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Business Law and Ethics

UNIT - I

Companies Act – 2013

PRELIMINARY
Introduction

 The Companies Bill as passed by Lok Sabha on 18th December 2012 (called
Companies Bill, 2012) and passed by Rajya Sabha on 8th August 2013 (became
Companies Bill 2013). Section 1 came into effect from 30th August 2013 i.e. the date
of notification in the official Gazette after it received assent of President of India on
August 29, 2013 and became the Companies Act, 2013 (Act 18 of 2013).

 The Companies Act, 2013 is more of a rule-based legislation. It contains 470 sections
and a significant part of the legislation will be in the form of rules.

 The Act of 2013 intends to promote self-regulation and is aimed at building a smooth
and easy corporate environment along with the new and improved measures of strong
investor protection norms.

Sections of the Act and Rules Notified

 The Ministry of Corporate Affairs notified 98 sections of the Companies Act, 2013 vide
its notification dated 12th September, 2013 the effective date of which is 12th
September 2013.

 On February 27, 2014, the provisions of Section 135 i.e. Corporate Social
Responsibility were notified to come into force w.e.f. April 01, 2014 along with
Companies (Corporate Social Responsibility Policy) Rules, 2014 and Schedule VII.

 On March 26 2014, 183 sections of the Companies Act, 2013 and six schedules were
notified by the Ministry of Corporate Affairs and came into effect from April 1, 2014.

 282 Sections of the Companies Act, 2013 have been notified so far.

New Concepts Introduced:

The Companies Act 2013 has introduced new concepts supporting enhanced disclosure,
accountability, better board governance, better facilitation of business and so on. It includes the
following aspects. Those are

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Associate Company, One person Company, Small Company, Dormant Company, Independent
Director, Director, Resident Director, Secretarial Standards, Secretarial Audit, Special Courts,
Class Actions, Registered Valuer, Rotation of Auditors, Vigil Mechanism (Whistle Blowing),
Corporate Social Responsibility, Cross Border Mergers. Prohibition of Insider Trading, Global
Depository Receipts

The Statement of Objects and Reasons of Companies Act 2013

1. E‐governance including maintenance and inspection of documents in electronic form.


2. Concept of Corporate Social responsibility being introduced.
3. Enhanced accountability on part of companies covering aspects such as appointment of
independent directors, vigil mechanism through whistle blowing, restriction on layers of
subsidiaries etc.
4. Enhanced disclosures in Board Report, Annual Return etc.
5. Facilitating raising of capital by Companies.
6. Audit Accountability including aspects such as rotation of auditors, National Financial
Reporting Authority with a mandate to ensure monitoring and compliance of accounting and
auditing standards, Secretarial Audit for prescribed class of Companies.
7. Facilitating mergers, including cross‐border mergers.
8. Protecting of minority shareholders including aspects such as small shareholder director, exit
option etc.
9. Investor Protection measures including aspects such as class action suits, stringent norms for
acceptance of deposits etc.

Definition of company

“In terms of the Companies Act, 2013 ‘company’ means a company incorporated under the
Act, or under the previous company law” [Sec. 2(20)]

A company may be an incorporated company or a Corporation, or an unincorporated company.


An Incorporated company is a single and legal (artificial) person distinct from the individuals
constituting it, whereas an unincorporated company, such as a partnership, is a mere collection
or aggregation of individuals. Therefore, unlike a partnership, a company is a corporate body
and a legal person having status and personality distinct and separate from that of the members
constituting it.

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Characteristics/Advantages of company

1. Independent corporate existence


The outstanding feature of a company is its independent corporate existence. It is a distinct
legal person existing independent of its members. By incorporation under the Act, the company
is vested with a corporate personality which is distinct from the members who compose it.

A well-known illustration of this principle is the decision of the House of Lords in Salomon v.
Salomon & Co. [(1898) AC 22].

2. Limited Liability
The privilege of limiting liability for business debts is one of the principal advantages of doing
business under the corporate form of organization. Where the subscribers exercise the choice
of registering the company with limited liability, the members’ liability becomes limited or
restricted to the nominal value of the shares taken by them or the amount guaranteed by them.
No member is bound to contribute anything more than the nominal value of the shares held by
him.

