MOST IMPORTANT QUESTIONS

Most Important Questions

Part A – Direct Questions

1. What is the structure of the Indian Judicial System, and what is the hierarchy
of courts in India?

Sol. When there is a dispute between citizens or between citizens and the
Government, these disputes are resolved by the judiciary.
The functions of judiciary system of India are:
• Regulation of the interpretation of the Acts and Codes,
• Dispute Resolution,
• Promotion of fairness among the citizens of the land.
In the hierarchy of courts, the Supreme Court is at the top, followed by the High
Courts and District Courts. Decisions of a High Court are binding in the
respective state but are only persuasive in other states. Decisions of the
Supreme Court are binding on all High Courts under Article 141 of the Indian
Constitution. In fact, a Supreme Court decision is the inal word on the matter.
(i) Supreme Court
The Supreme Court is the apex body of the judiciary. The Chief Justice of
India is the highest authority appointed under Article 126. The principal
bench of the Supreme Court consists of seven members including the Chief
Justice of India.
(ii) High Court
The highest court of appeal in each state and union territory is the High
Court. Article 214 of the Indian Constitution states that there must be a
High Court in each state. The High Court has appellant, original
jurisdiction, and Supervisory jurisdiction. However, Article 227 of the
Indian Constitution limits a High Court’s supervisory power.
(iii) District Court
Below the High Courts are the District Courts. The Courts of District Judge
deal with Civil law matters i.e. contractual disputes and claims for
damages etc., The Courts of Sessions deals with Criminal matters.
Under pecuniary jurisdiction, a civil judge can try suits valuing not more
than Rupees two crore.
(iv) Metropolitan courts
Metropolitan courts are established in metropolitan cities in consultation
with the High Court where the population is ten lakh or more. Chief
Metropolitan Magistrate has powers as Chief Judicial Magistrate and
Metropolitan Magistrate has powers as the Court of a Magistrate of the
irst class.

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2. What is Law and what is the process of making a law?

Sol. What is Law?

Law is a set of obligations and duties imposed by the government for securing
welfare and providing justice to society. India’s legal framework re lects the
social, political, economic, and cultural aspects of our vast and diversi ied
country.
The Process of Making a Law
(i) When a law is proposed in parliament, it is called a Bill.
(ii) After discussion and debate, the law is passed in Lok Sabha.
(iii) Thereafter, it has to be passed in Rajya Sabha.
(iv) It then has to obtain the assent of the President of India.
(v) Finally, the law will be noti ied by the Government in the publication
called the Of icial Gazette of India.
(vi) The law will become applicable from the date mentioned in the
noti ication as the effective date.
(vii) Once it is noti ied and effective, it is called an Act of Parliament.

3. Describe in brief about the following Regulatory bodies of the Government

of India: -
(i) Securities and Exchange Board of India
(ii) Reserve Bank of India
(iii) Insolvency and Bankruptcy Board of India

Sol.
(i) The Securities and Exchange Board of India (SEBI):
• It is the regulatory body
• for securities and commodity market in India
• under the ownership of Ministry of Finance within the Government of
India.
• It was established on 12 April, 1988 as an executive body and was given
statutory powers on 30 January, 1992 through the SEBI Act, 1992.

(ii) Reserve Bank of India (RBI):

• It is India's Central Bank and regulatory body responsible for regulation of
the Indian banking system.
• It is under the ownership of Ministry of Finance, Government of India.
• It is responsible for the control, issue and maintaining supply of the Indian
rupee.
• It also manages the country's main payment systems and works to
promote its economic development.
• Bharatiya Reserve Bank Note Mudran (BRBNM) is a specialised division of
RBI through which it prints and mints Indian currency notes (INR) in two
of its currency printing presses located in Nashik (Western India) and
Dewas (Central India).

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• RBI established the National Payments Corporation of India as one of its

specialised division to regulate the payment and settlement systems in
India.
• Deposit Insurance and Credit Guarantee Corporation was established by
RBI as one of its specialised division for the purpose of providing
insurance of deposits and guaranteeing of credit facilities to all Indian
banks.

(iii) Insolvency and Bankruptcy Board of India (IBBI)-

• It is the regulator for overseeing insolvency proceedings and entities like
Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and
Information Utilities (IU) in India.
• It was established on 1 October 2016 and given statutory powers through
the Insolvency and Bankruptcy Code, which was passed by Lok Sabha on
5th May 2016.
• It covers Individuals, Companies, Limited Liability, Partnerships and
Partnership irms. The new code will speed up the resolution process for
stressed assets in the country.
• It attempts to simplify the process of insolvency and bankruptcy
proceedings.
• It handles the cases using two tribunals like NCLT (National Company Law
Tribunal) and Debt Recovery Tribunal.

4. Explain the types of laws in the Indian Legal System considering the Indian
Regulatory Framework.

Sol. The laws in the Indian legal system could be broadly classi ied as follows:

Criminal Law

Criminal law is concerned with laws pertaining to violations of the rule of law or public
wrongs and punishment of the same. Criminal Law is governed under the Indian Penal
Code, 1860, and the Code of Criminal Procedure, 1973 (CrPC). The Indian Penal Code,
1860, de ines the crime, its nature, and punishments whereas the Criminal Procedure
Code, 1973, de ines exhaustive procedure for executing the punishments of the crimes.
Murder, rape, theft, fraud, cheating and assault are some examples of criminal offences
under the law.

Civil Law

Matters of disputes between individuals or organisations are dealt with under Civil Law.
Civil courts enforce the violation of certain rights and obligations through the institution
of a civil suit. Civil law primarily focuses on dispute resolution rather than punishment.
The act of process and the administration of civil law are governed by the Code of Civil

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Procedure, 1908 (CPC). Civil law can be further classi ied into Law of Contract, Family
Law, Property Law, and Law of Tort.
Some examples of civil offences are breach of contract, non-delivery of goods, non-
payment of dues to lender or seller defamation, breach of contract, and disputes
between landlord and tenant.

Common Law

A judicial precedent or a case law is common law. A judgment delivered by the Supreme
Court will be binding upon the courts within the territory of India under Article 141 of
the Indian Constitution. The doctrine of Stare Decisis is the principle supporting
common law. It is a Latin phrase that means “to stand by that which is decided.” The
doctrine of Stare Decisis reinforces the obligation of courts to follow the same principle
or judgement established by previous decisions while ruling a case where the facts are
similar or “on all four legs” with the earlier decision.

Principles of Natural Justice

Natural justice, often known as Jus Natural deals with certain fundamental principles of
justice going beyond written law. Nemo judex in causa sua (Literally meaning “No one
should be made a judge in his own cause, and it’s a Rule against Prejudice), audi alteram
partem (Literally meaning “hear the other party or give the other party a fair hearing),
and reasoned decision are the rules of Natural Justice. A judgement can override or alter
a common law, but it cannot override or change the statute.

5. How the law is enforced after passing ?

After a law is passed in parliament it has to be enforced. Somebody should monitor
whether the law is being followed. This is the job of the executive. Depending on whether
a law is a Central law or a State law the Central or State Government will be the enforcing
authority. For this purpose government functions are distributed to various ministries.
Some of the popular Ministries are the Ministry of Finance, the Ministry of Corporate
Affairs, the Ministry of Home Affairs, the Ministry of Law and Justice and so on. These
Ministries are headed by a minister and run by of icers of the Indian administrative and
other [Link] Government of India exercises its executive authority through a
number of Government Ministries or Departments of State. A Ministry is composed of
employed of icials, known as civil servants, and is politically accountable through a
minister. Most major Ministries are headed by a Cabinet Minister, who sits in the Union
Council of Ministers, and is typically supported by a team of junior ministers called the
Ministers of [Link] example, the Income Tax Act is implemented and enforced by the
Ministry of Finance through the Central Board for Direct Taxes coming under the
Department of Revenue and is administered by the of icers of the Indian Revenue Service.

6. All contracts are agreements, but all agreements are not contracts”.
Comment.

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Sol. An agreement comes into existence when one party makes a proposal or offer to the
other party and that other party gives his acceptance to it.
A contract is an agreement enforceable by law. It means that to become a contract
an agreement must give rise to a legal obligation i.e. duty enforceable by law.
If an agreement is incapable of creating a duty enforceable by law, it is not a contract.
There can be agreements which are not enforceable by law, such as social, moral or
religious agreements.
The agreement is a wider term than the contract. All agreements need not
necessarily become contracts but all contracts shall always be agreements.
All agreements are not contracts: When there is an agreement between the parties
and they do not intend to create a legal relationship, it is not a contract.
All contracts are agreements: For a contract there must be two things
(a) an agreement and (b) enforceability by law.
Thus, existence of an agreement is a pre- requisite existence of a contract.
Therefore, it is true to say that all contracts are agreements.
Thus, we can say that there can be an agreement without it becoming a
contract, but we can’t have a contract without an agreement.

7. As per the general rule, "Stranger to a contract cannot ile a suit in case of
breach of contract". Comment and explain the exceptions to this rule as per
the provisions of the Indian Contract Act, 1872.

Sol. Under the Indian Contract Act, 1872, the consideration for an agreement may
proceed from a third party; but the third party cannot sue on contract. Only a
person who is party to a contract can sue on it.
The aforesaid rule, that stranger to a contract cannot sue is known as a
“doctrine of privity of contract”, is however, subject to certain exceptions. In
other words, even a stranger to a contract may enforce a claim in the following
cases:
(1) In the case of trust, a bene iciary can enforce his right under the trust,
though he was not a party to the contract between the settler and the
trustee.
(2) In the case of a family settlement, if the terms of the settlement are
reduced into writing, the members of family who originally had not been
parties to the settlement, may enforce the agreement.
(3) In the case of certain marriage contracts/arrangements, a provision
may be made for the bene it of a person, who may ile a suit though he is
not a party to the agreement.
(4) In the case of assignment of a contract, when the bene it under a
contract has been assigned, the assignee can enforce the contract but such
assignment should not involve any personal skill.

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(5) Acknowledgement or estoppel – Where the promisor by his conduct

acknowledges himself as an agent of the third party, it would result into a
binding obligation towards third party.
(6) In the case of covenant running with the land, the person who
purchases land with notice that the owner of land is bound by certain
duties affecting land, the covenant affecting the land may be enforced by
the successor of the seller.
(7) Contracts entered into through an agent: The principal can enforce the
contracts entered by his agent where the agent has acted within the scope
of his authority and in the name of the principal.

8. De ine consideration. What are the legal rules regarding consideration

under the Indian Contract Act, 1872?

Sol. Consideration [Section 2(d) of the Indian Contract Act, 1872]: When at the
desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing or promises to do or abstain from
doing something, such an act or abstinence or promise is called consideration
for the promise.
Legal Rules Regarding Consideration
(i) Consideration must move at the desire of the promisor: Consideration
must be offered by the promisee or the third party at the desire or request
of the promisor. This implies “return” element of consideration.
(ii) Consideration may move from promisee or any other person: In India,
consideration may proceed from the promisee or any other person who is
not a party to the contract. In other words, there can be a stranger to a
consideration but not stranger to a contract.
(iii) Executed and executory consideration: A consideration which consists
in the performance of an act is said to be executed. When it consists in a
promise, it is said to be executory. The promise by one party may be the
consideration for an act by some other party, and vice versa.
(iv) Consideration may be past, present or future: It is a general principle
that consideration is given and accepted in exchange for the promise. The
consideration, if past, may be the motive but cannot be the real
consideration of a subsequent promise. But in the event of the services
being rendered in the past at the request or the desire of the promisor, the
subsequent promise is regarded as an admission that the past
consideration was not gratuitous.
(v) Consideration need not be adequate: Consideration need not to be of
any particular value. It need not be approximately of equal value with the
promise for which it is exchanged but it must be something which the law
would regard as having some value.

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(vi) Performance of what one is legally bound to perform: The

performance of an act by a person who is legally bound to perform the
same cannot be consideration for a contract. Hence, a promise to pay
money to a witness is void, for it is without consideration. Hence, such a
contract is void for want of consideration.
(vii) Consideration must be real and not illusory: Consideration must be
real and must not be illusory. It must be something to which the law
attaches some value. If it is legally or physically impossible it is not
considered valid consideration.
(viii) Consideration must not be unlawful, immoral, or opposed to public
policy: Only presence of consideration is not suf icient it must be lawful.
Anything which is immoral or opposed to public policy also cannot be
valued as valid consideration.

9. What are the conditions need to be ful illed to make the following
agreements valid without consideration as per the provisions of the Indian
Contract Act, 1872?
(A)Agreement made based on natural love and affection
(B)Promise to pay time-barred debts

Sol. (A) Agreement made based on natural love and affection: Conditions to be
ful illed under section 25(1) of the Indian Contract Act, 1872

(i) It must be made out of natural love and affection between the parties.
(ii) Parties must stand in near relationship to each other.
(iii) It must be in writing.
(iv) It must also be registered under the law.

A written and registered agreement based on natural love and affection between
the parties standing in near relation (e.g., husband and wife) to each other is
enforceable even without consideration.

(B) Promise to pay time barred debts: Where a promise in writing signed by the
person making it or by his authorised agent, is made to pay a debt barred by
limitation it is valid without consideration [Section 25(3)].

10. Explain the terms “Traf icking relating to public of ices and titles” and
“Sti ling prosecution” as per the Indian Contract Act, 1872.

Sol. Traf icking relating to Public Of ices and titles: An agreement to traf icking
in public of ice is opposed to public policy, as it interferes with the appointment
of a person best quali ied for the service of the public. Public policy requires
that there should be no money consideration for the appointment to an of ice

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in which the public is interested. The following are the examples of agreements
that are void since they are tantamount to sale of public of ices.
(1) An agreement to pay money to a public servant in order to induce him to
retire from his of ice so that another person may secure the appointment
is void.
(2) An agreement to procure a public recognition like Padma Vibhushan for
reward is void.
Sti ling Prosecution: An agreement to sti le prosecution i.e. “an agreement to
present proceedings already instituted from running their normal course using
force” tends to be a perversion or an abuse of justice, therefore, such an
agreement is void. The principle is that one should not make a trade of felony.
The compromise of any public offence is generally illegal.
For example, when a party agrees to pay some consideration to the other party
in exchange for the later promising to forgo criminal charges against the former
is an agreement to sti le prosecution and therefore is void.
Under the Code of Criminal Procedure, there is however, a statutory list of
compoundable offences and an agreement to drop proceeding relating to such
offences with or without the permission of the Court, as the case may be, in
consideration the accused promising to do something for the complainant, is
not opposed to public policy.

11. Explain the term Wagering agreement in the light of the Indian Contract Act,
1872. Also, explain some transactions resembling wagering transaction but
which are not void.

Sol. Wagering agreement (Section 30 of the Indian Contract Act, 1872):

An agreement by way of a wager is void. It is an agreement involving payment
of a sum of money upon the determination of an uncertain event. The essence
of a wager is that each side should stand to win or lose, depending on the way
an uncertain event takes place in reference to which the chance is taken and in
the occurrence of which neither of the parties has legitimate interest.
Transactions resembling with wagering transaction but are not void
(i) Chit fund: Chit fund does not come within the scope of wager (Section
30). In case of a chit fund, a certain number of persons decide to contribute
a ixed sum for a speci ied period and at the end of a month, the amount
so contributed is paid to the lucky winner of the lucky draw.
(ii) Commercial transactions or share market transactions: In these
transactions in which delivery of goods or shares is intended to be given
or taken, do not amount to wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture
competitions and athletic competitions where prizes are awarded on the

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basis of skill and intelligence are the games of skill and hence such
competitions are valid.
(iv) A contract of insurance: A contract of insurance is a type of contingent
contract and is valid under law and these contracts are different from
wagering agreements.

12. Explain any ive circumstances under which contracts need not be
performed with the consent of both the parties.

Sol. Under following circumstances, the contracts need not be performed with the
consent of both the parties:
(i) Novation: Where the parties to a contract substitute a new contract for
the old it is called novation. A contract in existence may be substituted
by a new contract either between the same parties or between different
parties the consideration mutually being the discharge of old contract.
Novation can take place only by mutual agreement between the parties.
On novation, the old contract is discharged and consequently it need
not be performed. (Section 62 of the Indian Contract Act, 1872)
(ii) Rescission: A contract is also discharged by recission. When the
parties to a contract agree to rescind it, the contract need not be
performed. (Section 62)
(iii) Alteration: Where the parties to a contract agree to alter it, the original
contract is rescinded, with the result that it need not be performed. In
other words, a contract is also discharged by alteration. (Section 62)
(iv) Remission: Every promisee may dispense with or remit, wholly or in
part, the performance of the promise made to him, or may extend the
time for such performance or may accept instead of it any satisfaction
which he thinks it. In other words, a contract is discharged by
remission. (Section 63)
(v) Rescinds voidable contract: When a person at whose option a
contract is voidable rescinds it, the other party thereto need not
perform any promise therein contained in which he is the promisor.
(vi) Neglect of promisee: If any promisee neglects or refuses to afford the
promisor reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-
performance caused thereby. (Section 67)

13. How is a contract is discharged under the Indian Contract Act, 1872 and what
are the different ways in which the obligations created by a contract can
come to an end?

Sol. A contract is discharged when the obligations created by it come to an end. A contract
may be discharged in any one of the following ways:

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(i) Discharge by performance: It takes place when the parties to the

contract ful il their obligations arising under the contract within the time
and in the manner prescribed. Discharge by performance may be
(1) Actual performance; or
(2) Attempted performance.
Actual performance is said to have taken place, when each of the parties
has done what he had agreed to do under the agreement. When the
promisor offers to perform his obligation, but the promisee refuses to
accept the performance, it amounts to attempted performance or tender.
(ii) Discharge by mutual agreement: Section 62 of the Indian Contract Act
provides if the parties to a contract agree to substitutea new contract for
it, or to rescind or remit or alter it, the original contract need not be
performed.
(iii) Discharge by impossibility of performance: The impossibility may
exist from the very start. In that case, it would be impossibility ab initio.
Alternatively, it may supervene. Supervening impossibility may take place
owing to:
(a) an unforeseen change in law;
(b) the destruction of the subject-matter essential to that performance;
(c) the non-existence or non-occurrence of particular state of things,
which was naturally contemplated for performing the contract, as a
result of some personal incapacity like dangerous malady;
(d) the declaration of a war (Section 56).
(iv) Discharge by lapse of time: A contract should be performed within a
speci ied period as prescribed by the Limitation Act, 1963. If it is not
performed and if no action is taken by the promisee within the speci ied
period of limitation, he is deprived of remedy at law.
(v) Discharge by operation of law: A contract may be discharged by
operation of law which includes by death of the promisor, by insolvency
etc.
(vi) Discharge by breach of contract: Breach of contract may be actual
breach of contract or anticipatory breach of contract. If one party defaults
in performing his part of the contract on the due date, he is said to have
committed breach thereof. When on the other hand, a person repudiates
a contract before the stipulated time for its performance has arrived, he is
deemed to have committed anticipatory breach. If one of the parties to a
contract breaks the promise the party injured thereby, has not only a right
of action for damages but he is also discharged from performing his part
of the contract.
(vii) Promisee may waive or remit performance of promise: Every
promisee may dispense with or remit, wholly or in part, the performance
of the promise made to him, or may extend the time for such performance

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or may accept instead of it any satisfaction which he thinks it. In other

words, a contract may be discharged by remission. (Section 63)
(viii) Effects of neglect of promisee to afford promisor reasonable facilities
for performance: If any promisee neglects or refuses to afford the
promisor reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-performance
caused thereby. (Section 67)
(ix) Merger of rights: Sometimes, the inferior rights and the superior rights
coincide and meet in one and the same person. In suchcases, the inferior
rights merge into the superior rights. On merger, the inferior rights vanish
and are not required to be enforced.

14. “An anticipatory breach of contract is a breach of contract occurring before

the time ixed for performance has arrived”. Discuss stating also the effect of
anticipatory breach on contracts.
Sol. An anticipatory breach of contract is a breach of contract occurring
before the time ixed for performance has arrived. When the promisor
refuses altogether to perform his promise and signi ies his
unwillingness even before the time for performance has arrived, it is
called Anticipatory Breach.

The law in this regard has very well summed up in Frost v. Knight and
Hochster v.
DelaTour:

Section 39 of the Indian Contract Act deals with anticipatory breach of

contract and provides as follows: “When a party to a contract has refused to
perform or disable himself from performing, his promise in its entirety, the
promisee may put an end to the contract, unless he has signi ied, but words
or conduct, his acquiescence in its continuance.”

Effect of anticipatory breach: The promisee is excused from performance or

from further performance. Further he gets an option:

 To either treat the contract as “rescinded and sue the other party for
damages from breach of contract immediately without waiting until the due
date of performance; or

 He may elect not to rescind but to treat the contract as still operative,
and wait for the time of performance and then hold the other party
responsible for the consequences of non- performance.

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But in this case, he will keep the contract alive for the bene it of the other
party as well as his own, and the guilty party, if he so decides on re-
consideration, may still perform his part of the, contract and can also
take advantage of any supervening impossibility
which may have the effect of discharging the contract.

15. “Liquidated damage is a genuine pre-estimate of compensation of damages

for certain anticipated breach of contract whereas Penalty on the other hand
is an extravagant amount stipulated and is clearly unconscionable and has
no comparison to the loss suffered by the parties”. Explain.

Sol. Liquidated damage is a genuine pre-estimate of compensation

of damages for certain anticipated breach of contract. This estimate is agreed
to between parties to avoid at a later date detailed calculation and the
necessity to convince outside parties.

Penalty on the other hand is an extravagant amount stipulated and is

clearly unconscionable and has no comparison to the loss suffered by the
parties.

In terms of Section 74 of the Act “where a contract has been broken, if a

sum is named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not
actual damages or loss is proved to have been caused thereby, to receive
from the other party who has broken the contract, a reasonable
compensation not exceeding the amount so named, or as the case may
be the penalty stipulated for.

A stipulation for increased interest from the date of default may be a

stipulation by way of penalty.

In terms of Section 74, courts are empowered to reduce the sum payable on
breach whether it is ‘penalty’ or “liquidated damages” provided the sum
appears to be unreasonably high.
Sri ChunniLal vs. Mehta & Sons Ltd (Supreme Court)

Supreme Court laid down the ratio that the aggrieved party should not
be allowed to claim a sum greater than what is speci ic in the written
agreement. But even then, the court has powers to reduce the amount if
it considers it reasonable to reduce.

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16. What do you mean by Quantum Meruit and state the cases where the claim
for Quantum Meruit arises?

Sol. Quantum Meruit: Where one person has rendered service to another in
circumstances which indicate an understanding between them that it is to be
paid for although no particular remuneration has been ixed, the law will infer
a promise to pay. Quantum Meruit i.e. as much as the party doing the service has
deserved. It covers a case where the party injured by the breach had at the time
of breach done part but not all of the work which he is bound to do under the
contract and seeks to be compensated for the value of the work done. For the
application of this doctrine, two conditions must be ful illed:
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum meruit is to recompensate the party
or person for value of work which he has done. Damages are compensatory in
nature while quantum meruit is restitutory. It is but reasonable compensation
awarded on implication of a contract to remunerate.
The claim for quantum meruit arises in the following cases:
(a) When an agreement is discovered to be void or when a contract becomes
void.
(b) When something is done without any intention to do so gratuitously.
(c) Where there is an express or implied contract to render services but there
is no agreement as to remuneration.
(d) When one party abandons or refuses to perform the contract.
(e) Where a contract is divisible and the party not in default has enjoyed the
bene it of part performance.
(f) When an indivisible contract for a lump sum is completely performed but
badly the person who has performed the contract can claim the lump sum,
but the other party can make a deduction for bad work.

