to the cheque which the person from whom he took it had. ‘Account payee’ crossing directs the collecting banker to collect it for the payee only and warns that if the amount is collected for someone else, the bank may be held liable for damages. In view of the above protections available, the combination of ‘not negotiable’ and ‘account payee’ crossing can be considered as the safest form of crossing. (b) Pollution indicates dangerous contamination of environment. Out of variety of pollution, contamination of air leads to destruction of natural and botanical resources due to various chemical pollutants like cadmium, vanadium, etc. The destruction of forest wealth results in depletion of ozone causing innumerable hazards and incurable diseases like leukaemia. Similarly, global warming emanates various oxides and acids which directly affect oceanic species and standing crops. Likewise, land and water are polluted by toxic materials, or lead, mercury and so on. Industrial toxic chemicals used in production of plastics cause cancer, liver damage, pre-natal and post-natal diseases. Depletion of fossil fuels adds to the cause of extinction of rare species on the earth. Unless and until, the policy of recycling the wastes by improved technological methods is developed, various ecological and environment problems are bound to arise. To overcome all these, a principle to assess the value of these factors and incorporate them in the account, which is called green accounting

Model Test Paper 2

461

system, by adopting built in environmental consideration measures taken to minimize the waste of natural resources and energy and rescue wastes, environment-friendly living is difficult. Unless commitment is made by produces, the implementation of 3Ps, namely Polluter, Pay, and Principles, should be enforced to stop all subsidies. (c) Group conflict is an ‘express struggle’ between two interdependent parties who perceive incompatible goals, scarce resources and interference from the other party in achieving their goals. There are two aspects in relation to conflict: 1. Expression: The two sides must communicate/express about the problem for there to be conflict. 2. Perception: Conflict evolves perceptions in the two sides may only perceive that their goals, resources, and interference are incompatible with each other’s. The climate in which conflict is managed is important. It is essential to plan communications to foster a supportive climate, marked by emphasis on: (i) Presenting ideas or options (ii) Problem orientation—focusing attention to the task (iii) Spontaneity—communicating openly and honestly (iv) Empathy—understanding another person’s thoughts (v) Equality—asking for opinions (vi) Willing to listen to the ideas of others Successfully managed conflicts can be constructive and can strengthen relationships in an organisation. 6. (a) The term ‘e-filing’ indicates the process of getting services electronically with a comprehensive online portal. The advantages of e-filing under MCA-21 are: 1. Instant registration of companies 2. Simplified and more facile method of filing documents 3. Total transparency 4. Easier and better compliance of regulations 5. Utmost customer care 6. Authentic and reliable filling of forms/returns through professionals 7. Centralized database management 8. Better service availability 9. Filing and inspection of documents anywhere and anytime 10. Quick redressal of investor grievances 11. Supervisor and monitoring of compliance made easier (b) The focus on core values and sound ethics, the hallmark of ethical management, is being recognized as an important way to ensure the long-term effectiveness of governance structures and procedures and avoid the need for whistle-blowing. Employers who understand the importance of workplace ethics, provide their workforce with an effective framework and guiding principles to identify and address ethics issues as they rise. Measures to ensure ethics in the workplace are: 1. Establishing a code of conduct and ethics 2. Establish open communication 3. Make ethics decisions in group and make decision public as appropriate

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Law, Ethics and Communication