3. Perpetual succession
An incorporated company never dies. It is an entity with perpetual succession. Perpetual
succession, means that the membership of a company may keep changing from time to time,
but that does not affect the company’s continuity. The death or insolvency of individual
members does not, in any way affect the corporate existence of the company.
[Gopalpur Tea Co. Ltd. v. Penhok Tea Co. Ltd. (1982) 52 Comp. Cas. 238 (Cal.)] “Members
may come and go but the company can go on forever”. It continues to exist even if all its
human members are dead. Even where during the war all the members of a private company,
while in general meeting, were killed by a bomb, the company survived not even a hydrogen
bomb could have destroyed it. [K’9 Meat Supplies (Guildford) Ltd., Re 1966 (3) All. ER 320.]

4. Separate property
A company, being a legal person, is capable of owning, enjoying and disposing of property in
its own name. The company becomes the owner of its capital and assets. The shareholders are
not the several or joint owners of the company’s property. The company is the real person in
which all its property is vested, and by which is controlled, managed and disposed of [Bacha F
Guzdar v. C.I.T. AIR 1955 SC 74.]. The property is vested in the company as a body corporate,
and no changes of individual membership affect the title. The property, however much, the
shareholders may come and to remains vested in the company, and the company can convey,
assign, mortgage, or otherwise deal with it irrespective of these mutations.

5. Transferable Shares
When joint stock companies were established the great object was that their shares should be
capable of being easily transferred. Accordingly, the Companies Act, 2013 in Section 44
declares: ‘The shares or debentures or other interest of any member in a company shall be
movable property, transferable in the manner provided by the articles of the company’. Thus
incorporation enables a member to sell his shares in the open market and to get back his

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investment without having to withdraw the money from the company. This provides liquidity
to the investor and stability to the company.

6. Common seal
Since the company has no physical existence, it must act through its agents and all such
contracts entered into by its agents must be under the seal of the company. The common seal
acts as the official signature of the company. Prior to the Companies (Amendment) Act, 2015
the common seal is a seal used by a corporation as the symbol of its incorporation and also a
statutory requirement for a company. As a departure from this concept, the Companies
(Amendment) Act, 2015 has deleted the requirement of having Common Seal compulsorily.
After this amendment, in case a company does not have a common seal, the authorisation shall
be made by two directors or by a director and the Company Secretary, wherever the company
has appointed a Company Secretary.

Classes of Companies
A company may be incorporated as a One Person Company (OPC) a new concept all together
in the Companies Act, 2013, Private Company or a Public Company, depending upon the
number of members joining it. Again it may either be an unlimited company, or may be limited
by shares or by guarantee or by both. On the basis of control, companies can be classified as
associate company, holding company and subsidiary company. Some other forms of
classification of companies are: foreign company, Government Company, small company,
dormant company, Nidhi Company and company formed for charitable objects.
Companies may be classified into various classes on the following basis:

1 On the Basis of Incorporation


(a) Statutory companies
These are the companies which are created by a special Act of the Legislature, e.g., the Reserve
Bank of India, the State Bank of India, the Life Insurance Corporation, the Industrial Finance
Corporation, the Unit trust of India and State Financial Corporations These are mostly
concerned with public utilities, e.g. railways, tramways, gas and electricity companies and
enterprises of national importance. The provisions of the Companies Act, 2013 do not apply to
them unless the special act specifies such application. Banking Regulation Act, 1949 is a
special legislation concerning banking companies.

(b) Registered companies


These are the companies which are formed and registered under the Companies Act, 2013, or
were
registered under any of the earlier Companies Acts.

2 On the basis of liability


(a) Company limited by shares
Section 2 (22) of the Companies Act, 2013, defines that when the liability of the members of a
company is limited by its memorandum of association to the amount (if any) unpaid on the
shares held by them, it is known as a company limited by shares. It thus implies that for
meeting the debts of the company, the shareholder may be called upon to contribute only to the

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extent of the amount, which remains unpaid on his shareholdings. His separate property cannot
be encompassed to meet the company’s debt.

(b) Company limited by guarantee


Section 2 (21) of the Companies Act, 2013 defines it as the company having the liability of its
members limited by the memorandum to such amount as the members may respectively
undertake by the memorandum to contribute to the assets of the company in the event of its
being wound up. Thus, the liability of the member of a guarantee company is limited up to a
stipulated sum mentioned in the memorandum. Members cannot be called upon to contribute
beyond that stipulated sum.