17. What is the meaning of contingent contract? Write brie ly its essentials. Also,
explain any three rules relating to enforcement of a contingent contract.

Sol. Essentials of a Contingent Contract

(a) The performance of a contingent contract would depend upon the
happening or non-happening of some event or condition. The
condition may be precedent or subsequent.
(b) The event referred to as collateral to the contract. The event is not part
of the contract. The event should be neither performance promised nor a
consideration for a promise.
(c) The contingent event should not be a mere ‘will’ of the promisor. The
event should be contingent in addition to being the will of the promisor.

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(d) The event must be uncertain. Where the event is certain or bound to
happen, the contract is due to be performed, then it is a not contingent
contract.
De inition of ‘Contingent Contract’ (Section 31 of the Indian Contract Act,
1872)
“A contract to do or not to do something, if some event, collateral to such
contract, does or does not happen”.
Rules Relating to Enforcement of a contingent contract:
The rules relating to enforcement of a contingent contract are laid down in
sections 32, 33, 34, 35 and 36 of the Act.
(a) Enforcement of contracts contingent on an event happening: Section
32 says that “where a contingent contract is made to do or not to do
anything if an uncertain future event happens, it cannot be enforced by
law unless and until that event has happened. If the event becomes
impossible, such contracts become void”.
(b) Enforcement of contracts contingent on an event not happening:
Section 33 says that “Where a contingent contract is made to do or not do
anything if an uncertain future event does not happen, it can be enforced
only when the happening of that event becomes impossible and not
before”.
(c) A contract would cease to be enforceable if it is contingent upon the
conduct of a living person when that living person does something to
make the ‘event’ or ‘conduct’ as impossible of happening.
Section 34 says that “if a contract is contingent upon as to how a person
will act at an unspeci ied time, the event shall be considered to have
become impossible when such person does anything which renders it
impossible that he should so act within any de inite time or otherwise
than under further contingencies”.
(d) Contingent on happening of speci ied event within the ixed time:
Section 35 says that Contingent contracts to do or not to do anything, if a
speci ied uncertain event happens within a ixed time, becomes void if, at
the expiration of time ixed, such event has not happened, or if, before the
time ixed, such event becomes impossible.
(e) Contingent on speci ied event not happening within ixed time:
Section 35 also says that - “Contingent contracts to do or not to do
anything, if a speci ied uncertain event does not happen within a ixed
time, may be enforced by law when the time ixed has expired, and such
event has not happened or before the time ixed has expired, if it becomes
certain that such event will not happen”.
(f) Contingent on an impossible event (Section 36): Contingent
agreements to do or not to do anything, if an impossible event happens
are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.

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18. Explain in brief with reference to the provisions of the Indian Contract Act,
1872, what are the rights enjoyed by Surety against the Creditor, the
Principal Debtor and Co-Sureties?

Sol. In terms of the provisions of the Indian Contract Act, 1872, the surety enjoys the
following rights:
(a) Rights against the creditor;
(b) Rights against the principal debtor;
(c) Rights against co-sureties.
Right against the Creditor
(a) Surety’s right to bene it of creditor’s securities [Section 141]: A
surety is entitled to the bene it of every security which the creditor has
against the principal debtor at the time when the contract of suretyship is
entered into, whether the surety knows of the existence of such security
or not; and, if the creditor loses, or, without the consent of the surety, parts
with such security, the surety is discharged to the extent of the value of the
security.
(b) Right to set off: If the creditor sues the surety, for payment of principal
debtor’s liability, the surety may have the bene it of the set off, if any, that
the principal debtor had against the creditor.
(c) Right to share reduction: The surety has right to claim proportionate
reduction in his liability if the principal debtor becomes insolvent.
Right against the principal debtor
(a) Rights of subrogation [Section 140 of the Indian Contract Act, 1872]:
Where, a guaranteed debt has become due, or default of the principal
debtor to perform a guaranteed duty has taken place, the surety, upon
payment or performance of all that he is liable for, is invested with all the
rights which the creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of
the guaranteed debt, or performance of the guaranteed duty, the surety
steps into the shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145]: In every contract
of guarantee there is an implied promise by the principal debtor to
indemnify the surety. The surety is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the guarantee, but not
sums which he paid wrongfully.
Rights against co-sureties
“Co-sureties (meaning)- When the same debt or duty is guaranteed by two or
more persons, such persons are called co-sureties”.
(a) Co-sureties liable to contribute equally (Section 146): Unless
otherwise agreed, each surety is liable to contribute equally for discharge
of whole debt or part of the debt remains unpaid by debtor.

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(b) Liability of co-sureties bound in different sums (Section 147): The

principal of equal contribution is, however, subject to the maximum limit
ixed by a surety to his liability. Co-sureties who are bound in different
sums are liable to pay equally as far as the limits of their respective
obligations permit.
19. Q2. State the rights of the indemnity-holder when sued?
Sol. According to the Section 125 of the Indian Contract Act,1872 the
indemnity holder i.e., promisee in a contract of indemnity, acting within the
scope of his authority, is entitled to recover from the promisor:
(i) all damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies.
(ii) all costs which he may be compelled to pay in any such suit, if in bringing or
defending it, he did not contravene the orders of the promisor, and acted as it would
have been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorised him to bring or defend the suit.
(iii) all sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contrary to the orders of the promisor and was one
which it would have been prudent for the promisee to make in the absence of any
contract of indemnity, or if the promisor authorised him to compromise the suit.
(iv) Section 125 is by no means exhaustive, which deals only with his rights in the
event of his being sued. The indemnity holder has other rights besides those mentioned
above. If he has incurred a liability and that liability is absolute, he is entitled to call
upon his indemni ier to save him from that liability and to pay it off.

20. State the essential elements of a contract of bailment.

Sol. Essential elements of a contract of bailment: Section 148 of the Indian Contract
Act, 1872 de ines the term ‘Bailment’. A ‘bailment’ the pledges are the delivery of goods
by one person to another for some purpose upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them.

The essential elements of the contract of the bailment are:

1. Delivery of goods: The essence of bailment is delivery of goods by one person to
another.
2. Bailment is a contract: In bailment, the delivery of goods is upon a contract that
when the purpose is accomplished, the goods shall be returned to the bailor.
3. Return of goods in speci ic: The goods are delivered for some purpose and it is
agreed that the speci ic goods shall be returned.
4. Ownership of goods: In a bailment, it is only the possession of goods which is
transferred and the bailor continues to be the owner of the goods.
5. Property must be movable: Bailment is only for movable goods and never for
immovable goods or money.

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21. In accordance with the provisions of the Indian Contract Act, 1872, answer
the following:
(i) Rights of Bailor against any wrong doer (Third Party)
(ii) Duties of the Pawnee

Sol. (i) Suit by bailor & bailee against wrong doers [Section 180 of the Indian
Contract Act, 1872]: If a third person wrongfully deprives the bailee of
the use or possession of the goods bailed, or does them any injury, the
bailee is entitled to use such remedies as the owner might have used in
the like case if no bailment had been made; and either the bailor or the
bailee may bring a suit against a third person for such deprivation or
injury.
(ii) Duties of the Pawnee
Pawnee has the following duties:
a. Duty to take reasonable care of the pledged goods.
b. Duty not to make unauthorized use of pledged goods.
c. Duty to return the goods when the debt has been repaid or the
promise has been performed.
d. Duty not to mix his own goods with goods pledged.
e. Duty not to do any act which is inconsistent with the terms of the
pledge.
f. Duty to return accretion to the goods, if any.

22. Both a sub-agent and a substituted agent are appointed by the agent. But,
however, there are some points of distinction between the two. Explain any
three points under the Indian Contract Act, 1872.

Sol. Following are the points of distinction between a sub-agent and a substituted
agent:

S. No. Sub Agent Substituted Agent

1. A sub-agent does his work A substituted agent works under the
under the control and instructions of the principal.
directions of agent.
2. The agent not only appoints a The agent does not delegate any part of
sub-agent but also delegates his task to a substituted agent.
to him a part of his own
duties.
3. There is no privity of contract Privity of contract is established
between the principal and between a principal and a substituted
the subagent. agent.

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4. The sub-agent is responsible A substituted agent is responsible to

to the agent alone and is not the principal and not to the original
generally responsible to the agent who
principal. appointed him.
5. The agent is responsible to The agent is not responsible to the
the principal for the acts of principal for the acts of the substituted
the sub-agent. agent.
6. The sub-agent has no right of The substituted agent can sue the
action against the principal principal for remuneration due to him.
for remuneration due to him.
7. Sub-agents may be Substituted agents can never be
improperly appointed. improperly appointed.
8. The agent remains liable for The agent's duty ends once he has
the acts of the subagent as named the substituted agent.
long as the subagency
continues.

23. Who is considered as an agent under the Indian Contract Act, 1872, and what
are the duties and obligations associated with this role?

Sol. The Indian Contract Act, 1872 does not de ine the word ‘Agency’. However, section
182 of the Indian Contract Act, 1872 de ines Agent and Principal as:
Agent means a person employed to do any act for another or to represent
another in dealing with the third persons and
The principal means a person for whom such act is done or who is so
represented.
Duties and obligations of an Agent
(i) Duty to follow instructions or customs: According to Section 211, an
agent is bound to conduct the business of his principal according to the
direction given by the principal, or, in the absence of any such directions,
according to the customs which prevails in doing business of the same
kind at the place where the agent conducts such business. When the agent
acts otherwise and any loss is sustained by the Principal, he must
indemnify him, and, if any pro it accrues, he must account for it.
(ii) Duty of reasonable care and skill: According to section 212, an agent is
bound to conduct the business of the principal with as much skill as is
generally possessed by persons engaged in similar business, unless the
principal has notice of his want of skill. The agent is always bound to act
with reasonable diligence, and to use such skill as he possesses; and to
make compensation to his principal in respect of the direct consequences
of his own neglect, want of skill or misconduct, but not in respect of loss
of damage which are indirectly or remotely caused by such neglect, want
of skill or misconduct.
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(iii) Duty to render proper accounts [Section 213]: An agent is bound to

render proper accounts to his principal on demand. Rendering accounts
does not mean showing the accounts but the accounts supported by
vouchers. (Anandprasad vs. Dwarkanath)
(iv) Agent’s duty to communicate with principal [Section 214]: It is the
duty of an agent, in cases of dif iculty, to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his
instructions.
(v) Duty not to deal on his own account: Agent should not deal on his own
account without irst obtaining the consent of the principal, otherwise the
principal may—
(a) repudiate the transaction, (Section 215)
(b) claim from the agent any bene it which may have resulted to him
from the transaction. (Section 216)
(vi) Duty not to make secret pro its: It is the duty of an agent not to make
any secret pro it in the business of agency. His relationship with the
principal is of iduciary nature and this requires absolute good faith in the
conduct of agency.
Secret Pro it means any advantage obtained by the agent over and above
his agreed remuneration and which he would not have been able to make
but for his position as agent.
(vii) Duty not to delegate: According to section 190, an agent cannot lawfully
employ to perform acts which he has expressly or impliedly undertaken
to perform personally, unless by the ordinary custom of trade a sub-agent
may, or, from the nature of agency, a sub- agent, must be employed.
(viii) Agent’s duty to pay sums received for principal [Section 218]: Subject
to such deductions, the agent is bound to pay to his principal all sums
received on his account.
(ix) Duty not to use any con idential information received in the course of
agency against the principal.

24. What are the consequences of the destruction of speci ied goods, before
making of contract and after the agreement to sell under the Sale of Goods
Act, 1930.

Sol. (A) Goods perishing before making of Contract (Section 7 of the Sale of
Goods Act, 1930): In accordance with the provisions of the Sale of
Goods Act, 1930 as contained in Section 7, a contract for the sale of
speci ic goods is void, if at the time when the contract was made;
the goods without the knowledge of the seller, perished or become
so damaged as no longer to answer to their description in the
contract, then the contract is void ab initio.

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(B) Goods perishing before sale but after agreement to sell (Section
8 of the Sale of Goods Act, 1930): Where there is an agreement to
sell speci ic goods, and subsequently the goods without any fault on
the part of the seller or buyer perish or become so damaged as no
longer to answer to their description in the agreement before the
risk passes to the buyer, the agreement is thereby avoided or
becomes void.

25. What are the implied conditions in a contract of 'Sale by sample' under the
Sale of Goods Act, 1930? Also state the implied warranties operative under
the Act.

Sol. Sale by sample [Section 17 of the Sale of Goods Act, 1930]: In a contract of
sale by sample, there is an implied condition that
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing the bulk with
the sample,
(c) the goods shall be free from any defect rendering them unmerchantable,
which would not be apparent on reasonable examination of the sample.
This condition is applicable only with regard to defects, which could not
be discovered by an ordinary examination of the goods. If the defects are
latent, then the buyer can avoid the contract. This simply means that the
goods shall be free from any latent defect i.e. a hidden defect.
The following are the implied warranties operative under the Act:
1. Warranty as to undisturbed possession [Section 14(b)]: An implied
warranty that the buyer shall have and enjoy quiet possession of the
goods. That is to say, if the buyer having got possession of the goods, is
later on disturbed in his possession, he is entitled to sue the seller for the
breach of the warranty.
2. Warranty as to non-existence of encumbrances [Section 14(c)]: An
implied warranty that the goods shall be free from any charge or
encumbrance in favour of any third party not declared or known to the
buyer before or at the time the contract is entered into.
3. Warranty as to quality or itness by usage of trade [Section 16(3)]: An
implied warranty as to quality or itness for a particular purpose may be
annexed or attached by the usage of trade. Regarding implied condition or
warranty as to the quality or itness for any particular purpose of goods
supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty
to reveal un lattering truths about the goods sold, but this rule has certain
exceptions.
4. Disclosure of dangerous nature of goods: Where the goods are
dangerous in nature and the buyer is ignorant of the danger, the seller

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must warn the buyer of the probable danger. If there is a breach of

warranty, the seller may be liable in damages.

26. Write the exceptions to the doctrine of Caveat Emptor as per the Sale of
Goods Act, 1930.

Sol. The doctrine of Caveat Emptor given under the Sale of Goods Act, 1930 is
subject to the following exceptions:
1. Fitness as to quality or use: Where the buyer makes known to the seller
the particular purpose for which the goods are required, it is the duty of
the seller to supply such goods as are reasonably it for that purpose
[Section 16 (1)].
2. Goods purchased under patent or brand name: In case where the
goods are purchased under its patent name or brand name, there is no
implied condition that the goods shall be it for any particular purpose
[Section 16(1)].
3. Goods sold by description: Where the goods are sold by description
there is an implied condition that the goods shall correspond with the
description [Section 15]. If it is not so, then seller is responsible.
4. Goods of Merchantable Quality: Where the goods are bought by
description from a seller who deals in goods of that description there is an
implied condition that the goods shall be of merchantable quality. The rule
of Caveat Emptor is not applicable. [Section 16(2)].
5. Sale by sample: Where the goods are bought by sample, this rule of
Caveat Emptor does not apply if the bulk does not correspond with the
sample [Section 17].
6. Goods by sample as well as description: Where the goods are bought by
sample as well as description, the rule of Caveat Emptor is not applicable
in case the goods do not correspond with both the sample and description
or either of the condition [Section 15].
7. Trade Usage: An implied warranty or condition as to quality or itness for
a particular purpose may be annexed by the usage of trade and if the seller
deviates from that, this rule of Caveat Emptor is not applicable [Section
16(3)].
8. Seller actively conceals a defect or is guilty of fraud: Where the seller
sells the goods by making some misrepresentation or fraud and the buyer
relies on it or when the seller actively conceals some defect in the goods
so that the same could not be discovered by the buyer on a reasonable
examination, then the rule of Caveat Emptor will not apply.

27. State the various essential elements involved in the sale of unascertained
goods and its appropriation as per the Sale of Goods Act, 1930.

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Sol. Sale of unascertained goods and Appropriation (Section 23 of the Sale of

Goods Act, 1930): Appropriation of goods involves selection of goods with
the intention of using them in performance of the contract and with the
mutual consent of the seller and the buyer.
The essentials are:
(a) There is a contract for the sale of unascertained or future goods.
(b) The goods should conform to the description and quality stated in the
contract.
(c) The goods must be in a deliverable state.
(d) The goods must be unconditionally appropriated to the contract either
by delivery to the buyer or his agent or the carrier.
(e) The appropriation must be made by:
(i) the seller with the assent of the buyer; or
(ii) the buyer with the assent of the seller.
(f) The assent may be express or implied.
(g) The assent may be given either before or after appropriation.

28. Explain any six circumstances in detail in which a non-owner can convey
better title to the bona ide purchaser of goods for value under the Sale of
Goods Act, 1930.

Sol. In the following cases, a non-owner can convey better title to the bona ide purchaser
of goods for value:
(1) Sale by a Mercantile Agent: A sale made by a mercantile agent of the
goods for document of title to goods would pass a good title to the buyer
in the following circumstances; namely;
(a) If he was in possession of the goods or documents with the consent
of the owner;
(b) If the sale was made by him when acting in the ordinary course of
business as a mercantile agent; and
(c) If the buyer had acted in good faith and has at the time of the contract
of sale, no notice of the fact that the seller had no authority to sell
(Proviso to Section 27).
Mercantile Agent means an agent having in the customary course of
business as such agent has authority either to sell goods, or to consign
goods for the purposes of sale, or to buy goods, or to raise money on the
security of goods [Section 2(9)].
(2) Sale by one of the joint owners (Section 28): If one of several joint
owners of goods has the sole possession of them by permission of the co-
owners, the property in the goods is transferred to any person who buys
them from such joint owner in good faith and has not at the time of the
contract of sale notice that the seller has no authority to sell.

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(3) Sale by a person in possession under voidable contract: A buyer would

acquire a good title to the goods sold to him by a seller who had obtained
possession of the goods under a contract voidable on the ground of
coercion, fraud, misrepresentation or undue in luence provided that the
contract had not been rescinded until the time of the sale (Section 29).
(4) Sale by one who has already sold the goods but continues in
possession thereof: If a person has sold goods but continues to be in
possession of them or of the documents of title to them, he may sell them
to a third person, and if such person obtains the delivery thereof in good
faith and without notice of the previous sale, he would have good title to
them, although the property in the goods had passed to the irst buyer
earlier. A pledge or other disposition of the goods or documents of title by
the seller in possession are equally valid [Section 30(1)].
(5) Sale by buyer obtaining possession before the property in the goods
has vested in him: Where a buyer with the consent of the seller obtains
possession of the goods before the property in them has passed to him, he
may sell, pledge or otherwise dispose of the goods to a third person, and
if such person obtains delivery of the goods in good faith and without
notice of the lien or other right of the original seller in respect of the goods,
he would get a good title to them [Section 30(2)].
However, a person in possession of goods under a ‘hire-purchase’
agreement which gives him only an option to buy is not covered within the
section unless it amounts to a sale.
(6) Effect of Estoppel: Where the owner is estopped by the conduct from
denying the seller’s authority to sell, the transferee will get a good title as
against the true owner. But before a good title by estoppel can be made, it
must be shown that the true owner had actively suffered or held out the
other person in question as the true owner or as a person authorized to
sell the goods.
(7) Sale by an unpaid seller: Where an unpaid seller who had exercised his
right of lien or stoppage in transit resells the goods, the buyer acquires a
good title to the goods as against the original buyer [Section 54 (3)].
(8) Sale under the provisions of other Acts:
(i) Sale by an Of icial Receiver or Liquidator of the Company will give
the purchaser a valid title.
(ii) Purchase of goods from a inder of goods will get a valid title under
circumstances [Section 169 of the Indian Contract Act, 1872]
(iii) A sale by pawnee can convey a good title to the buyer [Section 176
of the Indian Contract Act, 1872]

29. Explain the legal rules of auction sale relating to the following points as per
provisions of the Sale of Goods Act, 1930:
(A) Bid by seller with or without noti ication

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(B) Bidder to retract from his bid

(C) Effect of pretending bidding

Sol. Section 64 of the Sale of Goods Act, 1930 provides following rules to regulate the
sale by auction:

(A) Bid with noti ication: Right to bid may be reserved expressly by or on behalf of
the seller and where such a right is expressly reserved, but not otherwise, the
seller or any one person on his behalf may bid at the auction.
Bid by seller without noti ication: Where the sale is not noti ied to be subject to a
right to bid on behalf of the seller, it shall not be lawful for the seller to bid
himself or to employ any person to bid at such sale, or for the auctioneer
knowingly to take any bid from the seller or any such person; and any sale
contravening this rule may be treated as fraudulent by the buyer.

(B) Bidder to retract from his bid: The sale is complete when the auctioneer
announces its completion by the fall of hammer or in any other customary
manner. Until such announcement is made, any bidder may retract from his bid.

(C) Effect of pretending bidding: If the seller makes use of pretended bidding to raise
the price, the sale is voidable at the option of the buyer.

30. What are the rights of a buyer, when seller commits a breach of contract
under the provisions of the Sale of Goods Act, 1930?

Sol. If the seller commits a breach of contract, the buyer gets the following rights
against the seller:

1. Damages for non-delivery [Section 57 of the Sale of Goods Act, 1930]: Where the
seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer
may sue the seller for damages for non- delivery.

2. Suit for speci ic performance (Section 58): Where the seller commits of breach of
the contract of sale, the buyer can appeal to the court for speci ic performance.
The court can order for speci ic performance only when the goods are
ascertained or speci ic.
This remedy is allowed by the court subject to these conditions:
(a) The contract must be for the sale of speci ic and ascertained goods.
(b) The power of the court to order speci ic performance is subject to provisions of
the Speci ic Relief Act of 1963.
(c) It empowers the court to order speci ic performance where damages would not
be an adequate remedy.
(d) It will be granted as remedy if goods are of special nature or are unique.

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3. Suit for breach of warranty (Section 59): Where there is breach of warranty on
the part of the seller, or where the buyer elects to treat breach of condition as
breach of warranty, the buyer is not entitled to reject the goods only on the basis
of such breach of warranty. But he may –
(i) set up against the seller the breach of warranty in diminution or extinction of the
price; or
(ii) sue the seller for damages for breach of warranty.

4. Repudiation of contract before due date (Section 60): Where either party to a
contract of sale repudiates the contract before the date of delivery, the other may
either treat the contract as subsisting and wait till the date of delivery, or he may
treat the contract as rescinded and sue for damages for the breach.

5. Suit for interest:

(1) Nothing in this Act shall affect the right of the seller or the buyer to recover
interest or special damages, in any case where by law interest or special damages
may be recoverable, or to recover the money paid where the consideration for
the payment of it has failed.
(2) In the absence of a contract to the contrary, the court may award interest at such
rate as it thinks it on the amount of the price to the buyer in a suit iled by him
for the refund of the price (in a case of a breach of the contract on the part of the
seller) from the date on which the payment was made.

31. De ine partnership and name the essential elements for the existence of a
partnership as per the Indian Partnership Act, 1932.