4. Integrate ethics management with other management practices 5. Use of cross-functional terms when developing and implementing the ethics management programme 6. Appointing an ombudsman 7. Creating an atmosphere of trust 8. Regularly updating of policies and procedures 9. Include a grievance policy for employees 10. Set an example from the top (c) Emotional intelligence refers to the capacity to recognizing your own feelings and those of others, for motivating yourself and for managing emotions well in yourself and in your relationships. It describes abilities distinct from but complementary to academic intelligence, the purely cognitive capabilities measured by IQ. Many people who look smart but lack emotional intelligence end up working for people who have lower IQs than they but who excel in emotional intelligence skills. Emotional quotient (EQ) inventory is designed to measure a nature of constructs related to emotional intelligence. EQ is the ability to make deeper connections at three levels—with ourselves (personal mastery), with another person (one-to-one) and within groups/teams. Our EQ or emotional intelligence is the capacity for effectively recognizing and managing our own emotions and those of others. Social competencies associated with emotional intelligence are as follows: 1. Empathy: Sensing others’ emotions, understanding their perspective and taking active interest in their concerns. 2. Organizational awareness: Leading the current decision, networks and politics at the organizational level. 3. Service: Recognizing and meeting follower, client or customer needs. 7. (a) According to Section 17A of the Employee’s Provident Funds and M.P. Act, 1952, where an employee of an establishment to which this Act applies leaves his employment and obtains re-employment in another establishment to which this Act does not apply, the amount of accumulations to the credit of such employee in the Fund or, as the case may be, in the provident fund in the establishment left by him shall be transferred to the credit of his account in the provident fund of the establishment in which he is re-employed, if the employee so desires and the rules in relation to that provident fund permit such transfer. Conversely, when an employee of an establishment to which this act does not apply leaves his employment and obtains re-employment in another establishment to which this Act applies, the amount of accumulations to the credit of such employee in the provident fund of the establishment left by him, if the employee so desires and the rules in relation to such provident fund permit, may be transferred to the credit of his account in the fund or as the case may be, in the provident fund of the establishment in which he is re-employed. (b) A charge should be registered within 30 days after the date of its creation [Section 125 (11)]. In the given question, the charge was created on 1st Feb., 2011. Hence, the particulars of charge are required to be filed with the Registrar on or before 3rd March, 2011. The Secretary of the company realized only on 15th March, 2011, that the charge was not filed with the Registrar. It is, however, open to the Registrar to allow the particulars of the charge to be filed within 30 days next following the expiry of the period of 30 days if the company satisfies the Registrar that it had sufficient cause for not filling

Model Test Paper 2

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the particulars within 30 days [Proviso to Section 125(1)]. The Secretary may take advantage of this provision and immediately file the particulars of charge with the Registrar giving adequate reasons for the delay. If the Registrar is satisfied, he may allow registration on payment of additional fee. (c) The core roles of the various committees in regulation of corporate governance are as follows: 1. Board of Directors The Board’s role is that of trusteeship to protect and enhance shareholders value through strategic supervision. The strategy should aim at accountability and fulfilment of goals. 2. Audit Committee They have to provide assurance to Board on adequacy of internal control systems and financial disclosures. 3. Compensation Committee The committee has to recommend to the Board compensation terms for executive Directors and the senior most level of management below the Executive Directors. 4. Nomination Committee It is to recommend to the Board nominations for membership of the Corporate Management Committee and the Board, and oversee succession to the senior most level of management below the Executive Directors. 5. Investor Services Committee It is to look into redressal of shareholders’ and investors’ grievances, approval of transmissions, sub-division of shares, issue of duplicate shares, and so on. 6. Corporate Management Committee Its primary role is strategic management of company’s businesses within Board’s approved direction/framework. 7. Divisional Management Committee It is to realize tactical and strategic objectives in accordance with Corporate Management Committee/Board approved plan. (d) POWER OF ATTORNEY We, the subscribers to the Memorandum and Articles of Association of the proposed___________ Company, hereby authorize __________ to present the Memorandum of Articles of Association and other connected documents for the registration of the said company before the Registrar of Companies, Punjab, HP & J&K to make such corrections/alternations/deletions/additions as may be required to be done by the Registrar in the documents and also to receive the certificate of incorporation. Place: Signatures Date: I, ________________ hereby declare that I am duly qualified to represent the above-mentioned person. Place: Date: (Signatures and Address of Power of attorney holder)