(c) Unlimited company


Section 2 (92) of the Companies Act, 2013 defines unlimited company as a company not
having any limit on the liability of its members. In such a company the liability of a member
ceases when he ceases to be a member. The liability of each member extends to the whole
amount of the company’s debts and liabilities but he will be entitled to claim contribution from
other members.

3 On the basis of members


(a) One person company

(1) The Concept of One Person Company (OPC)


The concept of One Person Company (OPC) has now been introduced in India, through
Section 2 (62) of Companies Act, 2013 thereby enabling Entrepreneur(s) carrying on the
business in the Sole Proprietor form of business to enter into a Corporate Framework. Though
this concept is new in India but it is already a part of many other countries like China,
Australia, Pakistan and UK etc.

According to Section 2 (62) of the Companies Act, 2013 ‘One Person Company’ means a
company which has only one person as a member. A company formed under one person
company may be either:
a) A company limited by shares, or
b) company limited by guarantee, or
c) An unlimited company.

One Person Company is a hybrid of Sole-Proprietor and Company form of business, and has
been provided with concessional/relaxed requirements under the Act.

(2) Features of One Person Company (OPC)


a) Only One Shareholder: Only a natural person, who is an Indian citizen and resident in India,
shall be eligible to incorporate a One Person Company.
b) Nominee for the Shareholder: The Shareholder shall nominate another person who shall
become the shareholders in case of death/incapacity of the original shareholder. Such nominee
shall give his/her consent and such consent for being appointed as the Nominee for the sole

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Shareholder. Only a natural person, who is an Indian citizen and resident in India, shall be a
nominee for the sole member of a One Person Company.
c) Director: Must have a minimum of One Director, the Sole Shareholder can himself be the
Sole Director. The Company may have a maximum number of 15 directors.

(b) Private Company [Section 2 (68)]


According to Section 2 (68) of Companies Act, 2013 a ‘private company’ means a company
having a minimum paid-up share capital as may be prescribed, and which by its articles:
(1) restricts the right to transfer its shares.

(2) except in case of One Person Company, limits the number of its members to two hundred:

Provided that 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;

Provided further 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, and
(3) prohibits any invitation to the public to subscribe for any securities of the company.

The Companies (Amendment) Act, 2015 has omitted ‘of one lakh rupees or such higher paid-
up share capital’ from the definition of Private Company w.e.f. 25.05.2015. The impact of this
amendment is that today one can have a company of paid up capital of mere ` Two (with each
subscriber giving a rupee as subscription) for a private company and ` Seven for a public
company.

(c) Public company [Section 2 (71)]


According to Section 2 (71) of Companies Act, 2013 a ‘public company’ means a company
which:
(1) is not a private company.
(2) has a minimum paid-up share capital, as may be prescribed:
(3) Seven or more members are required to form the company.

Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles.

The Companies (Amendment) Act, 2015 has omitted “of five lakh rupees or such higher paid-
upcapital,” from the definition of Public Company w.e.f. 25.05.2015.

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(d) Small Company [Section 2 (85)]


According to Section 2 (85) of Companies Act, 2013 a ‘‘small company’’ means a company,
other than a public company:
(1) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as
may be prescribed which shall not be more than five crore rupees. Or
(2) turnover of which as per its last profit and loss account does not exceed two crore rupees or
such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to:


a) a holding company or a subsidiary company.
b) a company registered under Section 8, or
c) a company or body corporate governed by any special Act.

Some of the advantages enjoyed by the small companies are:


a) holding of two board meetings instead of four – one each in the first and second half years
and the gap between the two meeting should not be more than 90 days. (section 173(5))
b) Not required to give cash flow statements with the financial statements (section 2(40))

4 On the basis of control


Holding company and Subsidiary company
‘Holding’ and ‘Subsidiary’ Companies are relative terms. A company is a holding company of
another if the other is its subsidiary.

According to Section 2 (46) of the Companies Act, 2013 'holding company', in relation to one
or more other companies, means a company of which such companies are subsidiary
companies.

According to Section 2 (87) of the Companies Act, 2013 'subsidiary company' or 'subsidiary',
in relation to any other company (that is to say the holding company), means a company in
which the holding company :

(a) controls the composition of the Board of Directors, Or


(b) exercises or controls more than one-half of the total share capital 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.