Sol. De inition of Partnership: 'Partnership' is the relation between persons who have
agreed to share the pro its of a business carried on by all or any of them acting
for all. (Section 4 of the Indian Partnership Act, 1932)
The de inition of the partnership contains the following ive elements which
must co-exist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to Share Pro its
5. Business Carried on by all or any of them acting for all
ELEMENTS OF PARTNERSHIP
The de inition of the partnership contains the following ive elements which
must co-exist before a partnership can come into existence:
1. Association of two or more persons: Partnership is an association of 2
or more persons. Again, only persons recognized by law can enter into an
agreement of partnership. Therefore, a irm, since it is not a person
recognized in the eyes of law cannot be a partner. Again, a minor cannot

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be a partner in a irm, but with the consent of all the partners, may be
admitted to the bene its of partnership.
2. Agreement: It may be observed that partnership must be the result of an
agreement between two or more persons. There must be an agreement
entered into by all the persons concerned. This element relates to
voluntary contractual nature of partnership. Thus, the nature of the
partnership is voluntary and contractual. An agreement from which
relationship of Partnership arises may be express. It may also be implied
from the act done by partners and from a consistent course of conduct
being followed, showing mutual understanding between them. It may be
oral or in writing.
3. Business: Firstly, there must exist a business. For the purpose, the term
'business' includes every trade, occupation and profession. The existence
of business is essential. Secondly, the motive of the business is the
"acquisition of gains" which leads to the formation of partnership.
Therefore, there can be no partnership where there is no intention to
carry on the business and to share the pro it thereof.
4. Agreement to share pro its: The sharing of pro its is an essential feature
of partnership. There can be no partnership where only one of the
partners is entitled to the whole of the pro its of the business. Partners
must agree to share the pro its in any manner they choose. But an
agreement to share losses is not an essential element. It is open to one or
more partners to agree to share all the losses. However, in the event of
losses, unless agreed otherwise, these must be borne in the pro it-sharing
ratio.
5. Business carried on by all or any of them acting for all: The business
must be carried on by all the partners or by anyone or more of the
partners acting for all. This is the cardinal principle of the partnership
Law. In other words, there should be a binding contract of mutual agency
between the partners. An act of one partner in the course of the business
of the irm is in fact an act of all partners. Each partner carrying on the
business is the principal as well as the agent for all the other partners. He
is an agent in so far as he can bind the other partners by his acts and he is
a principal to the extent that he is bound by the act of other partners. It
may be noted that the true test of partnership is mutual agency rather
than sharing of pro its. If the element of mutual agency is absent, then
there will be no partnership.

32. "Whether a group of persons is or is not a irm, or whether a person is or is

not a partner in a irm." Explain the mode of determining existence of
partnership as per the Indian Partnership Act, 1932?

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Sol. Mode of determining existence of partnership (Section 6 of the Indian

Partnership Act, 1932): In determining whether a group of persons is or
is not a irm, or whether a person is or not a partner in a irm, regard shall
be had to the real relation between the parties, as shown by all relevant
facts taken together.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned
2. The agreement was to share the pro its of a business and
3. the business was carried on by all or any of them acting for all.
1. Agreement: Partnership is created by agreement and not by status
(Section 5). The relation of partnership arises from contract and not
from status; and in particular, the members of a Hindu Undivided
family carrying on a family business as such are not partners in such
business.
2. Sharing of Pro it: Sharing of pro it is an essential element to
constitute a partnership. But, it is only a prima facie evidence and
not conclusive evidence, in that regard. The sharing of pro its or of
gross returns accruing from property by persons holding joint or
common interest in the property would not by itself make such
persons partners. Although the right to participate in pro its is a
strong test of partnership, and there may be cases where, upon a
simple participation in pro its, there is a partnership, yet whether
the relation does or does not exist must depend upon the whole
contract between the parties.
3. Agency: Existence of Mutual Agency which is the cardinal principle
of partnership law, is very much helpful in reaching a conclusion in
this regard. Each partner carrying on the business is the principal as
well as an agent of other partners. So, the act of one partner done on
behalf of irm, binds all the partners. If the elements of mutual
agency relationship exist between the parties constituting a group
formed with a view to earn pro its by running a business, a
partnership may be deemed to exist.

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33. What is the difference between partnership and co-ownership as per the
Indian Partnership Act, 1932?
Sol.

Partnership Vs. Co-Ownership or joint ownership i.e. the relation which subsists between
persons who own property jointly or in common.
Basis of difference Partnership Co-ownership
1. Formation Partnership always Co-ownership may
arises out of a arise either from
contract, express or agreement or
implied. by the operation of
law, such as by
inheritance.
2. Implied agency A partner is the agent A co-owner is not the
of the other partners. agent of other co-
owners.
3. Nature of interest There is community of Co-ownership does
interest which means not necessarily involve
that profits and losses sharing of profits and
must have to be losses.
shared.
4. Transfer of A share in the A co-owner may
interest partnership is transfer his interest or
transferred only by rights in the property
the consent of other without the consent of
partners. other co-owners.

34. State the modes by which a partner may transfer his interest in the irm in
favour of another person under the Indian Partnership Act, 1932. What are
the rights of such a transferee?
Sol. Section 29 of the Indian Partnership Act, 1932 provides that a share in a partnership
is transferable like any other property, but as the partnership relationship is based
on mutual con idence, the assignee of a partner’s interest by sale, mortgage or
otherwise cannot enjoy the same rights and privileges as the original partner.
The rights of such a transferee are as follows:
(1) During the continuance of partnership, such transferee is not entitled
(a) to interfere with the conduct of the business,
(b) to require accounts, or
(c) to inspect books of the irm.
He is only entitled to receive the share of the pro its of the transferring partner
and he is bound to accept the pro its as agreed to by the partners, i.e., he cannot
challenge the accounts.

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(2) On the dissolution of the irm or on the retirement of the transferring partner,
the transferee will be entitled, against the remaining partners:
(a) to receive the share of the assets of the irm to which the transferring
partner was entitled, and
(b) for the purpose of ascertaining the share, he is entitled to an account
as from the date of the dissolution.
By virtue of Section 31, no person can be introduced as a partner in a irm without
the consent of all the partners.
A partner cannot by transferring his own interest, make anybody else a partner in his
place, unless the other partners agree to accept that person as a partner. At the same
time, a partner is not debarred from transferring his interest.
A partner’s interest in the partnership can be regarded as an existing interest and
tangible property which can be assigned.

35. (i)When the continuing guarantee can be revoked under the Indian
Partnership Act, 1932?
(ii) With reference to the provisions of Indian partnership Act, 1932 explain
the various effects of insolvency of a partner.
Sol. (i) Revocation of continuing guarantee (Section 38 of the Indian Partnership
Act, 1932)
According to section 38, a continuing guarantee given to a irm or to third
party in respect of the transaction of a irm is, in the absence of an
agreement to the contrary, revoked as to future transactions from the date
of any change in the constitution of the irm. Such change may occur by
the death, or retirement of a partner, or by introduction of a new partner.
(ii) Effects of insolvency of a partner (Section 34 of the Indian
Partnership Act, 1932):
(i) The insolvent partner cannot be continued as a partner.
(ii) He will be ceased to be a partner from the very date on which the
order of adjudication is made.
(iii) The estate of the insolvent partner is not liable for the acts of the
irm done after the date of order of adjudication.
(iv) The irm is also not liable for any act of the insolvent partner after
the date of the order of adjudication,
(v) Ordinarily, the insolvency of a partner results in dissolution of a irm;
but the partners are competent to agree among themselves that the
adjudication of a partner as an insolvent will not give rise to
dissolution of the irm.

36. State the legal position of a minor partner under the Indian Partnership Act,
1932 after attaining majority:
(A) When he opts to become a partner of the same irm.

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(B) When he decides not to become a partner.

Sol. (A) When he becomes partner: If the minor becomes a partner on his
own willingness or by his failure to give the public notice within
speci ied time, his rights and liabilities as given in Section 30(7) of
the Indian Partnership Act, 1932, are as follows:
(a) He becomes personally liable to third parties for all acts of the
irm done since he was admitted to the bene its of partnership.
(b) His share in the property and the pro its of the irm remains
the same to which he was entitled as a minor.
(B) When he elects not to become a partner:
(a) His rights and liabilities continue to be those of a minor up to
the date of giving public notice.
(b) His share shall not be liable for any acts of the irm done after
the date of the notice.
(c) He shall be entitled to sue the partners for his share of the
property and pro its. It may be noted that such minor shall give
notice to the Registrar that he has or has not become a partner.
37. State the grounds on which a irm may be dissolved by the Court under the
Indian Partnership Act, 1932?

Sol. DISSOLUTION BY THE COURT (SECTION 44): Court may, at the suit of the partner,
dissolve a irm on any of the following ground:
(a) Insanity/unsound mind: Where a partner (not a sleeping partner) has
become of unsound mind, the court may dissolve the irm on a suit of the
other partners or by the next friend of the insane partner. Temporary
sickness is no ground for dissolution of irm.
(b) Permanent incapacity: When a partner, other than the partner suing, has
become in any way permanently incapable of performing his duties as
partner, then the court may dissolve the irm. Such permanent incapacity
may result from physical disability or illness etc.
(c) Misconduct: Where a partner, other than the partner suing, is guilty of
conduct which is likely to affect prejudicially the carrying on of business,
the court may order for dissolution of the irm, by giving regard to the
nature of business. It is not necessary that misconduct must relate to the
conduct of the business. The important point is the adverse effect of
misconduct on the business. In each case nature of business will decide
whether an act is misconduct or not.
(d) Persistent breach of agreement: Where a partner other than the partner
suing, wilfully or persistently commits breach of agreements relating to
the management of the affairs of the irm or the conduct of its business, or
otherwise so conduct himself in matters relating to the business that it is

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not reasonably practicable for other partners to carry on the business in

partnership with him, then the court may dissolve the irm at the instance
of any of the partners. Following comes in to category of breach of
contract:
• Embezzlement,
• Keeping erroneous accounts
• Holding more cash than allowed
• Refusal to show accounts despite repeated request etc.
(e) Transfer of interest: Where a partner other than the partner suing, has
transferred the whole of his interest in the irm to a third party or has
allowed his share to be charged or sold by the court, in the recovery of
arrears of land revenue, the court may dissolve the irm at the instance of
any other partner.
(f) Continuous/Perpetual losses: Where the business of the irm cannot be
carried on except at a loss in future also, the court may order for its
dissolution.
(g) Just and equitable grounds: Where the court considers any other
ground to be just and equitable for the dissolution of the irm, it may
dissolve a irm. The following are the cases for the just and equitable
grounds-
(i) Deadlock in the management.
(ii) Where the partners are not in talking terms between them.
(iii) Loss of substratum.
(iv) Gambling by a partner on a stock exchange.

38. Subject to agreement by partners, state the rules that should be observed by
the partners in settling the accounts of the irm after dissolution under the
provisions of the Indian Partnership Act, 1932.
Sol. Mode of Settlement of partnership accounts: As per Section 48 of the
Indian Partnership Act, 1932, in settling the accounts of a irm after
dissolution, the following rules shall, subject to agreement by the
partners, be observed:-
(i) Losses, including de iciencies of capital, shall be paid irst out of
pro its, next out of capital, and, lastly, if necessary, by the partners
individually in the proportions in which they were entitled to share
pro its;
(ii) The assets of the irm, including any sums contributed by the
partners to make up de iciencies of capital, must be applied in the
following manner and order:
(a) in paying the debts of the irm to third parties;
(b) in paying to each partner rateably what is due to him from
capital;

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(c) in paying to each partner rateably what is due to him on

account of capital; and
(d) the residue, if any, shall be divided among the partners in the
proportions in which they were entitled to share pro its.

39. “Indian Partnership Act, 1932 does not make the registration of irms
compulsory nor does it impose any penalty for non-registration.” In light of
the given statement, discuss the consequences of non-registration of the
partnership irms in India?

Sol. It is true to say that the Indian Partnership Act, 1932 does not make the registration
of irms compulsory nor does it impose any penalty for nonregistration.
Following are consequences of Non-registration of Partnership Firms in
India:
The Indian Partnership Act, 1932 does not make the registration of irms
compulsory nor does it impose any penalty for non-registration. However,
under Section 69, non-registration of partnership gives rise to a number of
disabilities which we shall presently discuss. Although registration of irms is
not compulsory, yet the consequences or disabilities of non-registration have a
persuasive pressure for their registration. These disabilities are as follows:
(i) No suit in a civil court by irm or other co-partners against third
party: The irm or any other person on its behalf cannot bring an action
against the third party for breach of contract entered into by the irm,
unless the irm is registered and the persons suing are or have been shown
in the register of irms as partners in the irm. In other words, a registered
irm can only ile a suit against a third party and the persons suing have
been in the register of irms as partners in the irm.
(ii) No relief to partners for set-off of claim: If an action is brought against
the irm by a third party, then neither the irm nor the partner can claim
any set-off, if the suit be valued for more than ₹ 100 or pursue other
proceedings to enforce the rights arising from any contract.
(iii) Aggrieved partner cannot bring legal action against other partner or
the irm: A partner of an unregistered irm (or any other person on his
behalf) is precluded from bringing legal action against the irm or any
person alleged to be or to have been a partner in the irm. But such a
person may sue for dissolution of the irm or for accounts and realization
of his share in the irm’s property where the irm is dissolved.
(v) Third party can sue the irm: In case of an unregistered irm, an action can be
brought against the irm by a third party.
Exceptions: Non-registration of a irm does not, however affect the following rights:
1. The right of third parties to sue the irm or any partner.

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2. The right of partners to sue for the dissolution of the irm or for the settlement of
the accounts of a dissolved irm, or for realization of the property of a dissolved irm.
3. The power of an Of icial Assignees, Receiver of Court to release the property of
the insolvent partner and to bring an action.
4. The right to sue or claim a set-off if the value of suit does not exceed 100 in value.
5. The right to suit and proceeding instituted by legal representatives or heirs of the
deceased partner of a irm for accounts of the irm or to realise the property of the irm.

40. “A LLP (Limited Liability Partnership) is a type of partnership which

provides the bene its of limited liability but allows its members the
lexibility of organizing their internal structure as a partnership based on a
mutually arrived agreement.”
In line with the above statement clearly elaborate the difference between
LLP and Limited Liability Company (LLC).

Sol. Distinction between Limited Liability Partnership (LLP) and Limited Liability
Company (LLC)

S. Basis Limited Liability Limited Liability

No. Partnership (LLP) Company (LLC)
1. Regulating The LLP Act, 2008. The Companies Act,
Act 2013.
2. Members/Par The persons who The persons who invest
tners contribute to LLP are the money in the shares
known as artners of the are known as members
LLP. of the company.
3. Internal The internal governance The internal governance
governance structure of a LLP is structure of a company is
structure governed by agreement regulated by statute (i.e.,
between the partners. Companies Act, 2013)
read with its
Memorandum of
Association and Articles
of Association.
4. Name Name of the LLP to Name of the public
contain the word company to contain the
“Limited Liability word “limited” and Pvt.
partnership” or “LLP” as Co. to contain the word
suf ix. “Private limited” as
suf ix.
5. No. of Minimum – 2 partners Private company:
members/ Maximum – No such Minimum – 2 members

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partners limit on the partners in Maximum 200 members

the Act. The partners of Public company:
the LLP can be Minimum – 7 members
individuals/or body Maximum – No such limit
corporate through the on the members.
nominees. Members can be
organizations, trusts,
another business form or
individuals.
6. Liability of Liability of a partners is Liability of a member is
members/ limited to the extent of limited to the amount
partners agreed contribution. unpaid on the shares
held by them.
7. Management The business of the LLP The affairs of the
managed by the partners company are managed
including the designated by board of directors
partners authorized in elected by the
the shareholders.
agreement.
8. Minimum 2 designated partners. Pvt. Co. – 2 directors
number of Public Co. – 3 directors
directors/des
ignated
partners

41. (i) Who are the individuals which shall not be capable of becoming
a partner of a Limited Liability Partnership?
(ii) What are the effects of registration of Limited Liability Partnership?

Sol. (i) Partners (Section 5 of Limited Liability Partnership Act, 2008): Any
individual or body corporate may be a partner in a LLP
However, an individual shall not be capable of becoming a partner of a LLP,
if—
(a) he has been found to be of unsound mind by a Court of competent
jurisdiction and the inding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application
is pending.

(ii) Effect of registration (Section 14 of Limited Liability Partnership Act,

2008):
On registration, a LLP shall, by its name, be capable of—

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(a) suing and being sued;

(b) acquiring, owning, holding and developing or disposing of property,
whether movable or immovable, tangible or intangible;
(c) having a common seal, if it decides to have one; and
(d) doing and suffering such other acts and things as bodies corporate may
lawfully do and suffer.

42. Referring to the provisions of the Limited Liability Partnership Act,

2008, answer the following:
(i) Under what circumstances a Limited Liability Partnership is
compulsorily required to change its name? Also, explain the
compliance requirement following the change of name and the
consequences, if any, in case of default therein.

(ii) What do you mean by a Small Limited Liability Partnership?

Sol. (i) Change of name of LLP (Section 17 of Limited Liability Partnership

Act, 2008):
(1) Notwithstanding anything contained in sections 15 and 16, if
through inadvertence or otherwise, a LLP, on its irst registration or
on its registration by a new body corporate, its registered name, is
registered by a name which is identical with or too nearly resembles
to —
(a) that of any other LLP or a company; or
(b) a registered trade mark of a proprietor under the Trade Marks
Act, 1999, as is likely to be mistaken for it,
then on an application of such LLP or proprietor referred to in
clauses (a) and (b) respectively or a company,
the Central Government may direct that such LLP to change its name
or new name within a period of 3 months from the date of issue of
such direction.
(2) Where a LLP changes its name or obtains a new name under sub-
section (1), it shall within a period of 15 days from the date of such
change, give notice of the change to Registrar along with the order
of the Central Government, who shall carry out necessary changes in
the certi icate of incorporation and within 30 days of such change in
the certi icate of incorporation, such LLP shall change its name in the
LLP agreement.
(3) If the LLP is in default in complying with any direction given under
sub-section (1), the Central Government shall allot a new name to
the LLP in such manner as may be prescribed and the Registrar shall
enter the new name in the register of LLP in place of the old name

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and issue a fresh certi icate of incorporation with new name, which
the LLP shall use thereafter.
Nothing contained in this sub-section shall prevent a LLP from
subsequently changing its name in accordance with the provisions
of section 16.
(ii) Small Limited Liability Partnership [Section 2(1)(ta) of the Limited
Liability Partnership Act, 2008]: It means a limited liability
partnership—
(i) the contribution of which, does not exceed twenty- ive lakh rupees
or such higher amount, not exceeding ive crore rupees, as may be
prescribed; and
(ii) the turnover of which, as per the Statement of Accounts and
Solvency for the immediately preceding inancial year, does not
exceed forty lakh rupees or such higher amount, not exceeding ifty
crore rupees, as may be prescribed; or
(iii) which meets such other requirements as may be prescribed, and
ful ils such terms and conditions as may be prescribed.

43. A LLP is a new form of legal business entity with limited liability. It's an
alternative corporate business vehicle that only gives the bene its of
limited liability at low compliance cost but allows its partners the lexibility
of organizing their internal structure as a traditional partnership. Keeping
in view of above, de ine the following characteristics of LLP.
(i) Body Corporate
(ii) Mutual Agency
(iii) Foreign LLPs
(iv) Arti icial legal person

Sol. Body corporate: Section 2(1)(d) of the LLP Act, 2008 provides that a LLP is a
body corporate formed and incorporated under this Act and is a legal entity
separate from that of its partners and shall have perpetual succession.
Therefore, any change in the partners of a LLP shall not affect the existence,
rights or liabilities of the LLP.
Section 3 of LLP Act, 2008, provides that a LLP is a body corporate formed and
incorporated under this Act and is a legal entity separate from that of its
partners.

Mutual Agency: No partner is liable on account of the independent or un-

authorized actions of other partners, thus individual partners are shielded from
joint liability created by another partner’s wrongful business decisions or
misconduct. In other words, all partners will be the agents of the LLP alone. No
one partner can bind the other partner by his acts.

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Foreign LLPs: Section 2(1)(m) de ines foreign limited liability partnership “as
a limited liability partnership formed, incorporated, or registered outside India
which established as place of business within India”. Foreign LLP can become a
partner in an Indian LLP.

Arti icial Legal Person: A LLP is an arti icial legal person because it is created
by a legal process and is clothed with all rights of an individual. It can do
everything which any natural person can do, except of course that, it cannot be
sent to jail, cannot take an oath, cannot marry or get divorce nor can it practice
a learned profession like CA or Medicine. A LLP is invisible, intangible, immortal
(it can be dissolved by law alone) but not ictitious because it really exists.

44. A & B were friends. Now they have plans of setting up a supermarket in
their locality. They are confused as to whether to register as a traditional
partnership or as a Limited Liability Partnership. As an advisor, enumerate
the differences between the two forms of business highlighting the
compliances & other legal formalities.

Sol. Comparison between a Limited Liability Partnership (LLP) and partnership can be
analysed on the below tabulated parameters.

Basis LLP Partnership firm

1. Regulating Act The Limited The Indian Partnership
Liability Act, 1932.
Partnership Act,
2008.
2. Body corporate It is a body It is not a body
corporate. corporate.
3. Separate legal It is a legal entity It is a group of
entity separate from its persons with no
members. separate legal entity.
4. Creation It is created by a It is created by an
legal process called agreement between
registration under the partners.
the LLP Act, 2008.
5. Registration Registration Registration
i i
s mandatory. LLP s voluntary. Only the
can sue and be sued registered
in its own name. partnership firm can
sue the third parties.

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6. Perpetual The death, insanity, The death, insanity,

succession retirement retirement
o o
r insolvency of the r insolvency of the
partner(s) does not partner(s) may affect
affect its existence its existence. It has no
of LLP. Members perpetual succession.
may join or leave
but
it
s
e
xistence continues
forever.

7. Name Name of the LLP to No guidelines. The

contain the word partners can have any
limited liability name as per their
partners (LLP) as choice.
suffix.

8. Liability Liability of each Liability of each

partner limited to partner is unlimited. It
the extent to agreed can be extended upto
contribution except the personal assets of
in case of willful the partners.
fraud.

9. Mutual agency Each partner can Each partner can bind

bind the LLP by his the firm as well as
own acts but not the other partners by his
other partners. own acts.

10. Designated At least two There is no provision

partners designated for such partners
partners and atleast under the Partnership
one of them shall be Act, 1932.
resident in India.

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11. Common seal It may have its There is

common seal as its n
official signatures. o
s
uch concept in
partnership

12. Legal Only designated All partners are

compliances partners responsible for all the
a compliances
re responsible for a
all the compliances nd penalties under the
and penalties under Act.
this Act.
13. Annual LLP is required to Partnership firm is not
filing of file: required to file any
documents (i) annual document with
A
nnual

statement of the registrar of firms.

accounts
(ii) Statement of
solvency
(iii) Annual
return with
the
registration of LLP
every year.
14. Foreign Foreign nationals Foreign nationals
partnership can become a cannot become a
partner in a LLP. partner in a
partnership firm.

17. Minor as Minor cannot be Minor can be admitted

partner admitted to the to the benefits of the
benefits of LLP. partnership with the
prior consent of the
existing partners.

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45. State the rules regarding registered of ice of a Limited Liability

Partnership (LLP) and change therein as per provisions of the Limited
Liability Partnership Act, 2008.

Sol. Registered of ice of LLP and Change therein (Section 13 of the Limited Liability
Partnership Act, 2008)

(i) Every LLP shall have a registered of ice to which all communications and
notices may be addressed and where they shall be received.
(ii) A document may be served on a LLP or a partner or designated partner
thereof by sending it by post under a certi icate of posting or by registered
post or by any other manner, as may be prescribed, at the registered
of ice and any other address speci ically declared by the LLP for the
purpose in such form and manner as may be prescribed.
(iii) A LLP may change the place of its registered of ice and ile the notice of
such change with the Registrar in such form and manner and subject to
such conditions as may be prescribed and any such change shall take
effect only upon such iling.
(iv) If the LLP contravenes any provisions of this section, the LLP and its every
partner shall be liable to a penalty of ` 500 for each day during which the
default continues, subject to a maximum of
` 50,000 for the LLP and its every partner.

46. De ine OPC (One Person Company) and state the rules regarding its
membership. Can it be converted into a non-pro it company under Section 8
or a private company?

Sol. One Person Company (OPC) [Section 2(62) of the Companies Act, 2013]:
The Act de ines one person company (OPC) as a company which has only one
person as a member.
Rules regarding its membership:
• Only one person as member.
• The memorandum of OPC shall indicate the name of the other person, who
shall, in the event of the subscriber’s death or his incapacity to contract,
become the member of the company.
• The other person whose name is given in the memorandum shall give his
prior written consent in prescribed form and the same shall be iled with
Registrar of companies at the time of incorporation of the company along
with its e-memorandum and e-articles.
• Such other person may be given the right to withdraw his consent.
• The member of OPC may at any time change the name of such other
person by giving notice to the company and the company shall intimate
the same to the Registrar.

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• Any such change in the name of the person shall not be deemed to be an
alteration of the memorandum.
• Only a natural person who is an Indian citizen whether resident in India
or otherwise and has stayed in India for a period of not less than 120 days
during the immediately preceding inancial year-
➢ shall be eligible to incorporate a OPC;
➢ shall be a nominee for the sole member of a OPC.
• No person shall be eligible to incorporate more than one OPC or become
nominee in more than one such company.
• No minor shall become member or nominee of the OPC or can hold share
with bene icial interest.
OPC cannot be incorporated or converted into a company under section 8 of the
Act. Though it may be converted to private or public companies in certain cases.

47. (i) Explain listed company and unlisted company as per the provisions of
the Companies Act, 2013.
(ii) Explain the classi ication of the companies on the basis of control as
per the Companies Act, 2013.

Sol. (i) Listed company: As per the de inition given in the section 2(52) of the
Companies Act, 2013, it is a company which has any of its securities listed
on any recognised stock exchange.
Provided that such class of companies, which have listed or intend to list
such class of securities, as may be prescribed in consultation with the
Securities and Exchange Board, shall not be considered as listed
companies.
Whereas the word securities as per section 2(81) of the Companies Act,
2013 has been assigned the same meaning as de ined in clause (h) of
section 2 of the Securities Contracts (Regulation) Act, 1956.
Unlisted company means company other than listed company.
(ii) In line with the Companies Act, 2013, following are the classi ication
of the Companies on the basis of control:
(a) Holding and subsidiary companies: ‘Holding and subsidiary’
companies are relative terms.
A company is a holding company in relation to one or more other
companies, means a company of which such companies are
subsidiary companies. [Section 2(46)]
For the purposes of this clause, the expression “company" includes
any body corporate.
Whereas section 2(87) de ines “subsidiary company” in relation to
any other company (that is to say the holding company), means a
company in which the holding company—

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(i) controls the composition of the Board of Directors; or

(ii)exercises or controls more than one-half of the total voting
power either at its own or together with one or more of its
subsidiary companies:
Provided that such class or classes of holding companies as
may be prescribed shall not have layers of subsidiaries beyond
such numbers as may be prescribed.
48. Referring to the provisions of the Companies Act, 2013, answer the
following:
(i) "Corporate veil sometimes fails to protect the members of the
company from the liability connected to the company's actions."
Explain any three instances.
(ii) What is the effect of Memorandum and Articles when registered?

Sol. (i) "Corporate veil sometimes fails to protect the members of the
company from the liability connected to the company's actions."
The following are the cases where company law disregards the principle
of corporate personality or the principle that the company is a legal entity
distinct and separate from its shareholders or members:
(1) To determine the character of the company i.e. to ind out
whether co-enemy or friend: It is true that, unlike a natural
person, a company does not have mind or conscience; therefore, it
cannot be a friend or foe. It may, however, be characterised as an
enemy company, if its affairs are under the control of people of an
enemy country. For this purpose, the Court may examine the
character of the persons who are really at the helm of affairs of the
company.
(2) To protect revenue/tax: In certain matters concerning the law of
taxes, duties and stamps particularly where question of the
controlling interest is in issue.
(i) Where corporate entity is used to evade or circumvent tax, the
Court can disregard the corporate entity.
(ii) Where the company was not a genuine company at all but
merely the assessee himself disguised under the legal entity of
a limited company.
(3) To avoid a legal obligation: Where it was found that the sole
purpose for the formation of the company was to use it as a device
to reduce the amount to be paid by way of bonus to workmen, the
Supreme Court upheld the piercing of the veil to look at the real
transaction (The Workmen Employed in Associated Rubber
Industries Limited, Bhavnagar vs. The Associated Rubber
Industries Ltd., Bhavnagar and another).

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(4) Formation of subsidiaries to act as agents: A company may

sometimes be regarded as an agent or trustee of its members, or of
another company, and may therefore be deemed to have lost its
individuality in favour of its principal. Here the principal will be held
liable for the acts of that company.
(5) Company formed for fraud/improper conduct or to defeat law:
Where the device of incorporation is adopted for some illegal or
improper purpose, e.g., to defeat or circumvent law, to defraud
creditors or to avoid legal obligations.
(ii) Effect of Memorandum and Articles: As per Section 10 of the Companies
Act, 2013, where the memorandum and articles when registered, shall
bind the company and the members thereof to the same extent as if they
respectively had been signed by the company and by each member, and an
agreement to observe all the provisions of the memorandum and of the
articles.
All monies payable by any member to the company under the
memorandum or articles shall be a debt due from him to the company.

49. Explain the kinds of share capital as per the Companies Act, 2013.

Sol. Kinds of share capital: Section 43 of the Companies Act, 2013 provides the kinds
of share capital. According to the said provision, the share capital of a company
limited by shares shall be of two kinds, namely:—
1. ‘‘Equity share capital’’, with reference to any company limited by shares, means
all share capital which is not preference share capital;
Equity share capital— can be
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with
such rules as may be prescribed;
2. ‘‘Preference share capital’’, with reference to any company limited by shares,
means that part of the issued share capital of the company which carries or
would carry a preferential right with respect to—
(a) payment of dividend, either as a ixed amount or an amount calculated at a ixed
rate, which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of
the share capital paid-up or deemed to have been paid-up, whether or not, there
is a preferential right to the payment of any ixed premium or premium on any
ixed scale, speci ied in the memorandum or articles of the company.

50. Write in brief the content and model of the Articles of Association (AOA),
according to which the director and other of icers are required to
perform their functions as regards the management of the company, its
accounts and audit.

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Sol. The Articles of Association are in fact the Bye-Laws of the company according to
which director and other officers are required to perform their functions as
regards the management of the company, its accounts and audit. It is important
therefore that the auditor should study them and, while doing so he should note
the provisions therein in respect of relevant matters.
Section 5 of the Companies Act, 2013 seeks to provide the contents and model of
articles of association. The section lays the following law-
(1) Contains regulations: The articles of a company shall contain the regulations for
management of the company.
(2) Inclusion of matters: The articles shall also contain such matters, as are prescribed
under the rules. However, a company may also include such additional matters in
its articles as may be considered necessary for its management.
(3) Contain provisions for entrenchment: The articles may contain provisions for
entrenchment (to protect something) to the effect that specified provisions of the
articles may be altered only if conditions or procedures as that are more restrictive
than those applicable in the case of a special resolution, are met or complied with.
(4) Manner of inclusion of the entrenchment provision: The provisions for
entrenchment shall only be made either on formation of a company, or by an
amendment in the articles agreed to by all the members of the company in the case
of a private company and by a special resolution in the case of a public company.
(5) Notice to the registrar of the entrenchment provision: Where the articles contain
provisions for entrenchment, whether made on formation or by amendment, the
company shall give notice to the Registrar of such provisions in such form and
manner as may be prescribed.
(6) Forms of articles: The articles of a company shall be in respective forms specified
in Tables, F, G, H, I and J in Schedule I as may be applicable to such company.
(7) Model articles: A company may adopt all or any of the regulations contained in the
model articles applicable to such company.
(8) Company registered after the commencement of this Act: In case of any company,
which is registered after the commencement of this Act, in so far as the registered
articles of such company do not exclude or modify the regulations contained in the
model articles applicable to such company, those regulations shall, so far as
applicable, be the regulations of that company in the same manner and to the
extent as if they were contained in the duly registered articles of the company.

51. Explain Doctrine of ‘Indoor Management’ under the Companies Act, 2013.
Also state the circumstances where the outsider cannot claim relief on the
ground of ‘Indoor Management’.
Sol. Doctrine of Indoor Management (The Companies Act, 2013): According to the
“doctrine of indoor management” the outsiders, dealing with the company though
are supposed to have satisfied themselves regarding the competence of the
company to enter into the proposed contracts are also entitled to assume that as
far as the internal compliance to procedures and regulations by the company is
concerned, everything has been done properly.

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They are bound to examine the registered documents of the company and ensure
that the proposed dealing is not inconsistent therewith, but they are not
bound to do more. They are fully entitled to presume regularity and
compliance by the company with the internal procedures as required by the
Memorandum and the Articles.
This doctrine is a limitation of the doctrine of “constructive notice” and popularly
known as the rule laid down in the celebrated case of Royal British Bank v. Turqu
and. Thus, the doctrine of indoor management aims to protect outsiders against
the company.
The above mentioned doctrine of Indoor Management or Turqu and Rule has limitations
of its own. That is to say, it is inapplicable to the following cases, namely:
(a) Actual or constructive knowledge of irregularity: The rule does not
protect any person when the person dealing with the company has
notice, whether actual or constructive, of the irregularity.
(b) Suspicion of Irregularity: The doctrine in no way, rewards those who
behave negligently. Where the person dealing with the company is put upon
an inquiry, for example, where the transaction is unusual or not in the
ordinary course of business, it is the duty of the outsider to make the
necessary enquiry.
(c) Forgery: The doctrine of indoor management applies only to irregularities
which might otherwise affect a transaction but it cannot apply to forgery
which must be regarded as nullity.

52. Brie ly explain the doctrine of “ultravires” under the Companies Act, 2013.
What are the consequences of ultravires acts of the company?

Sol. Doctrine of ultra vires: The meaning of the term ultra vires is simply
“beyond (their) powers”. The legal phrase “ultra vires” is applicable only to acts
done in excess of the legal powers of the doers. This presupposes that the powers in
their nature are limited.
It is a fundamental rule of Company Law that the objects of a company as stated
in its memorandum can be departed from only to the extent permitted by the Act,
thus far and no further.
In consequence, any act done or a contract made by the company which
travels beyond the powers not only of the directors but also of the company is
wholly void and inoperative in law and is therefore not binding on the company.
On this account, a company can be restrained from employing its fund for purposes
other than those sanctioned by the memorandum. Likewise, it can be restrained
from carrying on a trade different from the one it is authorised to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on
an ultra vires transaction, nor can it sue on it. Since the memorandum is a “public
document”, it is open to public inspection. Therefore, when one deals with a
company one is deemed to know about the powers of the company. If in spite

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of this you enter into a transaction which is ultra vires the company, you cannot
enforce it against the company.
An act which is ultra vires the company being void, cannot be ratified by the
shareholders of the company. Sometimes, act which is ultra vires can be
regularized by ratifying it subsequently

53. What are Negotiable Instruments? Explain its essential characteristics

under the Negotiable Instruments Act, 1881.

Sol. Meaning of Negotiable Instruments: Negotiable Instruments is an instrument (the

word instrument means a document) which is freely transferable (by
customs of trade) from one person to another by mere delivery or by
indorsement and delivery. The property in such an instrument passes to a
bona ide transferee for value.
The Act does not de ine the term ‘Negotiable Instruments’. However, Section
13 of the Act provides for only three kinds of negotiable instruments namely
bills of exchange, promissory notes and cheques, payable either to order or
bearer.
Essential Characteristics of Negotiable Instruments
1. It is necessarily in writing.
2. It should be signed.
3. It is freely transferable from one person to another.
4. Holder’s title is free from defects.
5. It can be transferred any number of times till its satisfaction.
6. Every negotiable instrument must contain an unconditional promise or
order to pay money. The promise or order to pay must consist of money
only.
7. The sum payable, the time of payment, the payee, must be certain.
8. The instrument should be delivered. Mere drawing of instrument does
not create liability.
54. What is a Bill of Exchange? Also, explain its essential characteristics under
the Negotiable Instruments Act, 1881.

Sol. Bill of Exchange: A “bill of exchange” is an instrument in writing containing an

unconditional order, signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of, a certain person or to the bearer
of the instrument.
Parties to the bill of exchange
(a) Drawer: The maker of a bill of exchange.
(b) Drawee: The person directed by the drawer to pay is called the 'drawee'.
He is the person on whom the bill is drawn. On acceptance of the bill, he is

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called an acceptor and is liable for the payment of the bill. His liability is
primary and unconditional.
(c) Payee: The person named in the instrument, to whom or to whose order
the money is, by the instrument, directed to be paid.
Essential characteristics of bill of exchange
(a) It must be in writing.
(b) Must contain an express order to pay.
(c) The order to pay must be de inite and unconditional.
(d) The drawer must sign the instrument.
(e) Drawer, drawee, and payee must be certain. All these three parties may
not necessarily be three different persons. One can play the role of two.
But there must be two distinct persons in any case. As per Section 31 of
the RBI Act, 1934, a bill of exchange cannot be made payable to bearer on
demand.
(f) The sum must be certain.
(g) The order must be to pay money only.
(h) It must be stamped.
55. What are Inchoate and Ambiguous Instruments under the Negotiable
Instruments Act, 1881?

Sol. Inchoate Instrument: It means an instrument that is incomplete in certain

respects. The drawer/ maker/ acceptor/ indorser of a negotiable instrument
may sign and deliver the instrument to another person in his capacity leaving
the instrument, either wholly blank or having writ ten on it the word
incomplete. Such an instrument is called an inchoate instrument and this gives
the power to its holder to make it complete by writing any amount either within
limits speci ied therein or within the limits speci ied by the stamp’s af ixed on
it. The principle of this rule of an inchoate instrument is based on the principle
of estoppel.
Ambiguous Instrument: According to Section 17 of the Negotiable
Instruments Act, 1881, 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 treated accordingly. Thus, an
instrument which is vague and cannot be clearly identi ied either as a bill of
exchange, or as a promissory note, is an ambiguous instrument. In other words,
such an instrument may be construed either as a promissory note, or as a bill of
exchange. Section 17 provides that the holder may, at his discretion, treat it as
either and the instrument shall thereafter be treated accordingly.

56. Explain the Rules as to compensation payable in case of dishonour of

promissory note, bill of exchange or cheque, by any party liable to the holder
or any endorsee covered under the Negotiable Instruments Act, 1881.

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Sol. As per section 117 of the Negotiable Instruments Act, 1881, the compensation
payable in case of dishonour of promissory note, bill of exchange or cheque, by
any party liable to the holder or any endorsee, shall be determined by the
following rules:
(i) the holder is entitled to the amount due upon the instrument, together
with the expenses properly incurred in presenting, noting and protesting
it;
(ii) when the person charged resides at a place different from that at which
the instrument was payable, the holder is entitled to receive such sum at
the current rate of exchange between the two places;
(iii) an endorser who, being liable, has paid the amount due on the same is
entitled to the amount so paid with interest at 18% per annum from the
date of payment until tender or realisation thereof, together with all
expenses caused by the dishonour and payment;
(iv) when the person charged and such endorser reside at different places, the
endorser is entitled to receive such sum at the current rate of exchange
between the two places;
(v) the party entitled to compensation may draw a bill upon the party liable
to compensate him, payable at sight or on demand, for the amount due to
him, together with all expenses properly incurred by him. Such bill must
be accompanied by the instrument dishonoured and the protest thereof
(if any). If such bill is dishonoured, the party dishonouring the same is
liable to make compensation thereof in the same manner as in the case of
the original bill.
57. What is a cheque under the Negotiable Instruments Act, 1881, and who are
the parties involved? What are the essential elements of a cheque?

Sol. CHEQUE [Section 6 of the Negotiable Instruments Act, 1881]

A “cheque” is a bill of exchange drawn on a speci ied 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.
Parties to Cheque
1. Drawer: The person who draws a cheque i.e., makes the cheque (Debtor).
His liability is primary and conditional.
2. Drawee: The speci ic bank on whom cheque is drawn. He makes the
payment of the cheque. In case of cheque, drawee is always banker.
3. Payee: The person named in the instrument (i.e., the person in whose
favour cheque is issued), to whom or to whose order the money is, by the
instrument, directed to be paid, is called the payee. The payee may be the
drawer himself or a third party.
Essential Characteristics of a cheque

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According to the de inition of cheque under section 6, a cheque is a species of

bill of exchange. Thus, it should ful il:
a. all the essential characteristics of a bill of exchange
b. Must be drawn on a speci ied banker.
c. It must be payable on demand.
58. A promissory note, payable at a certain period after sight, must be presented
to the maker thereof for payment. Under which scenarios, presentment for
payment is not necessary and the instrument is dishonoured at the due date
for presentment according to the provisions of the Negotiable Instrument
Act, 1881?

Sol. As per Section 76 of the Negotiable Instruments Act, 1881: No presentment

for payment is necessary, and the instrument is dishonoured at the due date for
presentment, in any of the following cases:
(A) (i) If the maker, drawee or acceptor intentionally prevents the
presentment of the instrument, or
(ii) if the instrument being payable at his place of business, he closes
such place on a business day during the usual business hours, or
(iii) if the instrument being payable at some other speci ied place,
neither he nor any person authorised to pay it attends at such place
during the usual business hours, or
(iv) if the instrument not being payable at any speci ied place, he cannot
after due search be found;
(B) as against any party sought to be charged therewith, if he has engaged to
pay notwithstanding non-presentment;
(C) as against any party if, after maturity, with knowledge that the instrument
has not been presented—
o he makes a part payment on account of the amount due on the
instrument,
o or promises to pay the amount due thereon in whole or in part,
o or otherwise waives his right to take advantage of any default in
presentment for payment;
(D) as against the drawer, if the drawer could not suffer damage from the want
of such presentment

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Part B – Case Study Questions

1. Ashok goes to super market to buy a Air Conditioner. He selects a branded Air Conditioner
having a price tag of ₹ 40,000 after a discount of ₹ 3000. Ashok reaches at cash counter for
making the payment, but cashier says, “Sorry sir, the discount was upto yesterday. There is
no discount from today. Hence you have to pay ₹ 43,000.” Ashok got angry and insists for ₹
40,000. State with reasons whether under Indian Contract Act, 1872, Ashok can enforce the
cashier to sell at discounted price i.e. ₹ 40,000.

Sol. An invitation to offer is different from offer. Quotations, menu cards, price tags,
advertisements in newspaper for sale are not offer. These are merely invitations to
public to make an offer. An invitation to offer is an act precedent to making an offer.
Acceptance of an invitation to an offer does not result in the contract and only an offer
emerges in the process of negotiation.
In the instant case, Ashok reaches to super market and selects a Air Conditioner with
a discounted price tag of ₹ 40,000 but cashier denied to sell at discounted price by
saying that discount is closed from today and request to make full payment. But Ashok
insists to purchase at discounted price.
On the basis of above provisions and facts, the price tag with Air Conditioner was not
offer. It is merely an invitation to offer. Hence, it is the Ashok who is making the offer
not the super market. Cashier has right to reject the Ashok’s offer. Therefore, Ashok
cannot enforce cashier to sell at discounted price.

2. A sends an offer to B to sell his second- car for Rs. 1,40,000 with a condition that if B does
not reply within a week, he (A) shall treat the offer as accepted. Is A correct in his
proposition?
Sol. Provision
Acceptance to an offer cannot be implied merely from the silence of the offeree, even if it is
expressly stated in the offer itself. Unless the offeree has by his previous conduct indicated that
his silence amount to acceptance, it cannot be taken as valid acceptance.
Analysis and conclusion
So, in the given problem, if B remains silent, it does not amount to acceptance.
The acceptance must be made within the time limit prescribed by the offer. The acceptance of
an offer after the time prescribed by the offer or has elapsed will not avail to turn the offer into
a contract.

3. Explain the type of contracts in the following agreements under the Indian Contract
Act,1872:
(i) A coolie in uniform picks up the luggage of A to be carried out of the railway station
without being asked by A and A allows him to do so.
(ii) Obligation of finder of lost goods to return them to the true owner.
(iii) A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before
the supply is effected, the fire caught in the factory and everything was destroyed.
Sol.

1|Page
(i) It is an implied contract and A must pay for the services of the coolie detailed by him.
Implied Contracts: Implied contracts come into existence by implication. Most often the
implication is by law and or by action. Section 9 of the Act contemplates such implied contracts
when it lays down that in so far as such proposal or acceptance is made otherwise than in words,
the promise is said to be implied.
(ii) Obligation of finder of lost goods to return them to the true owner cannot be said to arise out of a
contract even in its remotest sense, as there is neither offer and acceptance nor consent. These
are said to be quasi-contracts.
Quasi-Contract: A quasi-contract is not an actual contract but it resembles a contract. It is
created by law under certain circumstances. The law creates and enforces legal rights and
obligations when no real contract exists. Such obligations are known as quasi-contracts. In
other words, it is a contract in which there is no intention on part of either party to make a
contract but law imposes a contract upon the parties.
(iii) The above contract is a void contract.
Void Contract: Section 2 (j) states as follows: “A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable”. Thus, a void contract is one which cannot be
enforced by a court of law.

4. Mr. A was running an orphanage. His friend Mr. S, a philanthropist agreed to donate Rs. 2
lakh for treatment of a child, who was suffering from cancer. On emergency, Mr. A incurred
Rs. 1.5 lakh on treatment of child. Now, Mr. S refused to pay. Whether Mr. A can claim Rs.
1.5 lakh from Mr. S with reference to provisions of the Indian Contract Act, 1872?

Sol. The general rule is that an agreement made without consideration is void (Section 25 of the
Indian Contract Act, 1872).
However, in the following case, the agreement though made without consideration, will be valid and
enforceable.
Charity: If a promisee undertakes the liability on the promise of the person to contribute to charity,
there the contract shall be valid.
In the instant case, Mr. A can claim 1.5 lakh from Mr. S.
5. Mr. Sohanlal sold 10 acres of his agricultural land to Mr. Mohanlal on 25th September
2020 for Rs. 25 Lakhs. The Property papers mentioned a condition, amongst other
details, that whosoever purchases the land is free to use 9 acres as per his choice but the
remaining 1 acre has to be allowed to be used by Mr. Chotelal, son of the seller for
carrying out farming or other activity of his choice. On 12th October, 2020, Mr. Sohanlal
died leaving behind his son and life. On 15th October, 2020 purchaser started
construction of an auditorium on the whole 10 acres of land and denied any land to the
son. Now Mr. Chotelal wants to file a case against the purchaser and get a suitable
redressal. Discuss the above in light of provisions of Indian Contract Act, 1872 and
decide upon Mr. Chotelal’s plan of action?
Sol.
Provision
Problem as asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in section 2(d) and on the principle ‘privity of consideration’.