5 On the basis of Listing in the recognised Stock Exchange

(a) Listed company (also widely held)


According to Section 2 (52) of the Companies Act, 2013, a 'listed company' means a company
which has any of its securities listed on any recognised stock exchange. Whereas the word
securities as per the Section 2 (81) of the Companies Act, 2013 has been assigned the same

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meaning as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act,
1956.

(b) Unlisted company: Unlisted Company means company other than listed company.

6 Others

(a) Government Company


According to Section 2 (45) of the Companies Act, 2013, a 'Government company' means any
company in which not less than fifty one per cent of the paid-up share capital is held by the
Central Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company which is a
subsidiary company of such a Government company.

(b) Foreign Company


According to Section 2 (42) of the Companies Act, 2013, ‘foreign company’ means any
company or body corporate incorporated outside India which:

(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode. And
(b) conducts any business activity in India in any other manner.

(c) Associate Company


According to Section 2 (6) of the Companies Act, 2013, '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.

As per the Explanation given under the Section, the clause, 'significant influence' means
control of at least twenty per cent of total share capital, or of business decisions under an
agreement.

(d) Dormant company


Where a company is formed and registered under this Act for a future project or to hold an
asset or intellectual property and has no significant accounting transaction, such a company or
an inactive company may make an application to the Registrar in such manner as may be
prescribed for obtaining the status of a dormant company. ‘Significant accounting transaction’
means any transaction other than:
(1) payment of fees by a company to the Registrar.
(2) payments made by it to fulfil the requirements of this Act or any other law.
(3) allotment of shares to fulfil the requirements of this Act, and
(4) payments for maintenance of its office and records.

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(e) Nidhi Companies


Company which has been incorporated as a Nidhi with the object of cultivating the habit of
thrift (cost cutting) and savings amongst its members, receiving deposits from, and lending to,
its members only, for their mutual benefits and which complies with such rules as are
prescribed by the Central Government for regulation of such class of companies. [Section 406
of the Companies Act, 2013]

(f) Public financial institutions


According to Section 2 (72) of the Companies Act, 2013 the following institutions are to be
regarded as public financial institutions:
(1) The LIC of India established under the Life Insurance Corporation Act, 1956.
(2) The Infrastructure Development Finance Company Limited,
(3) Specified company referred to in the Unit Trust of India (Transfer of Undertaking and
Repeal) Act, 2002.
(4) Institutions notified by the Central Government under Section 4A (2) of the Companies
Act, 1956 so repealed under Section 465 of this Act.
(5) Other institution as may be notified by the Central Government in consultation with the
Reserve Bank of India.

Provided that no institution shall be so notified unless:


a) it has been established or constituted by or under any Central or State Act. Or
b) not less than fifty-one per cent of the paid-up share capital is held or controlled by the
Central
Government or by any State Government or Governments or partly by the Central Government
and partly by one or more State Governments.

Conversion of Public Company into a Private Company or vice versa

(a) Conversion of public company into private company


A public company can be converted into a private company by passing a special resolution,
after altering its articles so as to include therein the restrictions contained in Section 2(68) of
the Act. A special resolution passed to convert a public company into a private company is
binding on dissenting shareholders provided it is bona fide, is in the interest of the company as
a whole, and is consistent with the objects in the Memorandum of Association [Bal Ramba vs.
Master Silk Mills AIR 1955 N.U.R. Saurashtra 927].

Under Section 14 (1), any alteration made in the articles to convert a public company into a
private company shall take effect only with the approval of the Tribunal which shall make such
order as it may deems fit.

(b) Conversion of private company into public company


Similarly where a private company alters its articles by passing special resolution in such a
manner that they no longer includes the restrictions and limitations which are required to be
included in the articles of a private company, then such company shall cease to be a private
company from the date of such alteration.

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(c) Filing with the registrar


Every alteration of the articles and a copy of the order of the Tribunal approving the alteration
of articles in respect of conversion of public company into private company or private
company into public company shall be filed with the Registrar, together with a printed copy of
the altered articles, within a period of fifteen days in such manner as may be prescribed, who
shall register the same. Any alteration of the articles registered as above shall, subject to the
provisions of this Act, be valid as if it were originally in the articles.

INCORPORATION OF COMPANY

A company comes into existence is generally by a process referred to as incorporation. Once a


company has been legally incorporated, it becomes a distinct entity from those who invest their
capital and labour to run the company.