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 Consideration is one of the essential elements to make a contract valid and it can flow
from the promisee or any other person. In view of the clear language used in definition of
‘consideration’ in Section 2(d), it is not necessary that consideration should be furnished by the
promisee only. A promise is enforceable if there is some consideration for it and it is quite
immaterial whether it moves from the promisee or any other person.

The leading authority in the decision of the Chinnaya Vs. Ramayya, held that the
consideration can legitimately move from a third party and it is an accepted principle of
law in India.
Analysis and conclusion
In the given problem, Mr. Sohanlal has entered into a contract with Mr. Mohanlal, but Mr.
Chotelal has not given any consideration to Mr. Mohanlal but the consideration did flow from
Mr. Sohanlal to Mr. Mohanlal on the behalf of Mr. Chotelal and such consideration from third
party is sufficient to enforce the promise of Mr. Mohanlal to allow Mr. Chotelal to use 1 acre of
land. Further the deed of sale and the promise made by Mr. Mohanlal to Mr. Chotelal to
allow the use of 1 acre of land were executed simultaneously and therefore they should be
regarded as one transaction and there was sufficient consideration for it.

Moreover, it is provided in the law that “in case covenant running with the land, where a
person purchases land with notice that the owner of the land is bound by certain duties
affecting land, the covenant affecting the land may be enforced by the successor of the
seller.”

In such a case, third party to a contract can file the suit although it has not moved the
consideration. Hence, Mr. Chotelal is entitled to file a petition against Mr. Mohanlal for
execution of contract.
6. Kashish was running a business of artificial jewellery since long. He sold his business to
Naman and promises, not to carry on the business of artificial jewellery and real diamond
jewellery in that area for a period of next one year. After two months, Kashish opened a
show room for real diamond jewellery. Naman filed a suit against Kashish for closing the
business of real diamond jewellery business as it was against the agreement. Whether
Kashish is liable to close his business of real diamond jewellery following the provisions of
Indian Contract Act, 1872?

Sol. According to Section 27 of Indian Contract Act, 1872, an agreement by which any person is
restrained from exercising a lawful profession, trade or business of any kind, is to that extent
void. But this rule is subject to the following exceptions, namely, where a person sells the
goodwill of a business and agrees with the buyer to refrain from carrying on a similar
business, within specified local limits, so long as the buyer or his successor in interest
carries on a like business therein, such an agreement is valid. The local limits within which
the seller of the goodwill agrees not to carry on similar business must be reasonable.
In the instant case, Kashish sold his running business of artificial jewellery to Naman and
promises, not to carry on the business of artificial jewellery and real diamond jewellery in
that area and for a period of next one year but just after two months, Kashish opened a show

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 room of real diamond jewellery. Naman sued Kashish for closing the business of real
diamond business as it was against the agreement.
As exceptions to section 27 is applicable to similar business only, agreement between
Naman and Kashish will not be applicable on business of real diamond jewellery. Hence,
Kashish can continue his business of real diamond jewellery.
7. Sahil sells by auction to Rohan a horse which Sahil knows to be unsound. The horse appears
to be sound, but Sahil knows about the unsoundness of the horse. Is this contract valid in
the following circumstances under the Indian Contract Act, 1872:
(A) If Sahil says nothing about the unsoundness of the horse to Rohan.
(B) If Sahil says nothing about it to Rohan who is Sahil’s son.
(C) If Rohan says to Sahil “If you do not deny it, I shall assume that the horse is
sound.” Sahil says nothing.

Sol. According to section 17 of the Indian Contract Act, 1872, mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them, it is the duty of the
person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.
Hence, in the instant case,
(A) This contract is valid since as per section 17, mere silence as to the facts likely to
affect the willingness of a person to enter into a contract is not fraud. Here, it is
not the duty of the seller to disclose defects.
(B) This contract is not valid since as per section 17, it becomes Sahil’s duty to tell
Rohan about the unsoundness of the horse because a fiduciary relationship
exists between Sahil and his son Rohan. Here, Sahil’s silence is equivalent to
speech and hence amounts to fraud.
(C) This contract is not valid since as per section 17, Sahil’s silence is equivalent to
speech and hence amounts to fraud.
8. Mr. Sanjay Kothari was a big businessman having two sons and one married daughter. He
decided to gift his house to his daughter. For this purpose, he called his lawyer at his house
and made a written document for such gift. The lawyer advised him to get the transfer
document properly registered. When they both were going for registration of document,
they met an accident, and both died. Later, the daughter found the document and claimed
the house on the basis of that document. Explain, whether she can get the house as gift
under the Indian Contract Act, 1872?

Sol. Section 25 of the Indian Contract Act, 1872 provides that an agreement made without
consideration is valid if it is expressed in writing and registered under the law for the time
being in force for the registration of documents and is made on account of natural love and
affection between parties standing in a near relation to each other.
In the instant case, the transfer of house made by Mr. Sanjay Kothari on account of natural
love and affection between the parties standing in near relation to each other is written but
not registered. Hence, this transfer is not enforceable, and his daughter cannot get the house
as gift under the Indian Contract Act, 1872.

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9. Mr. Sohan, a wealthy individual provided a loan of Rs. 80,000 to Mr. Mukesh on 26th
February, 2023. The borrower, Mr. Mukesh asked for a further loan of Rs. 1,50,000.
Mr. Sohan agreed but provided the loan in parts on different dates. He provided Rs.
1,00,000 on 28th February, 2023 and remaining Rs. 50,000 on 3rd March, 2023.
On 10th March, 2023 Mr. Mukesh while paying off part Rs. 75,000 to Mr. Sohan insisted
that the lender should adjust Rs. 50,000 towards the loan taken on 3rd March, 2023 and
balance as against the loan on 26th February, 2023.
Mr. Sohan objected to this arrangement and asked the borrower to adjust in the order of
date of borrowal of funds.
Now you decide:
(i) Whether the contention of Mr. Mukesh correct or otherwise as per the provisions of the
Indian Contract Act, 1872?
(ii) What would be the answer in case the borrower does not insist on such order of
adjustment of repayment?
(iii)What would be the mode of adjustment/appropriation of such part payment in case
neither Mr. Sohan nor Mr. Mukesh insist on any order of adjustment on their part?

Sol. Appropriation of Payments: In case where a debtor owes several debts to the same creditor
and makes payment, which is not sufficient to discharge all the debts, the payment shall be
appropriated (i.e. adjusted against the debts) as per the provisions of Section 59 to 61 of the
Indian Contract Act, 1872.
(i) As per the provisions of 59 of the Act, where a debtor owing several distinct debts to one person,
makes a payment to him either with express intimation or under circumstances implying that
the payment is to be applied to the discharge of some particular debt, the payment, if accepted,
must be applied accordingly.
Therefore, the contention of Mr. Mukesh is correct, and he can specify the manner of
appropriation of repayment of debt.
(ii) As per the provisions of 60 of the Act, where the debtor has omitted to intimate and there are no
other circumstances indicating to which debt the payment is to be applied, the creditor may
apply it at his discretion to any lawful debt actually due and payable to him from the debtor,
where its recovery is or is not barred by the law in force for the time being as to the limitation of
suits.
Hence in case Mr. Mukesh fails to specify the manner of appropriation of debt on part
repayment, Mr. Sohan the creditor, can appropriate the payment as per his choice.
(iii) As per the provisions of 61 of the Act, where neither party makes any appropriation, the
payment shall be applied in discharge of the debts in order of time, whether they are or are not
barred by the law in force for the time being as to the limitation of suits. If the debts are of equal
standing, the payments shall be applied in discharge of each proportionately.
Hence in case where neither Mr. Mukesh nor Mr. Sohan specifies the manner of appropriation of
debt on part repayment, the appropriation can be made in proportion of debts.

10. Rahul was a Disk Jockey at a five-star hotel. As per the contract, he is supposed to perform
every weekend. (i.e. twice a week). Rahul will be paid Rs. 2,500 per day. However, after a
month, Rahul willfully absents himself from the performance. Taking into account the
provisions of the Indian Contract Act, 1872, answer the following:
(i) Does the hotel have the right to end the contract?

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(ii) If the hotel sends out a mail to Rahul that they are interested to continue the contract
and Rahul accepts, can the hotel rescind the contract after a month on this ground
subsequently?
(iii) In which of the case – (termination of contract or continuance of contract) can the
hotel claim damages that it had suffered as a result of this breach?

Sol. By analysing Section 39 of the Indian Contract Act, 1872, it is understood that when a party
to a contract has refused to perform or disabled himself from performing his promise
entirely, the following two rights accrue to the aggrieved party (promisee):
(a) To terminate the contract
(b) To indicate by words or by conduct that he is interested in its continuance.
In either of the two cases, the promisee would be able to claim damages that he suffers.
In the given case,
(i) Yes, the hotel has the right to end the contract with Rahul, the DJ.
(ii) The hotel has the right to continue the contract with Rahul. But once this right is exercised, it
cannot subsequently rescind the contract on this ground subsequently.
(iii) In both the cases, the hotel (promisee) is entitled to claim damages that has been suffered as
a result of breach.
11. X, Y and Z jointly borrowed Rs. 50,000 from L. Decide each of the following in the light of
the Indian Contract Act, 1872:
(i) Whether L can compel only Y to pay the entire loan of Rs. 50,000?
(ii) Whether L can compel only the legal representatives of Y to pay the loan of Rs.
50,000, if X, Y and Z died?
(iii) Whether Y and Z are released from their liability to L and X is released from his
liability to Y and Z for contribution, if L releases X from his liability and sues Y and
Z for payment?
Sol.
(i) Yes, L can compel only Y to pay Rs. 50,000/- since as per Section 43 of the Indian
Contract Act, 1872, in the absence of express agreement to the contrary, the promisee
may compel any one or more of the joint promisors to perform the whole of the
promise.
(ii) As per Section 42, when two or more persons have made a joint promise, then, unless
a contrary intention appears by the contract, all such persons, during their joint lives and
after the death of any of them, his representative jointly with the survivor or survivors
and after the death of last survivor, the representatives of all jointly must fulfill the
promise.
In the instant case, if X, Y and Z died then the legal representatives of all (i.e. X, Y and Z)
shall be liable to pay the loan jointly. L cannot compel only the legal representatives
of Y to pay the loan of Rs. 50,000.
(iii) According to Section 44, where two or more persons have made a joint promise, a
release of one of such joint promisors by the promisee does not discharge the other
joint promisor or joint promisors, neither does it free the joint promisors so released
from responsibility to the other joint promisor or promisors.

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 In this case, the release of X does not discharge Y and Z from their liability. Y and Z
remain liable to pay the entire amount of Rs. 50,000 to L. And though X is not liable
to pay to L, but he remains liable to pay to Y and Z i.e. he is liable to make the
contribution to the other joint promisors.
12. Murti was travelling to Manali with his wife by bus of Himalya Travels Pvt. Ltd. Due to some
technical default in the bus, the driver has to stop the bus in a mid way in cold night. Driver
advised the passenger to get the shelter in nearest hotel which was at a distance of only one
kilometre from that place. The wife of Mr. Murti caught cold and fell ill due to being asked
to get down and she had to walk in cold night to reach hotel. Mr. Murti filed the suit against
Himalya Travels Pvt. Ltd. for damages for the personal inconvenience, hotel charges and
medical treatment for his wife. Explain, whether Mr. Murti would get compensation for
which he filed the suit?
Sol.
Provision
Section 73 of Indian Contract Act, 1872 provides that when a contract has been broken, the party
who suffers by such breach is entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which naturally arose in the usual
course of things from such breach, or which the parties knew, when they made the contract, to be
likely to result from the breach of it. But such compensation is not to be given for any remote
and indirect loss or damage sustained by reason of the breach.
Analysis and conclusion
In the instant case, Mr. Murti filed the suit against Himalya Travels Pvt. Ltd. for damages for the
personal inconvenience, hotel charges and medical treatment for his wife.

On the basis of above provisions and facts of the case, it can be said that Mr. Murti can claim
damages for the personal inconvenience and hotel charges but not for medical treatment for
his wife because it is a remote or indirect loss.

13. ‘X’ entered into a contract with ‘Y’ to supply him 1,000 water bottles @ Rs. 5.00 per water
bottle, to be delivered at a specified time. Thereafter, ‘X’ contracts with ‘Z’ for the purchase
of 1,000 water bottles @ Rs. 4.50 per water bottle, and at the same time told ‘Z’ that he did
so for the purpose of performing his contract entered into with ‘Y’. ‘Z’ failed to perform his
contract in due course and market price of each water bottle on that day was Rs. 5.25 per
water bottle. Consequently, ‘X’ could not procure any water bottle and ‘Y’ rescinded the
contract. Calculate the amount of damages which ‘X’ could claim from ‘Z’ in the
circumstances? What would be your answer if ‘Z’ had not informed about the ‘Y’s contract?
Explain with reference to the provisions of the Indian Contract Act, 1872.
Sol.
Provision
The problem asked in this question is based on the provisions of Section 73 of the Indian
Contract Act, 1872.
Breach of Contract-Damages: Section 73 of the Indian Contract Act, 1872 lays down that when a
contract has been broken, the party who suffers by such breach is entitled to receive from the
party who has broken the contract compensation for any loss or damage caused to him
thereby which naturally arose in the usual course of things from such breach or which the
parties knew when they made the contract to be likely to result from the breach of it.

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The leading case on this point is “Hadley v. Baxendale” in which it was decided by the Court that the
special circumstances under which the contract was actually made were communicated by
the plaintiff to the defendant, and thus known to both the parties to the contract, the damages
resulting from the breach of such contract which they would reasonably contemplate, would be the
amount of injury which would ordinarily follow from the breach of contract under these
special circumstances so known and communicated.

Analysis and conclusion

In the instant case ‘X’ had intimated to ‘Z’ that he was purchasing water bottles from him for
the purpose of performing his contract with ‘Y’. Thus, ‘Z’ had the knowledge of the specal
circumstances. Therefore, ‘X’ is entitled to claim from ‘Z’ Rs. 500/- at the rate of 0.50 paise i.e. 1000
water bottles x 0.50 paise (difference between the procuring price of water bottles and contracted
selling price to ‘Y’) being the amount of profit ‘X’ would have made by the performance of his
contract with ‘Y’.

If ‘X’ had not informed ‘Z’ of ‘Y’s contract, then the amount of damages would have been the
difference between the contract price and the market price on the day of default. In other
words, the amount of damages would be Rs. 750/- (i.e. 1000 water bottles x 0.75 paise).

14. Mr. L let out his residential house to Mr. M for ₹ 50,000 p.m. for a period of one year.
According to the Rent agreement, electricity bill will be paid by Mr. L. But Mr. L could not
pay electricity dues up to 5 months, due to his financial hardships. The Electricity Board
sent the notice of disconnection, if it is not paid within a week's time. To avoid all this, Mr.
M paid the electricity bill of ₹ 50,000 with penalty. Later on, L refused to reimburse ₹ 50,000
and argued that he has paid bill voluntarily because of his own interest. Decide with
reference to provisions of the Indian Contract Act, 1872 whether Mr. M is entitled to be
reimbursed by Mr. L?

Sol. According to Section 69 of the Indian Contract Act, 1872, 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.
In the instant case, Mr. M paid the electricity bill to avoid the disconnection that was
pending due to Mr. L's failure to fulfil his contractual obligation. Hence, Mr. M is entitled
to be reimbursed ₹ 50,000 from Mr. L.

15. Mr. Y aged 21 years, lost his mental balance after the death of his parents in an accident. He
was left with his grandmother aged 85 years, incapable of walking and dependent upon
him. Mr. M, their neighbour, out of pity, started supplying food and other necessaries to both
of them. Mr. Y and his grandmother used to live in the house built by his parents. Mr. M also
provided grandmother with some financial assistance for her emergency medical
treatment. After supplying necessaries to Mr. Y for four years, Mr. M approached the former
asking him to payback ₹ 15 Lakhs inclusive of ₹ 7 Lakhs incurred for the medical treatment
of the lady (grandmother). Mr. Y pleaded that he has got his parents’ jewellery to sell to a
maximum value of ₹ 4 Lakhs, which may be adjusted against the dues. Mr. M refused and
threatened Mr. Y with a legal suit to be brought against for recovering the money.

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 Now, you are to decide upon based on the provisions of the Indian Contract Act, 1872:
(a) Will Mr. M succeed in filing the suit to recover money?
(b) What is the maximum amount of money that can be recovered by Mr. M?
(c) Shall the provisions of the above Act also apply to the medical treatment given
to the grandmother?

Sol. Claim for necessaries supplied to persons incapable of contracting (Section 68 of the
Indian Contract Act, 1872):
(a) If a person, incapable of entering into a contract, or anyone whom he is legally
bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.
In the instant case, Mr. M supplied the food and other necessaries to Mr. Y (who lost
his mental balance) and Mr. Y’s grandmother (incapable of walking and dependent
upon Mr. Y), hence, Mr. M will succeed in filing the suit to recover money.
(b) Supplier is entitled to be reimbursed from the property of such incapable person.
Hence, the maximum amount of money that can be recovered by Mr. M is ₹ 15 Lakhs
and this amount can be recovered from Mr. Y’s parent’s jewellery amounting to ₹ 4
Lakhs and rest from the house of Y’s Parents. (Assumption: Y has inherited the
house property on the death of his parents)
(c) Necessaries will include emergency medical treatment. Hence, the above
provisions will also apply to the medical treatment given to the grandmother as Y
is legally bound to support his grandmother.

16. Raghav found gold and diamond studded wristwatch value approximately Rs. 1,00,000/-
on the roadside. He picked it up and then advertised in the newspaper that the true owner
thereof can take the watch after showing proper evidence. After waiting for a certain period
of time, when the true owner did not tum up, he gifted that wristwatch to his son Mahesh.
A few days later, Madhav, the true owner of watch, somehow noticed his watch on wrist of
Mahesh. He approached him to collect the same, but Mahesh refused. In the evening, Raghav
called Madhav and told him that he incurred f 20,000 to find the true owner if he fails to
reimburse him the lawful expenses incurred on finding out the true owner, he will sue him
for recovery thereof or retain the possession of the watch with him till recovery. Even he
can sell the watch for recovery of expenses. Advise whether the following actions of Raghav
were lawful according to provisions of The Indian Contract Act, 1872:
(A) Gifting the wristwatch to his son.
(B) Warning Madhav to sue for recovery of lawful expenses incurred in finding true
owner.
(C) Retaining the possession of wristwatch till recovery of lawful expenses.
(D) Selling of wristwatch for recovery of expenses.

Sol. Responsibility of finder of goods (Section 71 of the Indian Contract Act, 1872): A person
who finds goods belonging to another and takes them into his custody is subject to
same responsibility as if he were a bailee.

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Thus, a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
The right of finder of lost goods- may sue for specific reward offered [Section 168]:
The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him in finding the owner and preserving the goods
found. But he has a right to retain the goods against the owner until he receives
such compensation.
When finder of thing commonly on sale may sell it [Section 169]: When a thing
which is commonly the subject of sale if lost, if the owner cannot with reasonable
diligence be found, or if he refuses, upon demand, to pay the lawful charges of the
finder, the finder may sell it—
(1) when the thing is in danger of perishing or of losing the greater part of its value,
or
(2) when the lawful charges of the finder in respect of the thing found amount to
two-thirds of its value.

Hence, the answers are:

(A) Gifting the wristwatch to his son Mahesh is unlawful. Raghav had no ownership
rights over the watch and could not legally transfer it to someone else.
(B) Warning Madhav to Sue for Recovery of Lawful Expenses: Raghav has no right to
sue Madhav for the expenses voluntarily incurred by Raghav in finding the owner.
(C) Retaining Possession of the Wristwatch Until Recovery of Lawful Expenses:
Raghav’s action of retaining the wristwatch until Madhav reimburses him for lawful
expenses is valid.
(D) Selling of Wristwatch for Recovery of Expenses: the watch is not perishable, and the
expenses claimed (₹ 20,000) are far below two-thirds of the value of the watch (₹
1,00,000). Therefore, Raghav does not have the right to sell the watch under these
circumstances, and selling the watch would be unlawful.

17. C’ advances to ‘B’, ₹2,00,000 on the guarantee of ‘A’. ‘C’ has also taken a further security for
the same borrowing by mortgage of B’s furniture worth ₹2,00,000 without knowledge of ‘A’.
C’ cancels the mortgage. After 6 months ‘B’ becomes insolvent and ‘C’ ‘sues ‘A’ his guarantee.
Decide the liability of ‘A’ if the market value of furniture is worth ₹80,000, under the Indian
Contract Act, 1872.

Sol.
Provision
Surety’s right to benefit of creditor’s securities: According to section 141 of the Indian Contract
Act, 1872, a surety is entitled to the benefit of every security which the creditor
has against the principal debtor at the time when the contract of suretyship is
entered into, whether the surety knows of the existence of such security or not; and,
if the creditor loses, or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.

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Analysis and conclusion
In the instant case, C advances to B, ₹2,00,000 rupees on the guarantee of A. C has also taken a further
security for ₹2,00,000 by mortgage of B’s furniture without knowledge of A. C
cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the furniture i.e. ₹80,000 and
will remain liable for balance ₹1,20,000.

18. A agrees to sell goods to B on the guarantee of C for the payment of the price of goods in
default of B. Is the agreement of guarantee valid in each of the following alternate cases:
Case 1. If A is a Minor
Case 2: If B is a Minor
Case 3: If C is a minor.

Sol.
Case 1: The agreement of guarantee is void because the creditor is incompetent to contract.
Case 2: The agreement of guarantee is valid because the capability of the principal debtor does not
affect the validity of the agreement of the guarantee.
Case 3: The agreement of guarantee is void because the surety is incompetent to contract.

19. Mr. X, is employed as a cashier on a monthly salary of Rs. 12,000 by ABC bank
for a period of three years. Y gave surety for X’s good conduct. After nine
months, the financial position of the bank deteriorates. Then X agrees to
accept a lower salary of Rs. 10,500/- per month from Bank. Two months later,
it was found that X has misappropriated cash since the time of his
appointment. What is the liability of Y?

Sol. According to section 133 of the Indian Contract Act, 1872, where there is any variance in
the terms of contract between the principal debtor and creditor without surety’s
consent, it would discharge the surety in respect of all transactions taking place
subsequent to such variance.
In the instant case, the creditor has made variance (i.e. change in terms) without
the consent of surety. Thus, surety is discharged as to the transactions subsequent
to the change.
Hence, Y is liable as a surety for the loss suffered by the bank due to
misappropriation of cash by X during the first nine months but not for
misappropriations committed after the reduction in salary.

20. Mr. Stefen owns a chicken farm near Gurugram, where he breeds them and sells eggs and
live chicken to retail shops in Gurugram. Mr. Flemming also owns a similar farm near
Gurugram, doing the same business. Mr. Flemming had to go back to his native place in
Australia for one year. He needed money for travel, so he had pledged his farm to Mr. Stefen
for one year and received a deposit of Rs. 25 lakhs and went away. At that point of time, the

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 stock of live birds was 100,000 and eggs 10,000. The condition was that when Flemming
returns, he will repay the deposit and take possession of his farm with live birds and eggs.
After one year Flemming came back and returned the deposit. At that time there were
109,000 live birds (increase is due to hatching of eggs out of 10,000 eggs he had left), and
15,000 eggs.
Mr. Stefen agreed to return 100,000 live birds and 10,000 eggs only.
State the duties of Mr. Stefen as Pawnee and advise Mr. Flemming about his rights in the
given case.

Sol. According to section 163 of the Indian Contract Act, 1872, in the absence of any contract to
the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any
increase or profit which may have accrued from the goods bailed.
In the given question, when Mr. Flemming returned from Australia there were 1,09,000 live birds
and 15,000 eggs (1,00,000 birds and 10,000 eggs were originally deposited by Mr. Flemming).
Mr. Stefen agreed to return 1,00,000 live birds and 10,000 eggs only and not the increased
number of live birds and eggs.
In the light of the provision of law and facts of the question, following are the answers:
Duties of Mr. Stefen: Mr. Stefen (pawnee) is bound to deliver to Mr. Flemming (pawnor), any
increase or profit (9,000 live birds and 5,000 eggs) which has occurred from the goods bailed
(i.e. the live birds and eggs).
Right of Mr. Flemmimg: Mr. Flemming is entitled to recover from Pawnee any increase in
goods so pledged.

21. Examine whether the following constitute a contract of ‘Bailment’ under the provisions of
the Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities.
Sol.
Provision
As per Section 148 of the Act, bailment is the delivery of goods by one person to another for some
purpose, upon a contract, that the goods shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of the person
delivering them.

For a bailment to exist the bailor must give possession of the bailed property and
the bailee must accept it. There must be a transfer in ownership of the goods.

Analysis and conclusion

(i) No. Mere custody of goods does not mean possession. In the given case, since the keys of
the car are with V, Section 148, of the Indian Contract Act, 1872 shall not applicable.
(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore,
bailment exists and section 148 is applicable.

22. Srushti acquired valuable diamond at a very low price by a voidable contract under the
provisions of the Indian Contract Act, 1872. The voidable contract was not rescinded.

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 Srushti pledged the diamond with Mr. VK. Is this a valid pledge under the Indian Contract
Act, 1872?
Sol.
Provision
Pledge by person in possession under voidable contract [Section 178A of the Indian
Contract Act, 1872]: When the pawnor has obtained possession of the goods
pledged by him under a contract voidable under section 19 or section 19A, but the
contract has not been rescinded at the time of the pledge, the pawnee acquires a
good title to the goods, provided he acts in good faith and without notice of the
pawnor’s defect of title.

Analysis and conclusion

Therefore, the pledge of diamond by Srushti with Mr. VK is valid.

23. R is the wife of P. She purchased some sarees on credit from [Link]
demanded the amount from P. P refused. Nalli filed a suit against P for the said
amount. Decide in the light of provisions of the Indian Contract Act, 1872,
whether Nalli would succeed?
Sol.
Provision
The situation asked in the question is based on the provisions related with the
modes of creation of agency relationship under the Indian Contract Act, 1872.
Agency may be created by a legal presumption; in a case of cohabitation by a
married woman (i.e. wife is considered as an implied agent of her husband). If wife
lives with her husband, there is a legal presumption that a wife has authority to
pledge her husband’s credit for necessaries.
But the legal presumption can be rebutted in the following cases:
(i) Where the goods purchased on credit are not necessaries.
(ii) Where the wife is given sufficient money for purchasing necessaries.
(iii) Where the wife is forbidden from purchasing anything on credit or contracting debts.
(iv) Where the trader has been expressly warned not to give credit to his wife

Yes, Nalli would succeed.

24. Explain whether the agency shall be terminated in the following cases under the provisions
of the Indian Contract Act, 1872:
(i) A gives authority to B to sell A's land, and to pay himself, out of the proceeds,
the debts due to him from A. Afterwards, A becomes insane.
(ii) A appoints B as A's agent to sell A's land. B, under the authority of A, appoints C
as agent of B. Afterwards, A revokes the authority of B but not of C. What is the
status of agency of C?

Sol. (i) According to section 202 of the Indian Contract Act, 1872, where the agent has himself
an interest in the property which forms the subject matter of the agency, the agency

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 cannot, in the absence of an express contract, be terminated to the prejudice of such
interest.
In other words, when the agent is personally interested in the subject matter of agency,
the agency becomes irrevocable.
In the given question, A gives authority to B to sell A’s land, and to pay himself, out of
the proceeds, the debts due to him from A.
As per the facts of the question and provision of law, A cannot revoke this authority,
nor it can be terminated by his insanity.
(ii) According to section 191 of the Indian Contract Act, 1872, a “Sub - agent” is a person
employed by, and acting under the control of, the original agent in the business of the
agency.
Section 210 provides that, the termination of the authority of an agent causes the
termination (subject to the rules regarding the termination of an agent’s authority) of
the authority of all sub-agents appointed by him.
In the given question, B is the agent of A, and C is the agent of B. Hence, C becomes a
sub- agent.
Thus, when A revokes the authority of B (agent), it results in termination of authority
of sub-agent appointed by B i.e. C (sub-agent).

25. Rama directs Shyam to sell laptops for him and agrees to give Shyam eleven percent (11%)
commission on the sale price fixed by Rama for each laptop. As Government of India put
restrictions on import of Laptops, Rama thought that the prices of laptops might go up in
near future and he revokes Shyam's authority for any further sale. Shyam, before receiving
the letter at his end sold 5 laptops at the price fixed by Rama. Shyam asked for 11%
commission on the sale of 5 Laptops for 1 lakh each. Explain under the provisions of the
Indian Contract Act, 1872:
(1) Whether sale of laptops after revoking Shyam's authority is binding on Rama?
(2) Whether Shyam will be able to recover his commission from Rama, if yes, what will be
the amount of such commission?

Sol. When termination of agent’s authority takes effect as to agent, and as to third persons
[Section 208 of the Indian Contract Act, 1872]: The termination of the authority of an agent
does not, so far as regards the agent, take effect before it becomes known to him, or, so far as
regards third persons, before it becomes known to them.
In the instant case,
(1) The revocation of Shyam's authority becomes effective only when it is communicated to and
received by Shyam. Since Shyam had not received the revocation letter at the time of selling
the laptops, his authority to sell on behalf of Rama was still valid. Hence, the sale of laptops
conducted by Shyam is binding on Rama.
(2) Shyam is entitled to receive his commission for the sales made while he still had the authority
to sell. Since he sold the laptops before receiving the revocation, he is entitled to his
commission as per the initial agreement with Rama.
Amount of Commission: Shyam sold 5 laptops at the price fixed by Rama, which is Rs. 1 lakh
each. The total sales amount to Rs. 5 lakh. The agreed commission rate is 11% i.e. Rs. 55,000.

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26. Kapil entered in a contract with Rahul to purchase 1000 litres of mustard oil at the price
which should be fixed by Akhilesh. Rahul already delivered 600 litres out of 1000 litres to
Kapil but when remaining 400 litres was ready to deliver, Akhilesh denied fixing the price
of mustard oil. Rahul asked Kapil to return the oil already delivered and avoid the delivery
of 400 litres. Kapil sued Rahul for non-delivery of remaining 400 litres mustard oil. Advise
in the light of the Sale of Goods Act, 1930.

Sol. By virtue of Section 9 of the Sale of Goods Act 1930, the price in the contract of sale may be
• fixed by the contract,
• or agreed to be fixed in a manner provided by the contract, e.g., by a valuer,
• or determined by the course of dealings between the parties. Further, section 10 provides for
the determination of price by a third party.
• Where there is an agreement to sell goods on the terms that price has to be fixed by the third
party and he either does not or cannot make such valuation, the agreement will be void.
• In case the third party is prevented by the default of either party from fixing the price, the
party at fault will be liable to the damages to the other party who is not at fault.
• However, a buyer who has received and appropriated the goods must pay a reasonable price
for them in any eventuality.
In the instant case, Kapil is liable to pay a reasonable price of 600 litres while for remaining 400
litres, contract may be avoided

27. Shubhangi went to a Jewellery shop and asked the salesgirl to show her diamond necklace
with Sapphire stones. The Jeweller told her that we have a lot of designs of diamond
necklace but with blue stones. If she chooses for herself any special design of diamond
necklace with blue stones, they will replace blue stones with Sapphire stones. But for the
Sapphire stones they will charge some extra cost. Shubhangi selected a beautiful designer
necklace and paid for it. She also paid the extra cost of Sapphire stones. The Jeweller
requested her to come back a week later for delivery of that necklace. When she came after
a week to take delivery of necklace, she noticed that due to Sapphire stones, the design of
necklace had been completely disturbed. Now, she wants to terminate the contract and
thus, asked the manager to give her money back, but he denied for the same. Answer the
following questions as per the Sale of Goods Act, 1930.
(i) State with reasons whether Shubhangi can recover the amount from the Jeweller.
(ii) What would be your answer if Jeweller says that he can change the design, but he will
charge extra cost for the same?

Sol. As per Section 4(3) of the Sale of Goods Act, 1930, where under a contract of sale, the
property in the goods is transferred from the seller to the buyer, the contract is called a sale, but
where the transfer of the property in the goods is to take place at a future time or subject to some
condition thereafter to be fulfilled, the contract is called an agreement to sell and as per Section
4(4), an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled
subject to which the property in the goods is to be transferred.
(i) On the basis of above provisions and facts given in the question, it can be said that there is an
agreement to sell between Shubhangi and Jeweller and not a sale. Even though the payment was
made by Shubhangi, the property in goods can be transferred only after the fulfilment of conditions

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fixed between the buyer and the seller. As due to Sapphire Stones, the original design is disturbed,
necklace is not in original position. Hence, Shubhangi has right to avoid the agreement to sell and
can recover the price paid.
(ii) If Jeweller offers to bring the necklace in original position by repairing, he cannot charge
extra cost from Shubhangi. Even though he has to bear some expenses for repair; he cannot charge it
from Shubhangi.

28. Arun contracted to sell his swift car to Mr. Nikhil. Both missed to discuss the price of the
said swift car. Later, Mr. Arun refused to sell his swift car to Mr. Nikhil on the ground that
the agreement was void, being uncertain about the price. Does Mr. Nikhil have any right
against Mr. Arun under the Sale of Goods Act, 1930?

Sol. As per the provisions of Section 2(10) of the Sale of Goods Act, 1930, price is the consideration
for sale of goods and therefore is a requirement to make a contract of sale. Section 2(10) is to be
read with Section 9 of the Sale of Goods Act, 1930.
According to Section 9 of the Sale of Goods Act, 1930, the price in a contract of sale may be fixed by
the contract or may be left to be fixed in a manner thereby agreed or may be determined by the
course of dealing between the parties.
Even though both the parties missed discussing the price of the car while making the contract, it will
be a valid contract, rather than being uncertain and void; the buyer shall pay a reasonable price in
this situation.
In the given case, Mr. Arun and Mr. Nikhil have entered into a contract for the sale of a swift car, but
they did not fix the price of the same. Mr. Arun refused to sell the car to Mr. Nikhil on this ground. Mr.
Nikhil can legally demand the car from Mr. Arun and Mr. Arun can recover a reasonable price for the
car from Mr. Nikhil.

29. Certain goods were sold by sample by A to B, who in turn sold the same goods by sample to
C and C by sample sold the goods to D. The goods were not according to the sample.
Therefore, D who found the deviation of the goods from the sample rejected the goods and
gave a notice to C. C sued B and B sued A. Advise B and C under the Sale of Goods Act, 1930.
Sol.
Provision
when the goods are sold by sample the goods must correspond to the sample in quality and the buyer
should be given reasonable time and opportunity of comparing the bulk with the
sample.

Analysis and conclusion

In the instant case, D who noticed the deviation of goods from the sample can reject the goods and
treat it as a breach of implied condition as to sample Whereas C can recover only
damages from B and B can recover damages from A. For C and B it will not be
treated as a breach of implied condition as to sample as they have accepted and sold
the goods according to Section 13(2) of the Sales of Goods Act, 1930.

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30. (i) M/s RK Traders (Buyer) made a contract with M/s CK Traders (Seller) for purchase of
2000 kg of basmati rice specifically grown in Chhattisgarh State should be packed in pink
colour bags of 25 kg each to identify the place of origin by specifying the mode of packing
of basmati rice. The seller agreed for specific packing of rice grown in Chhattisgarh State.
However, by misunderstanding, staff of seller packed the quantity of 1800 kg of basmati
rice grown in the State of Maharashtra in white colour bags of 30 kg each and the remaining
quantity of 200 kg, grown in Chhattisgarh State, in pink colour bags of 25 kg each. Referring
to the provisions of the Sale of Goods Act, 1930 analyse, whether the buyer has the right to
reject the entire quantity of basmati rice supplied by the seller.
On the other hand what is the remedy available to buyer if he has to accept the entire
quantity to fulfil his other contracts with other parties?

(ii) Kartik agreed to sell his laptop to Vasant for a price to be fixed by Kusum a hardware
engineer. However, before the delivery of the laptop, Kartik changed his mind and did not
share any particulars and configuration of the laptop with Kusum, which made her unable
to do the valuation. Kusum refused to do valuation.
Vasant needed laptop for his project, so he promised Kartik that, if the laptop is delivered
to him, he would pay a reasonable price for it However, Kartik decided not to sell his
laptop to Vasant. Now, Vasant wants to know from you, being a legal expert, whether
Kartik is bound by his promise as he agreed earlier to deliver his laptop to him at a
reasonable price. If he does not agree to deliver what is the other remedy available to
Vasant? Advise, referring to the provisions of the Sale of Goods Act, 1930.

Sol. (i) According to Section 15 of the Sale of Goods Act, 1930, where there is a contract of
sale of goods by description, there is an implied condition that the goods shall correspond
with the description. The buyer is not bound to accept and pay for the goods which are not in
accordance with the description of goods.
In the instant case, the contract specified that the basmati rice should be grown in
Chhattisgarh, packed in pink colour bags of 25 kg each but the seller mistakenly packed 1800
kg of rice from Maharashtra in white bags of 30 kg each, and only 200 kg of rice from
Chhattisgarh in the correct pink bags.
Therefore, the buyer has the right to reject the entire quantity of basmati rice supplied by the
buyer as the goods do not correspond with the description.

ANSWER TO SECOND PART

In case the buyer has to accept the entire quantity of rice to fulfil his other contracts with
other parties, he can claim damages which provides that where the seller wrongfully neglects
or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-
delivery.

(ii) Section 10 of the Sale of Goods Act, 1930 provides for the determination of price by a third
party.

1. Where there is an agreement to sell goods on the terms that price has to be fixed by the third
party and he either does not or cannot make such valuation, the agreement will be void.

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2. In case the third party is prevented by the default of either party from fixing the price, the
party at fault will be liable to the damages to the other party who is not at fault.
In the instant case, as Kusum cannot do valuation of laptop due to non-sharing of particulars
and configuration by Kartik who was bound by his promise, the agreement will be void.
The other remedy available to Vasant is that he can claim damages from Kartik as he will be
liable for the damages to Vasant who is not at fault.

31. Adarsh visited an authorized car showroom and purchased a car of his choice without
conducting a detailed inspection. After making the payment and taking delivery of the car,
he discovered a defect in the engine that could not have been detected even with a
reasonable inspection. With reference to the provisions of the Sale of Goods Act, 1930,
advise, whether Adarsh can invoke the implied condition of merchantability and repudiate
the contract due to the defect in the car.

Sol. Condition as to Merchantability [Section 16(2) of the Sale of Goods Act, 1930]: Where goods
are bought by description from a seller who deals in goods of that description (whether he is
the manufacturer or producer or not), there is an implied condition that the goods shall be of
merchantable quality.
There are two requirements for this condition to apply:
(a) Goods should be bought by description.
(b) The seller should be a dealer in goods of that description.
Provided that, if the buyer has examined the goods, there shall be no implied condition as
regards defects which such examination ought to have revealed.
The expression “merchantable quality”, though not defined, nevertheless connotes goods of
such a quality and in such a condition a man of ordinary prudence would accept them as
goods of that description. It does not imply any legal right or legal title to sell.
In the instant case, the defect in the engine could not have been detected even with a
reasonable inspection.
Therefore, Adarsh can invoke the implied condition of merchantability and is entitled to
repudiate the contract due to the defect in the car.

32. Saurabh purchased electric scooter of Vivek for Rs. 5000 only on the gun point. Vivek
decided to file the complaint and to avoid the contract on the basis of coercion applied
against him by Saurabh. But before he could do that, Saurabh sold the scooter to Vinay who
had no idea about the situation on which the scooter was purchased by Saurabh. Vivek sued
Saurabh and Vinay for recovery of scooter. Referring to the provisions of the Sale of Goods
Act, 1930, whether Vivek was correct in his decision?

Sol. By virtue of provisions of Section 29 of the Sale of Goods Act, 1930, a buyer would acquire a
good title to the goods sold to him by a seller who had obtained possession of the goods under a
contract voidable on the ground of coercion, fraud, misrepresentation or undue influence
provided that the contract had not been rescinded until the time of the sale.
In the instant case, Saurabh purchased electric scooter of Vivek for
Rs. 5000 only by applying coercion. Before Vivek avoid the contract, Saurabh sold the scooter
to Vinay who was an innocent buyer. Now, Vivek sued Saurabh and Vinay for recovery of
scooter.

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 According to above provisions, even Saurabh purchased the electric scooter by applying
coercion, Vinay got good title as he was an innocent buyer and purchased the scooter before
setting aside the contract by
Vivek. Hence, Vivek cannot recover the scooter from Vinay. However, Vivek may claim
damages from Saurabh.

33. Ashish, a trader, delivered a camera to Mohan on 'sale or return' basis. Mohan delivers the
camera to Raj on the terms of 'sale for cash only or return'. Afterward, Raj delivered it to
Vikas on a 'sale or return' basis without paying cash to Mohan. The camera, which was in
possession of Vikas, was lost by theft though he exercised due care for its safety. Referring
to the provisions of the Sale of Goods Act, 1930, analyse the situation and advise whether
Mohan, Raj or Vikas are, jointly or severally, liable to pay the price of the camera to Ashish.

Sol. As per the provisions of section 24 of the Sale of Goods Act, 1930, when goods are delivered to
the buyer on approval or “on sale or return" or other similar terms, the property
therein passes to the buyer when he does something to the good which is equivalent
to accepting the goods e.g. he pledges or sells the goods.
Referring to the above provisions, we can analyse the situation given in the question.
Since, Mohan, who had taken delivery of the camera on Sale or Return basis and
delivers the same to Raj on sale for cash only or return, has attracted the third
condition that he has done something to the good which is equivalent to accepting the
goods e.g. he pledges or sells the goods. Therefore, the property therein (Camera)
passes to Mohan.
Now, Raj delivered it to Vikas on a sale or return without paying cash to Mohan.
Since Raj did not pay cash and had not exercised the option to purchase, ownership of
the camera did not pass to Raj. Therefore, Raj is not liable to pay the price of the
camera either.
Since Vikas did not accept the goods and the camera was lost by theft (despite his due
care), Vikas is not liable for the price of the camera as ownership had not passed to
him.
Therefore, Mohan is solely liable to pay the price of the camera to Ashish, as he
accepted the camera on a "sale or return" basis and did not return it within a
reasonable time.

34. Mr. G sold some goods to Mr. H for a certain price by issue of an invoice, but payment in
respect of the same was not received on that day. The goods were packed and lying in the
godown of Mr. G. The goods were inspected by H's agent and were found to be in order. Later
on, the dues of the goods were settled in cash. Just after receiving cash, Mr. G asked Mr. H
that goods should be taken away from his godown to enable him to store other goods
purchased by him. After one day, since Mr. H did not take delivery of the goods, Mr. G kept
the goods out of the godown in an open space. Due to rain, some goods were damaged.
Referring to the provisions of the Sale of Goods Act, 1930, analyse the above
situation and decide who will be held responsible for the above damage. Will your
answer be different if the dues were not settled in cash and are still pending?

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Sol. 1. According to section 44 of the Sale of Goods Act, 1930, when the seller is ready and willing to
deliver the goods and requests the buyer to take delivery, and the buyer does not
within a reasonable time after such request take delivery of the goods, he is liable to
the seller for any loss occasioned by his neglect or refusal to take delivery and also for
a reasonable charge for the care and custody of the goods.
Risk of loss of goods prima facie follows the passing of property in goods. Goods
remain at the seller's risk unless the property there in is transferred to the buyer, but
after transfer of property therein to the buyer, the goods are at the buyer's risk
whether delivery has been made or not.
In the given case, since Mr. G has already intimated Mr. H, that he wanted to store some
other goods and thus Mr. H should take the delivery of goods kept in the godown of
Mr. G, the loss of goods damaged should be borne by Mr. H.
2. If the price of the goods would not have settled in cash and some amount would have
been pending then Mr. G will be treated as an unpaid seller and he can enforce the
following rights against the goods as well as against the buyer personally:
(a) Where under a contract of sale, the property in the goods has passed to the buyer
and the buyer wrongfully neglects or refuses to pay for the goods according to
the terms of the contract, the seller may sue him for the price of the goods.
[Section 55(1) of the Sales of Goods Act, 1930]
(b) Where under a contract of sale the price is payable on a day certain irrespective
of delivery and the buyer wrongfully neglects or refuses to pay such price, the
seller may sue him for the price although the property in the goods has not
passed and the goods have not been appropriated to the contract. [Section 55(2)
of the Sales of Goods Act, 1930].

35. Akash of Jaipur sold 100 smart TV set @ ₹ 50,000/- per set to Barun of Delhi. He delivered
the TV sets to Chirag, a transport carrier for transmission to Barun. Barun further sold
these 100 TV sets to Sarthak @ ₹ 60,000/- per set. On reaching the goods at the destination,
Barun demanded the delivery but Chirag, wrongfully, refused to deliver the goods to Barun.
That is why; he failed to deliver TV sets to Sarthak and suffered a huge loss on account of
non-delivery. Akash came to know about this. He directed Chirag to stop the delivery to
Barun and re-deliver the goods to him at Jaipur.
Answer the following questions under the provisions of the Sale of Goods Act,
1930:
(A) Whether Akash has the right to stop the goods in transit?
(B) Whether Barun can claim loss suffered due to non-delivery from Akash?

Sol. According to Section 51 of the Sale of Goods Act, 1930, when the carrier wrongfully refuses
to deliver the goods to buyer, the right of stoppage in transit is lost and transit comes
to an end.
On the other hand, according to section 57 of the Sale of Goods Act, 1930, where buyer
suffers losses due to non-delivery, he can sue seller for damages on account of non-
delivery.
In the instant case, the transit came to an end when Chirag wrongfully refused to
deliver the goods to Barun, and he suffered a huge loss due to non- delivery. Hence,

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 Akash cannot exercise the right of stoppage of goods in transit as the transit has
already come to an end.
Barun can claim loss suffered due to non-delivery from Akash.

36. Mr. Shankar sold 1000 Kgs wheat to Mr. Ganesh on credit of 3 months. Wheat was to be
delivered after 10 days of contract. After 5 days of contract, a friend of Mr. Shankar secretly
informed him that Mr. Ganesh may default in payment. On the information of friend, Mr.
Shankar applied the right to lien and withheld the delivery. With referring to the provisions
of the Sale of Goods Act, 1930:
(i) State, whether Mr. Shankar was right in his decision?
(ii) What would be your answer if Mr. Ganesh became insolvent within five days of
contract?

Sol. According to Section 45(1) of the Sale of Goods Act, 1930 the seller of
goods is deemed to be an ‘Unpaid Seller’ when-
(a) The whole of the price has not been paid or tendered.
(b) A bill of exchange or other negotiable instrument was given as payment, but the same has
been dishonoured, unless this payment was an absolute, and not a conditional payment.
Further, Section 47 provides about an unpaid seller’s right of lien. Accordingly, an unpaid
seller can retain the possession of the goods and refusal to deliver them to the buyer until the
price due in respect of them is paid or tendered. This right can be exercised by him in the
following cases only:
(a) where goods have been sold without any stipulation of credit; (i.e., on cash sale)
(b) where goods have been sold on credit, but the term of credit has expired; or
(c) where the buyer becomes insolvent.
In the instant case, Mr. Ganesh purchased 1000 Kg wheat from Mr. Shankar on 3 month’s
credit which was to be delivered after 10 days of contract. But, after 5 days of contract, one
friend of Mr. Shankar secretly informed him that Mr. Ganesh may default in payment. On the
belief of friend, Mr. Shankar applied the right to lien and withheld the delivery.
(i) On the basis of above provisions and facts, it can be said that even Mr. Ganesh was an unpaid
seller until the term of credit i.e. has expired, Mr. Shankar had to perform his promise of
supplying 1000 Kg of wheat.
(ii) In case Mr. Ganesh became insolvent before the delivery of wheat, Mr. Shankar had the right
to apply the lien and he could withhold the delivery.

37. Suraj sold his car to Sohan for Rs. 1,75,000. After inspection and satisfaction, Sohan paid
Rs. 75,000 and took possession of the car and promised to pay the remaining amount
within a month. Later on, Sohan refuses to give the remaining amount on the grounds that
the car was not in good condition. Advise Suraj as to what remedy is available to him against
Sohan under the Sale of Goods Act, 1930.

Sol. As per section 55 of the Sale of Goods Act, 1930, an unpaid seller has a right to institute a suit
for price against the buyer personally. The said Section lays down that:

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(i) Where under a contract of sale the property in the goods has passed to buyer and the buyer
wrongfully neglects or refuses to pay for the goods, the seller may sue him for the price of the
goods [Section 55(1)].
(ii) Where under a contract of sale the price is payable on a certain day irrespective of delivery
and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the
price. It makes no difference even if the property in the goods has not passed and the goods
have not been appropriated to the contract [Section 55(2)].
This problem is based on the above provisions. Hence, Suraj will succeed against Sohan for
recovery of the remaining amount. Apart from this, Suraj is also entitled to:
(1) Interest on the remaining amount
(2) Interest during the pendency of the suit.
(3) Costs of the proceedings.

38. Ram sells 200 bales of cloth to Shyam and sends 100 bales by lorry and 100 bales by
Railway. Shyam receives delivery of 100 bales sent by lorry, but before he receives the
delivery of the bales sent by railway, he becomes bankrupt. Ram being still unpaid, stops
the goods in transit. The official receiver, on Shyam’s insolvency claims the goods. Decide
the case with reference to the provisions of the Sale of Goods Act, 1930.
Sol.
Provision
Right of stoppage of goods in transit: The problem is based on section 50 of the Sale of Goods Act,
1930 dealing with the right of stoppage of the goods in transit available to an
unpaid seller. The section states that the right is exercisable by the seller only if
the following conditions are fulfilled.
(i) The seller must be unpaid
(ii) He must have parted with the possession of goods
(iii) The goods must be in transit
(iv) The buyer must have become insolvent
(v) The right is subject to the provisions of the Act.

Analysis and conclusion

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

39. Referring to the provisions of the Indian Partnership Act, 1932, answer the following:
(i) Ram and Shyam are partners in a partnership firm named as RS & Co. (the firm).
Gaurav, a renowned businessman, is their common friend. Ram introduced
Gaurav to Sahil, a supplier to the firm, as his newly joined partner. Gaurav
knowing that he is not a partner preferred to keep quiet on such an
introduction. This information about Gaurav, being a partner of the firm, was
shared by Sahil with another businessman Madhav. Next day, Sahil supplied the
raw material on credit and Madhav lent ₹ 5 lakhs to the firm for a short period
on the understanding that Gaurav is a partner of the firm. On due dates, the firm

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 failed to discharge its liability towards both. Advise Gaurav, whether he is liable
to Sahil and Madhav for the aforesaid liability of the firm.
(ii) On admission as a new partner, Ashwin agreed to be liable for the existing debts
(referred to as the old debts) of the firm by an agreement signed by all partners
including Ashwin. Examine, whether Ashwin will be liable in a suit filed by the
creditor against the firm and all existing partners for recovery of the old debt of
the firm.

Sol. (i)Partner by holding out (Section 28 of the Indian Partnership Act, 1932):
Anyone who by words spoken or written or by conduct represents himself, or
knowingly permits himself to be represented, to be a partner in a firm, is liable as a
partner in that firm to anyone who has on the faith of any such representation given
credit to the firm, whether the person representing himself or represented to be a
partner does or does not know that the representation has reached the person so
giving credit.
In the instant case, since Gaurav allowed himself to be represented as a partner to the
RS & Co. and third parties acted based on this belief and therefore, Gaurav is held liable
to Sahil as he represented himself by his act to be a partner to the RS & Co.
However, Gaurav is not liable to Madhav for the liabilities incurred by the firm.
Information of Gaurav being a partner to the firm was shared by the Sahil (Supplier to
the firm) which is not falling within the ambit of doctrine of holding out.
Hence Gaurav is liable to Sahil and not to Madhav for the liability of the Firm.
(ii) Rights and liabilities of new partner: The new firm, including the new partner who
joins it, may agree to assume liability for the existing debts of the old firm, and
creditors may agree to accept the new firm as their debtor and discharge the old
partners. The creditor’s consent is necessary in every case to make the transaction
operative. Novation is the technical term in a contract for substituted liability, of
course, not confined only to case of partnership.
But a mere agreement amongst partners cannot operate as Novation. Thus, an
agreement between the partners and the incoming partner that he shall be liable for
existing debts will not ipso facto give creditors of the firm any right against him.
In the instant case, Ashwin will not be liable in a suit filed by the creditor against the
firm and all existing partners for recovery of the old debt of the firm.

40. State whether the following are partnerships under the Indian Partnership Act, 1932:
(a) X, a contractor, appointed Y one of his servants to manage his business of
loading and unloading railway wagons. Y was to receive 50% of the profits of
the business and also to bear the losses, if any.
(b) Two firms each having 12 partners combine by an agreement into one firm.
(c) A and B, co-owners, agree to conduct the business in common for profit.
(d) Some individuals form an association to which each individual contributes ₹
500 annually. The objective of the association is to produce clothes and
distribute the clothes free to the war widows.
(e) A and B, co-owners share between themselves the rent derived from a piece of
land.

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 (f) A and B buy commodity X and agree to sell the commodity, sharing the profits
equally.
(g) 10 major persons form an association to which each member contributes ₹
10,000. The purpose is to produce medicines for free distribution to poor
patients.
(h) X, Y, and Z agree to divide the profits equally, but the loss, if any, is to be borne
by X alone. Is it case of partnership?
(i) X, a publisher, agrees to publish a book at his own expense written by Y and to
pay Y, half of the net profit. Does this create a relationship of partnership
between X and Y? Can paper dealer i.e. third party make Y liable for paper
supplied to X?
(j) A and B purchase a tea shop and incur additional expenses for purchasing
utensils etc. each contributing half of the total expense. The shop is leased out
on daily rent which is divided between both. Does this arrangement constitute
a partnership between A and B?

Sol. (a) No, this is a case of partnership because no mutual agency relationship exist among X
and Y.
(b) Yes, this is a case of partnership because there is an agreement between two firms to
combine into one firm.
(c) Yes. This is a case of partnership because A & B, co-owners, have agreed to conduct a
business in common for profit.
(d) No, this is not a case of partnership as no charitable association can be floated in
partnership.
(e) No, this is not a case of partnership as they are co-owners and not the partners.
Further, there exist no business.
(f) Yes, this is a case of partnership as there exist the element of doing business and
sharing of profits equally.
(g) No, this is not a case of partnership as there is no intention to carry on the business
and to share the profits thereof.
(h) Yes, it is a case of partnership.
Reason: The sharing of profits is an essential feature of partnership. There can be no
partnership where only one of the partners is entitled to the whole of the profits of
the business. Partners must agree to share the profits in any manner they choose. But
an agreement to share losses is not an essential requirement. It is open to one or more
partners to agree to share all the losses.
(i) No, it is not a case of partnership
Reason: Sharing of profit, which is a prima facie evidence, exists but mutual agency
among X and Y, which is an essential element, does not exist here. Since there is no
partnership, the third party i.e. paper dealer cannot make Y liable for the paper
supplied by him to X.
(j) No, it is not a case of partnership
Reason: Persons who share amongst themselves the rent derived from a piece of land
are not partners, rather they are coowners. Because, neither there is existence of
business, nor mutual agency is there.

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41. Sahil, Amit and Kunal were partners in a firm. The firm is a dealer in office furniture. They
have regular dealings with M/s AB and Co. for the supply of furniture for their business. On
30th June 2023, one of the partners, Mr. Kunal died in a road accident. The firm ordered
M/s AB and Co. to supply the furniture for their business on 25th May 2023, when Kunal
was also alive.
Now Sahil and Amit continue the business in the firm’s name after Kunal’s death. The firm
did not give any notice about Kunal’s death to the public or the persons dealing with the
firm. M/s AB and Co. delivered the furniture to the firm on 25th July 2023. The fact about
Kunal’s death was known to them at the time of delivery of goods. Afterwards the firm
became insolvent and failed to pay the price of furniture to M/s AB and Co. Now M/s AB
and Co. has filed a case against the firm for recovery of the price of furniture. With
reference to the provisions of Indian Partnership Act, 1932, explain whether Kunal’s
private estate is also liable for the price of furniture purchased by the firm?

Sol. Further, in order that the estate of the deceased partner may be absolved from liability for
the future obligations of the firm, it is not necessary to give any notice either to the public or
the persons having dealings with the firm.
In the light of the facts of the case and provisions of law, since the delivery of furniture was
made after Kunal’s death, his estate would not be liable for the debt of the firm. A suit for
goods sold and delivered would not lie against the representatives of the deceased partner.
This is because there was no debt due in respect of the goods in Kunal’s lifetime. He was
already dead when the delivery of goods was made to the firm and also it is not necessary to
give any notice either to the public or the persons having dealings with the firm on a death of
a partner (Section 35). So, the estate of the deceased partner may be absolved from liability
for the future obligations of the firm.

42. M/s ABC & Associates, a partnership firm with A, B and C as senior partners engaged in the
business of curtain manufacturing and exporting to foreign countries. On 25th August,
2022, they inducted Mr. P, an expert in the field of curtain manufacturing as their partner.
On 10th January 2024, Mr. P was blamed for unauthorized activities and thus expelled from
the partnership by approval of all of the remaining partners.
(i) Examine whether action by the partners was justified or not?
(ii) What should have the factors to be kept in mind prior expelling a partner from
the firm by other partners according to the provisions of the Indian Partnership
Act, 1932?

Sol. Expulsion of a Partner (Section 33 of the Indian Partnership Act, 1932): A partner may not be
expelled from a firm by a majority of partners except in exercise, in good faith, of powers
conferred by contract between the partners.
The test of good faith as required under Section 33(1) includes three things:
• The expulsion must be in the interest of the partnership.
• The partner to be expelled is served with a notice.
• He is given an opportunity of being heard.

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 If a partner is otherwise expelled, the expulsion is null and void.
(a) Action by the partners of M/s ABC & Associates, a partnership firm to expel Mr. P from
the partnership was justified as he was expelled by approval of the other partners
exercised in good faith to protect the interest of the partnership against the
unauthorized activities charged against Mr. P. A proper notice and opportunity of
being heard has to be given to Mr. P.
(b) The following are the factors to be kept in mind prior expelling a partner from the firm
by other partners:
• the power of expulsion must have existed in a contract between the partners;
• the power has been exercised by a majority of the partners; and
• it has been exercised in good faith.

43. X and Y were partners in a firm. The firm was dissolved on 12th June, 2022 but no public
notice was given. Thereafter, X purchased some goods in the firm’s name from Z. Z was
ignorant of the fact of dissolution of firm. X became insolvent and Z filed a suit against Y for
recovery of his amount. State with reasons whether Y would be liable under the provisions
of the Indian Partnership Act, 1932?

[Link] virtue of provisions of Section 45 of the Indian Partnership Act, 1932, notwithstanding the
dissolution of a firm, the partners continue to be liable as such to third parties for any act done
by any of them which would have been an act of the firm, if done before the dissolution, until
public notice is given of the dissolution.
In the instant case, X and Y were partners in a firm which was dissolved but no public notice was
given. After dissolution, X purchased some goods in the firm’s name from Z who was ignorant of
the fact of dissolution of firm. X became insolvent and Z filed a suit against Y for recovery of his
amount.
Following the provisions of Section 45, X and Y are continuing liable against third party even
after dissolution of firm until public notice is given. As in the given problem, X became insolvent,
therefore, Y will be liable to Z.

44. Mr. R, a manufacturer of toys approached MNO Private Limited for supply of raw material
worth ₹ 1,50,000/-. Mr. R was offered a credit period of one month. Mr. R went to the
company prior to the due date and met Mr. C, an employee at the billing counter, who
convinced the former that the payment can be made to him as the billing-cashier is on leave.
Mr. R paid the money and was issued a signed and sealed receipt by Mr. C. After the
lapse of due date, Mr. R received a recovery notice from the company for the payment
of ₹ 1,50,000/-.
Mr. R informed the company that he had already paid the above amount and being an
outsider had genuine reasons to trust Mr. C who claimed to be an employee and had
issued him a receipt.
The Company filed a suit against Mr. R for non-payment of dues. Discuss the fate of
the suit and the liability of Mr. R towards company as on current date in consonance
with the provision of the Companies Act, 2013? Would your answer be different if a
receipt under the company seal was not issued by Mr. C after receiving payment?

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Sol. (i) Fate of the suit and the liability of Mr. R towards the company: Doctrine of the Indoor
Management
According to the Doctrine of Indoor Management, the outsiders are not deemed to
have notice of the internal affairs of the company. They are entitled to assume that the
acts of the directors or other officers of the company are validly performed, if they are
within the scope of their apparent authority. So long as an act is valid under the
articles, if done in a particular manner, an outsider dealing with the company is
entitled to assume that it has been done in the manner required. This is the indoor
management rule, that the company’s indoor affairs are the company’s problem. This
rule has been laid down in the landmark case-the Royal British Bank vs. Turquand.
(Known as “Turquand Rule”)
In the instant case, Mr. R is not liable to pay the amount of ₹ 1,50,000 to MNO Private
Limited as he had genuine reasons to trust Mr. C, an employee of the company who
had issued him a signed and sealed receipt.
(ii) Liability of Mr. R in case no receipt is issued by Mr. C: Exceptions to doctrine of
indoor management: Suspicion of irregularity is an exception to the doctrine of
indoor management. The doctrine of indoor management in no way rewards those
who behave negligently. It is the duty of the outsider to make the necessary enquiry, if
the transaction is not in the ordinary course of business.
If a receipt under the company seal was not issued by Mr. C after receiving payment,
Mr. R is liable to pay the said amount as this will be deemed to be a negligence on the
part of Mr. R and it is his duty to make the necessary enquiry to check that whether
Mr. C is eligible to take the payment or not.

45. (i) ABC Limited has allotted equity shares with voting rights to XYZ Limited worth
₹ 15 Crores during the Financial Year 2023-24. After that the total Paid-up
Equity Share Capital of ABC Limited is ₹ 100 [Link] the Meaning of
Associate Company and comment on whether ABC Limited and XYZ Limited
would be called Associate Company as per the provisions of the Companies Act,
2013?

(ii) MTK Private Limited is a company registered under the Companies Act, 2013 on
5th January 2022. The company did not start its business till 31s July 2024.
Identify under which category MTK Private Limited company is classified.
Explain the definition of the category of the company in detail.

Sol. (i)As per Section 2(6) of the Companies Act, 2013, an Associate Company in relation to another
company, means a company in which that other company has a significant influence,
but which is not a subsidiary company of the company having such influence and
includes a joint venture company.
The term “significant influence” means control of at least 20% of total voting power,
or control of or participation in business decisions under an agreement.
In the given case, ABC Ltd. has allotted equity shares with voting rights to XYZ Limited
of ₹ 15 crore, which is less than requisite control of 20% of total share capital (i.e. ₹
100 crore) to have a significant influence of XYZ Ltd. Since the said requirement is not

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 complied therefore ABC Ltd. and XYZ Ltd. are not associate companies as per the
Companies Act, 2013.
(ii) “Inactive company” means a company which has not been carrying on any business
or operation or has not made any significant accounting transaction during the last
two financial years or has not filed financial statements and annual returns during the
last two financial years. [Explanation (i) to Section 455 of the Companies Act, 2013]
“Significant accounting transaction” means any transaction other than—
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.
[Explanation (ii) to Section 455 of the Companies Act, 2013]
In the instant case, MTK Private Limited was registered on 5th January 2022 and did
not start its business till 31st July 2024. Since the Company has not started its business
and a period of more than two years has already elapsed, it will be treated as an
inactive company.

46. (i) Mr. Sooraj sold his business of cotton production to a cotton production company, CPL
Private Limited, in which he held all the shares except one which was held by his wife. He is
also the creditor in the company for a certain amount. He also got the insurance of the stock
of cotton of CPL Private Limited in his own name and not in the name of the company. After
one month, all the stocks of the cotton of CPL Private Limited were destroyed by fire. Mr.
Sooraj filed the claim for such loss with the Insurance company. State with reasons that
whether the insurance company is liable to pay the claim?

(ii) Alfa school is a section 8 company which started imparting education on 1.4.2015,
with the sole objective of providing education to children of weaker society either free of
cost or at a very nominal fee depending upon the financial condition of their parents.
However, on 31st March 2023, it came to the knowledge of the Central Government that
the said school was operating by violating the objects of its objective clause due to which
it was granted the status of a section 8 company under the Companies Act, 2013. Describe
what powers can be exercised by the Central Government against the Alfa School, in such
a case?

Sol. (i) According to the decision taken in the case of Salomon Vs. Salomon & Co. Ltd., a
company has a separate legal entity. A company is different from its members. Further,
according to the decision taken in the case of Macaura Vs. Northern Assurance Co. Ltd.,
a member or creditor does not have any insurable interest in the property of the
company. Members or creditors of the company cannot claim ownership in the
property of company.
On the basis of the above provisions and facts, it can be said that Mr. Sooraj and CPL
Private Limited are separate entities. Mr. Sooraj cannot have any insurable interest in
the property of CPL Private Limited neither as member nor as creditor. Hence, the
insurance company is not liable to pay to Mr. Sooraj for the claim for the loss of stock
by fire.

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 (ii) Section 8 of the Companies Act, 2013 deals with the formation of companies which
are formed to promote the charitable objects of commerce, art, science, education,
sports etc. Such company intends to apply its profit in promoting its objects. Section 8
companies are registered by the Registrar only when a license is issued by the Central
Government to them. Since, Alfa School was a Section 8 company and it had started
violating the objects of its objective clause, hence in such a situation the following
powers can be exercised by the Central Government:
(i) The Central Government may by order revoke the licence of the company where
the company contravenes any of the requirements or the conditions of this
sections subject to which a licence is issued or where the affairs of the company
are conducted fraudulently, or violative of the objects of the company or
prejudicial to public interest, and on revocation the Registrar shall put ‘Limited’
or ‘Private Limited’ against the company’s name in the register. But before such
revocation, the Central Government must give it a written notice of its intention
to revoke the licence and opportunity to be heard in the matter.
(ii) Where a licence is revoked, the Central Government may, by order, if it is satisfied
that it is essential in the public interest, direct that the company be wound up
under this Act or amalgamated with another company registered under this
section. However, no such order shall be made unless the company is given a
reasonable opportunity of being heard.
(iii) Where a licence is revoked and where the Central Government is satisfied that it
is essential in the public interest that the company registered under this section
should be amalgamated with another company registered under this section and
having similar objects, then, notwithstanding anything to the contrary contained
in this Act, the Central Government may, by order, provide for such
amalgamation to form a single company with such constitution, properties,
powers, rights, interest, authorities and privileges and with such liabilities,
duties and obligations as may be specified in the order.

47. (i) Powertech Limited was registered as a public company. There are 230 members in
the company as noted below:
(a) Directors and their relatives 190
(b) Employees 15
(c) Ex-Employees (Shares were allotted when they 10
were employees)
(d) 5 couples holding shares jointly in the name of 10
husband and wife (5*2)
(e) Others 5
The Board of Directors of Powertech Limited proposes to convert it into a private
company. Also advise whether a reduction in the number of members is
necessary.

(ii) Popular Products Ltd. is company incorporated in India, having a total Share
Capital of ₹ 20 Crores. The Share capital comprises of 20 Lakh equity shares of
₹ 100 each. Delight Products Ltd. and Happy Products Ltd. hold 2,50,000 and

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 3,50,000 shares respectively in Popular Products Ltd. Another company,
Cheerful Products Ltd. holds 2,50,000 shares in Popular Products Ltd. Jovial Ltd.
is the holding company for all the above three companies namely Delight
Products Ltd.; Happy Products Ltd. and Cheerful Products Ltd. Can Jovial Ltd. be
termed as a subsidiary company of Popular Products Ltd.
State the related provision in favour of your answer, if Jovial Ltd. controls the
composition of directors of Popular Products Ltd.

Sol. (i) According to section 2(68) of the Companies Act, 2013, "Private company" means a
company having a minimum paid-up share capital as may be prescribed, and which by
its articles, except in case of One Person Company, limits the number of its members
to two hundred.
However, where two or more persons hold one or more shares in a company jointly,
they shall, for the purposes of this clause, be treated as a single member.
It is further provided that -
(A) persons who are in the employment of the company; and
(B) 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,
shall not be included in the number of members.
In the instant case, Powertech Limited may be converted into a private company only
if the total members of the company are limited to 200.
Total Number of members
(i) Directors and their relatives 190
(ii) 5 Couples (5*1) 5
(iii) Others 5
Total 200
Therefore, there is no need for reduction in the number of members since existing
number of members are 200 which does not exceed maximum limit of 200.
(ii) According to Section 2(87) of the Companies Act, 2013 “subsidiary company” in
relation to any other company (that is to say the holding company), means a company
in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its
own or together with one or more of its subsidiary companies.
In the present case, the total share capital of Popular Products Ltd. is ₹ 20 crores
comprised of 20 Lakh equity shares.
Delight Products Ltd., Happy Products Ltd. and Cheerful Products Ltd together hold
8,50,000 shares (2,50,000+3,50,000+2,50,000) in Popular Products Ltd. Jovial Ltd. is
the holding company of all above three companies. So, Jovial Ltd. along with its
subsidiaries hold 8,50,000 shares in Popular Products Ltd., which amounts to less than
one-half of its total voting power. Hence, Jovial Ltd. by virtue of shareholding is not a
holding company of Popular Products Ltd.

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 Secondly, it is given that Jovial Ltd. controls the composition of directors of Popular
Products Ltd., hence, Jovial Ltd. is a holding company of Popular Products Ltd. and not
a subsidiary company.

48. Mike Limited is incorporated in India having Liaison office at Singapore. Explain in
detail meaning of Foreign Company and analysis on whether Mike Limited
would be called as Foreign Company as it established a Liaison office at
Singapore as per the provisions of the Companies Act, 2013?
Sol.
(ii) Foreign Company [Section 2(42) of the Companies Act, 2013]: It means any
company or body corporate incorporated outside India which—
(i) has a place of business in India whether by itself or through an agent, physically
or through electronic mode; and
(ii) conducts any business activity in India in any other manner.
Since Mike Limited is a company incorporated in India, hence, it cannot be called as a
foreign company. Even though, Liaison Office was officially established at Singapore, it
would not be called as a foreign company as per the provisions of the Companies Act,
2013.

49. Mr. Rajeev, 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 Mr. Rajeev as a pretended loan. This way, Mr. Rajeev divided
his income into three parts in a bid to reduce his tax liability. Decide, for what purpose the
three companies were established? Whether the legal personality of all the three
companies may be disregarded.

Sol. The House of Lords in Salomon Vs. Salomon & Co. Ltd. laid down that a company is a person
distinct and separate from its members, and therefore, has an independent separate legal
existence from its members who have constituted the company. But under certain
circumstances the separate entity of the company may be ignored by the courts. When that
happens, the courts ignore the corporate entity of the company and look behind the
corporate facade and hold the persons in control of the management of its affairs liable for
the acts of the company. Where a company is incorporated and formed by certain persons
only for the purpose of evading taxes, the courts have discretion to disregard the corporate
entity and tax the income in the hands of the appropriate assessee.
1. The problem asked in the question is based upon the aforesaid facts. The three
companies were formed by the assessee purely and simply as a means of avoiding tax
and the companies were nothing more than the facade of the assessee himself.
Therefore, the whole idea of Mr. Rajeev was simply to split his income into three parts
with a view to evade tax. No other business was done by the company.
2. The legal personality of the three private companies may be disregarded because the
companies were formed only to avoid tax liability. It carried on no other business, but
was created simply as a legal entity to ostensibly receive the dividend and interest and

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 to hand them over to the assessee as pretended loans. The same was upheld in Re Sir
Dinshaw Maneckjee Petit and Juggilal vs. Commissioner of Income Tax.

50. The State Government of X, a state in the country is holding 48 lakh shares of Y Limited. The
paid up capital of Y Limited is ₹ 9.5 crore (95 lakh shares of ₹ 10 each). Y Limited directly
holds 2,50,600 shares of Z Private Limited which is having share capital of ₹ 5 crore in the
form of 5 lakh shares of ₹ 100 each. Z Private Limited claimed the status of a subsidiary
company of Y Limited as well as a Government company. Advise as a legal advisor, whether
Z Private Limited is a subsidiary company of Y Limited as well as a Government company
under the provisions of the Companies Act, 2013?

Sol. According to Section 2(45) of the Companies Act, 2013, Government Company means any
company in which not less than 51% of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,
and the section includes a company which is a subsidiary company of such a Government
company.
As per Section 2(87) of the Companies Act, 2013, “subsidiary company” in relation to any
other company (that is to say the holding company), means a company in which the holding
company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies.
In the instant case, the State Government of X, a state in the country is holding 48 Lakh
shares in Y Limited which is below 51% of the paid up share capital of Y Limited i.e. 48.45
Lakh shares (51% of 95 Lakh shares). Hence Y Limited is not a Government Company.
Further, Y Limited directly holds 2,50,600 shares in Z Private Limited, which is more than
one-half of the total shares of Z Limited i.e. 2,50,000 shares (50% of 5 Lakh shares). Thus,
the company controls more than one-half of the total voting power of Z Limited. Hence Z
Private Limited is a subsidiary of Y Limited.
Therefore, we can conclude that Z Private Limited is a subsidiary of Y Limited but not a
Government Company since Y Limited is not a Government Company.

51. Priyansh purchased some goods from Sumit. He issued a cheque to Sumit for the sale price
on 14.06.2023. Sumit presented the cheque in his bank and his bank informed him on
19.06.2023 that cheque was returned unpaid due to insufficiency of funds in the account of
Priyansh. Sumit sued against Priyansh under section 138 of the Negotiable Instrument Act,
1881. State with reasons, whether this suit is maintainable?

Sol. By virtue of provisions of Section 138 of the Negotiable Instruments Act, 1881, where cheque
was issued by a person to discharge a legally enforceable debt was dishonoured by bank due
to insufficiency of funds, such person shall be deemed to have committed an offence and
shall, without prejudice to any other provision of this Act, be punished with imprisonment

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 for a term which may be extended to two years or with fine which may extend to twice the
amount of the cheque, or with both.
When Section 138 shall not be applied unless the below given conditions are complied with-
(a) the cheque has been presented to the bank within three months or validity period of the
cheque, whichever is earlier;
(b) the holder 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 of the receipt of information from the
bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money within
fifteen days of the receipt of the said notice.
In the instant case, for filing the suit under section 138, Sumit should have to make a demand
of payment by giving a notice in writing to Priyansh upto 18.07.2023. In case, Priyansh failed
in making the payment within fifteen days of the receipt of the said notice, Sumit could sue
under section 138.

52. Referring to the provisions of the Negotiable Instruments Act, 1881, answer the following
in the given scenario:
(i) Aman drew the bill of exchange (the bill) on Baban, who accepted it, payable to
Magan or order. Magan indorsed the bill to Gagan. Gagan indorsed the bill to
Akash to be delivered to him on the next day. However, on the death of Gagan on
the same day, his only son Ankit delivered the bill to Akash on the next day as
intended by his deceased father. On presenting the bill on the due date, Baban
refused to pay. Explaining the importance of delivery in negotiation, decide,
whether Akash can enforce the payment of the bill against Baban or the previous
parties.
(ii) Reliable Limited, an Indian company, is a global leader in Petrochemical
products. For payment of the sale price of machinery imported from Alex
Manufacturing Limited, a USA based company (the exporter), the Indian
company drew a bill of exchange on Manish, a resident of Mumbai (India) who
accepted the bill at Mumbai payable to the exporter in Los Angeles, USA. Decide,
whether the bill of exchange is an inland instrument or a foreign instrument.
Assume that the bill of exchange was signed by the authorised person for the
drawer company.
Sol. (i)Importance of Delivery in Negotiation [Section 46 of the Negotiable Instruments Act,
1881]
Delivery of an instrument is essential whether the instrument is payable to bearer or
order for effecting the negotiation. The delivery must be voluntary, and the object of
delivery should be to pass the property in the instrument to the person to whom it is
delivered. The delivery can be, actual or constructive. Actual delivery takes place when
the instrument changes hand physically. Constructive delivery takes place when the
instrument is delivered to the agent, clerk or servant of the indorsee on his behalf or
when the indorser, after indorsement, holds the instrument as an agent of the
indorsee.
Section 46 also lays down that when an instrument is conditionally or for a special
purpose only, the property in it does not pass to the transferee, even though it is
indorsed to him, unless the instrument is negotiated to a holder in due course.

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 The contract on a negotiable instrument until delivery remains incomplete and
revocable. Delivery is essential not only at the time of negotiation but also at the time
of making or drawing of negotiable instrument. The rights in the instrument are not
transferred to the indorsee unless after the indorsement the same has been delivered.
If a person makes the indorsement of instrument but before the same could be
delivered to the indorsee, the indorser dies, the legal representatives of the deceased
person cannot negotiate the same by mere delivery thereof. (Section 57).
In the instant case, Ankit the only son of Gagan delivered the bill to Akash on the next
day as intended by his deceased father (Gagan) which is not valid.
Hence, Akash cannot enforce the payment of the bill against Baban or the previous
parties.
(ii) As per section 11 of the Negotiable Instruments Act, 1881, a promissory note, bill
of exchange or cheque drawn or made in India and made payable in, or drawn upon
any person resident in India shall be deemed to be an inland instrument.
In the instant case, the bill of exchange was:
• Drawn in India (since it was drawn by Reliable Limited, an Indian company).
• Accepted in India (Manish, a resident of Mumbai, accepted the bill in Mumbai).
• Payable outside India, in Los Angeles, USA.
The bill of exchange in this case is an inland instrument because it was drawn in India
and accepted by a person resident in India, even though it is payable outside India (Los
Angeles, USA).
53. Rama executes a promissory note in the following form, ‘I promise to pay a sum of
`10,000 after three months’. Decide whether the promissory note is a valid promissory
note.
Sol. The promissory note is an unconditional promise in writing. In the above question the amount
is certain but the date and name of payee is missing, thus making it a bearer instrument.

As per Reserve Bank of India Act, 1934, a promissory note cannot be made payable to bearer -
whether on demand or after certain days. Hence, the instrument is illegal as

per Reserve Bank of India Act, 1934 and cannot be legally enforced.

54. M owes money to N. Therefore, he makes a promissory note for the amount in favour of N,
for safety of transmission he cuts the note in half and posts one half to N. He then changes
his mind and calls upon N to return the half of the note which he had sent. N requires M to
send the other half of the promissory note. Decide how rights of the parties are to be
adjusted in reference to the Negotiable Instruments Act, 1881.
Sol.

Provision

The question arising in this problem is whether the making of promissory note is complete
when one half of the note was delivered to N. Under Section 46 of the Negotiable Instruments
Act, 1881, the making of a promissory note is completed by delivery, actual or constructive.
Delivery refers to the whole of the instrument and not merely a part of it. Delivery of half
instrument cannot be treated as constructive delivery of the whole.

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 Analysis and conclusion

So, the claim of N to have the other half of the promissory note sent to him is not maintainable.
M is justified in demanding the return of the first half sent by him. He can change his mind and
refuse to send the other half of the promissory note.

55. Bholenath drew a cheque in favour of Surendar. After having issued the cheque; Bholenath
requested Surendar not to present the cheque for payment and gave a stop payment
request to the bank in respect of the cheque issued to Surendar. Decide, under the
provisions of the Negotiable Instruments Act, 1881 whether the said acts of Bholenath
constitute an offence?
Sol.

Provision

As per the facts stated in the question, Bholenath (drawer) after having issued the cheque,
informs Surender (drawee) not to present the cheque for payment and as well gave a stop
payment request to the bank in respect of the cheque issued to Surender.

Section 138 of the Negotiable Instruments Act, 1881, is a penal provision in the sense that
once a cheque is drawn on an account maintained by the drawer with his banker for payment
of any amount of money to another person out of that account for the discharge in whole or
in part of any debt or liability, is informed by the bank unpaid either because of insufficiency
of funds to honour the cheques or the amount exceeding the arrangement made with the
bank, such a person shall be deemed to have committed an offence.

Once a cheque is issued by the drawer, a presumption under Section 139 of the Negotiable
Instruments Act, 1881 follows and merely because the drawer issues a notice thereafter to
the drawee or to the bank for stoppage of payment, it will not preclude an action under
Section 138.

Also, Section 140 of the Negotiable Instruments Act, 1881, specifies absolute liability of the
drawer of the cheque for commission of an offence under the section 138 of the Act. Section
140 states that it shall not be a defence in a prosecution for an offence under section 138
that the drawer had no reason to believe when he issued the cheque that the cheque may be
dishonoured on presentment for the reasons stated in that section.

Analysis and conclusion

Accordingly, the act of Bholenath, i.e., his request of stop payment constitutes an offence
under the provisions of the Negotiable Instruments Act, 1881.

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56. M drew a cheque amounting to ` 2 lakh payable to N and subsequently delivered to him. After
receipt of cheque N indorsed the same to C but kept it in his safe locker. After sometime, N
died, and P found the cheque in N’s safe locker. Does this amount to Indorsement under the
Negotiable Instruments Act, 1881?

Sol. No, P does not become the holder of the cheque as the negotiation was not completed by
delivery of the cheque to him. (Section 48, the Negotiable Instruments Act, 1881)
57. ‘Nakul’ made promissory note in favour of ‘Sahdev’ of `10,000 and delivered to him. ‘Sahdev’
indorsed the promissory note in favour of ‘Arjun’ but delivered to Arjun’s agent. Subsequently,
Arjun’s agent died, and promissory note was found by ‘Arjun’ in his agent’s table drawer.
‘Arjun’ sued ‘Nakul’ for the recovery of promissory note. Whether ‘Arjun’ can recover amount
under the provisions of the Negotiable Instrument Act 1881?

Sol. According to Section 48 of the Negotiable Instrument Act 1881, a promissory note, bill of
exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.

Further, delivery of an instrument is essential whether the instrument is payable to bearer or order for
effecting the negotiation. The delivery must be voluntary, and the object of delivery should be to pass the
property in the instrument to the person to whom it is delivered. The delivery can be, actual or
constructive. Actual delivery takes place when the instrument changes hand physically. Constructive
delivery takes place when the instrument is delivered to the agent, clerk or servant of the indorsee on
his behalf or when the indorser, after indorsement, holds the instrument as an agent of the indorsee.

In the instant case, ‘Sahdev’ received a promissory note from ‘Nakul’ and indorsed the promissory note
in favour of ‘Arjun’ and delivered to Arjun’s agent. Subsequently, Arjun’s agent died, and promissory note
was found by ‘Arjun’ in his agent’s table drawer. ‘Arjun’ sued ‘Nakul’ for the recovery of promissory note.

An order negotiable instrument can be transferred by endorsement and delivery. As delivery to Arjun’s
agent is sufficient delivery of promissory note to Arjun. Therefore, ‘Arjun’ is eligible to claim the payment
of promissory note.

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 Part C – Questions created by AI for Practice

Q1. M/s Bright Textiles Ltd. (BTL), a partnership irm engaged in garment exports, had continuous business
dealings with one of its suppliers, M/s Global Fabrics Pvt. Ltd. (GFPL). Over the years, BTL had purchased
goods worth several lakhs from GFPL and made payments from time to time. The transactions are as follows:
 Loan Accounts / Debts:
1. Loan A – ₹10,00,000 taken on 01 Jan 2021, interest 12% p.a., repayable in 2 years.
2. Loan B – ₹5,00,000 taken on 01 Jul 2022, interest 10% p.a., repayable in 1 year.
3. Loan C – ₹8,00,000 taken on 01 Apr 2023, interest 15% p.a., repayable in 3 years.
4. Running trade balance for raw material supplied (goods worth ₹7,00,000 delivered
in FY 2023–24, payable within 3 months of delivery).
 Payments Made by BTL:
1. On 01 Feb 2022, BTL paid ₹5,00,000, mentioning in writing “towards Loan A only”.
2. On 15 Aug 2023, BTL paid ₹4,00,000 without specifying the debt. GFPL also did not
clarify appropriation.
3. On 01 Apr 2024, BTL paid ₹6,00,000, instructing that it must be adjusted against
the trade balance irst. GFPL refused and adjusted it against Loan B (which had
become overdue).
4. On 01 Aug 2024, BTL again paid ₹5,00,000 without any instructions. GFPL
appropriated it towards Loan C (as it had higher interest).
5. On 01 Jan 2025, BTL paid ₹2,00,000, but by then Loan A, B had become barred by
limitation.
Now, a dispute arose when GFPL demanded repayment of the balance. BTL claimed that most of
the payments had already cleared the high-interest Loan C and trade balances, while GFPL argued
otherwise.
(i) Identify how each of the 5 payments made by BTL should be legally appropriated under Sections
59–61.
(ii) Critically analyze if GFPL acted lawfully in overriding BTL’s instructions in April 2024 payment.
(iii) If Loan A and B are barred by limitation in Jan 2025, can the ₹2,00,000 be appropriated to those
debts? Support with reasoning.

tep-by-Step Solution (Sections 59–61, Indian Contract Act, 1872)

Payment 1 – ₹5,00,000 (01 Feb 2022)
 Debtor clearly instructed: “towards Loan A only.”
 Section 59 applies → creditor must follow debtor’s direction.
✔ Appropriated to Loan A.

Payment 2 – ₹4,00,000 (15 Aug 2023)

 Debtor silent, creditor silent.
 Section 61 applies → payment to be appropriated in order of time (oldest debt irst).
 Order of debts: Loan A (Jan 2021), Loan B (Jul 2022), Loan C (Apr 2023), Trade balance
(2023–24).
✔ Hence, this amount goes to Loan A (since oldest debt still had balance).

Payment 3 – ₹6,00,000 (01 Apr 2024)

 Debtor clearly instructed: “adjust against trade balance.”
  Creditor cannot override debtor’s instruction (Sec 59).
 Even if creditor tried to force adjustment to Loan B, it is invalid in law.
✔ This amount must go to trade balance.

Payment 4 – ₹5,00,000 (01 Aug 2024)

 Debtor silent, creditor expressly appropriated to Loan C (high interest).
 Section 60 applies → creditor free to appropriate at discretion, even to time-barred debt.
✔ Validly appropriated to Loan C.

Payment 5 – ₹2,00,000 (01 Jan 2025)

 Debtor gave no instruction.
 Creditor can use Section 60 and adjust even to time-barred debts.
✔ Creditor may legally apply this to Loan A or Loan B (though barred by limitation,
appropriation is valid).

Q2. Three friends – Arjun, Bhavesh and Chitra – jointly borrowed ₹15,00,000 from Delta Bank Ltd. on 01
Jan 2022. The loan terms were:
 Repayable in three annual instalments of ₹5,00,000 each (with interest @ 12% p.a.).
 Liability of all three is joint and several under the Indian Contract Act.
The events unfolded as follows:
1. In Jan 2023, the irst instalment of ₹5,00,000 became due. Arjun paid ₹3,00,000 and
Bhavesh paid ₹2,00,000.
2. In Dec 2023, Bhavesh unfortunately died, leaving behind his son Dev as legal heir. Dev
inherited property worth ₹1,50,000 only from Bhavesh’s estate.
3. In Jan 2024, the second instalment of ₹5,00,000 became due. Chitra paid ₹2,50,000, Arjun
paid ₹1,00,000, but ₹1,50,000 remained unpaid.
4. In Jun 2024, Chitra was declared insolvent. Her estate paid only ₹1,00,000 towards the bank
out of the ₹1,50,000 unpaid.
5. In Jan 2025, the inal instalment of ₹5,00,000 became due. By this time, only Arjun was
solvent. The bank demanded the full amount from Arjun.
6. Arjun paid the entire balance to the bank but now seeks contribution from Dev (heir of
Bhavesh) and from Chitra’s estate.

Issues Raised
1. Whether Delta Bank Ltd. can demand the entire outstanding amount from Arjun alone?
2. To what extent is Dev (legal heir of Bhavesh) liable? Is his liability limited to the value of
inheritance?
3. What is the liability of Chitra’s estate after her insolvency?
4. If Arjun has paid more than his share, what are his rights of contribution against the other
two co-promisors or their estates?
Step 1: Creditor’s right against joint promisors
 Delta Bank can demand the entire unpaid loan from any one of the three (joint and several
liability).
 ✔ Bank was correct in asking Arjun to pay the balance in Jan 2025.

Step 2: Liability of Dev (Bhavesh’s heir)

  Bhavesh died after paying part of his share.
 Dev is liable only to the extent of property inherited (₹1,50,000).
 ✔ Dev cannot be forced to pay beyond ₹1,50,000.

Step 3: Liability of Chitra’s estate

 Chitra was declared insolvent → her estate contributed ₹1,00,000 earlier.
 Any remaining liability can be recovered from her estate subject to insolvency
proceedings.
 ✔ Estate liable only to the extent of assets available.

Step 4: Arjun’s right of contribution

 Arjun ended up paying more than his share.
 Rule: If one joint promisor pays more, he can claim contribution from others or their estates.
 Here:
o Arjun can claim ₹1,50,000 from Dev (limited to inherited property).
o Arjun can claim balance from Chitra’s estate.

Q3. M/s Alpha Ltd. (India) is a listed company engaged in IT services. Alpha Ltd. has invested in
multiple companies in India and abroad. The shareholding and voting power position as on 31st
March 2025 is given below:
1. Alpha Ltd. holds:
o 55% equity shares in Beta Ltd. (India).
o 48% equity shares in Gamma Ltd. (Singapore).
o 30% equity shares in Delta Ltd. (India), but also has a right to appoint 3 out of 6
directors.
o 25% equity shares in Epsilon Ltd. (India), but has signi icant in luence through a
shareholders’ agreement.
2. Beta Ltd. (India) holds:
o 60% equity shares in Theta Ltd. (India).
o 40% equity shares in Sigma Ltd. (India).
3. Gamma Ltd. (Singapore) holds:
o 51% equity shares in Zeta Ltd. (India).
o 20% equity shares in Epsilon Ltd. (India).
4. Delta Ltd. (India) holds:
o 55% equity shares in Omega Ltd. (India).

Questions to be Answered
1. Which companies are subsidiaries of Alpha Ltd.?
2. Which companies are associates of Alpha Ltd.?
3. Is Epsilon Ltd. an associate of Alpha Ltd. (direct + indirect in luence)?
4. Whether Omega Ltd. is a subsidiary of Alpha Ltd. (through Delta Ltd.)?
1. Beta Ltd. (India)
 Alpha holds 55% → More than 50% voting power.
✔ Beta is a Subsidiary of Alpha.

2. Gamma Ltd. (Singapore)

  Alpha holds 48% only, but if Gamma is a foreign company → still check “control of
composition of BoD or voting power > 50%.”
 Since Alpha has 48% (not >50%), no control of board is given.
Not a subsidiary.
✔ But since voting power ≥ 20% → Associate of Alpha.

3. Delta Ltd. (India)

 Alpha holds 30% shares + right to appoint 3/6 directors (control over composition of
board).
✔ Subsidiary of Alpha (because board control = subsidiary test satis ied).

4. Epsilon Ltd. (India)

 Alpha directly holds 25% shares (≥20% = signi icant in luence).
 Gamma (associate of Alpha) also holds 20%, but indirect holding through associate is not
counted for control test.
✔ Associate of Alpha (not subsidiary).

5. Theta Ltd. (India)

 Subsidiary of Beta (60%).
 Since Beta is a subsidiary of Alpha → Theta becomes step-down subsidiary of Alpha.
✔ Subsidiary of Alpha.

6. Sigma Ltd. (India)

 Subsidiary of Beta? No, because Beta has only 40% (not majority).
 But Beta’s 40% + no other signi icant control details given.
✔ From Alpha’s perspective → Not a subsidiary/associate (unless additional in luence facts
given).

7. Zeta Ltd. (India)

 Subsidiary of Gamma (51%).
 Gamma itself is an associate of Alpha, not subsidiary.
 Step-down subsidiary rule applies only if parent is subsidiary.
So Zeta is not a subsidiary of Alpha.

8. Omega Ltd. (India)

 Subsidiary of Delta (55%).
 Delta is itself a subsidiary of Alpha.
✔ Therefore, Omega becomes a step-down subsidiary of Alpha.