Usually the first step to form a company is the process known as ‘promotion’ where a person
persuades others to contribute capital to a proposed company before it is incorporated. Such a
person is called the promoter of the company. Promoters also can enter into a contract on
behalf of a company before or after it has been granted a certificate of incorporation, and
arrange share issues in the name of the company.

Section 3 to 22 of the Companies Act, 2013 (herein after called the Act) read with Companies
(Incorporation) Rules, 2014 made under Chapter II of the Act (herein after called ‘the Rules’)
cover the provisions with regard to incorporation of companies and matters incidental thereto.

FORMATION OF A COMPANY

In terms of Section 3(1), a company may be formed for any lawful purpose by—
a. seven or more persons, where the company to be formed is to be a public company;
b. two or more persons, where the company to be formed is to be a private company; or
c. one person, where the company to be formed is to be One Person Company that is to say, a
private company, by subscribing their names or his name to a memorandum and complying
with the requirements of this Act in respect of registration.

This is done by subscribing to their names or his name to a memorandum and complying with
the requirements of this Act in respect of registration.

(2) A company formed under sub-section (1) may be either—


(a) a company limited by shares; or
(b) a company limited by guarantee; or
(c) an unlimited company.

One Person Company With the implementation of the Companies Act, 2013, a single person
could constitute a Company, under the One Person Company (OPC) concept. The introduction
of OPC in the legal system is a move that would encourage corporatization of micro businesses

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and entrepreneurship. As per section 2(62) of the Companies Act, 2013, “One Person
Company” means a company which has only one person as a member.

The memorandum of One Person Company is required to indicate the name of the other
person, with his prior written consent in the prescribed form, who shall, in the event of the
subscriber’s death or his incapacity to contract become the member of the company and the
written consent of such person shall be filed with the Registrar at the time of incorporation of
the One Person Company along with its memorandum and articles. Such nomination shall be
filed in Form No INC.2 along with consent of such nominee obtained in Form No INC.3 and
fee as provided in the Companies (Registration offices and fees) Rules, 2014. The member of
One Person Company may at any time change the name of such other person by giving notice,
change the name of the person nominated by him at any time for any reason including in case
of death or incapacity to contract of nominee and nominate another person after obtaining the
prior consent of such another person in Form No INC.3.

Rule 3 of Companies (Incorporation) Rules, 2014 deals with One Person Company.

PROCEDURAL ASPECTS WITH REGARD TO INCORPORATION

1. Obtain Digital Signatures:


Nowadays various document prescribed under the Companies Act, 2013, are required to be
filed with the digital signature of the Managing Director or Director or Manager or Secretary
of the Company, therefore, it is compulsorily required to Obtain a Digital Signature Certificate
from authorized DSC issuing authority for at least one director to sign the E-forms related to
incorporate like form INC.1 and other documents.

2. Obtain Director Identification Number [Section 153]:


As per 153 of the Companies Act, 2013, every individual intending to be appointed as director
of a company shall make an application for allotment of Director Identification Number in
form DIR.3 to the Central Government in such form and manner and along with such fees as
may be prescribed. Therefore, before submission of e-Form INC.1 for availability of name, all
the directors of the proposed company must ensure that they are having DIN and if they are not
having DIN, it should be first obtained.

3. Application for Availability of Name of company


As per section 4(4) a person may make an application, in such form and manner and
accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name
set out in the application as—
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.

As per Rule 9 of Companies (incorporation) Rules 2014, an application for the reservation of a
name shall be made in Form No. INC.1 along with the fee as provided in the Companies
(Registration offices and fees) Rules, 2014.

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According to section 4(2), the name stated in the memorandum of association shall not—
(a) be identical with or resemble too nearly to the name of an existing company; or (b) be such
that its use by the company
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.

The Registrar may reserve the name for a period of 60 days from the date of the application.

4. Preparation of Memorandum and Articles of Association


A. Memorandum of Association
The Memorandum of Association is the charter of a company. It is a document, which amongst
other things, defines the area within which the company can operate. The first step in the
formation of a company is to prepare a document called the memorandum of association. In
fact memorandum is one of the most essential pre-requisites for incorporating any form of
company under the Act.

As per section 2(56) “memorandum” means the memorandum of association of a company as


originally framed or as altered from time to time in pursuance of any previous company law or
of this Act.

Section 4 of the Act prescribes the particulars to be mentioned in a memorandum of association


and other requirements. It is the constitution document of the company. The company cannot
depart from the provisions of the memorandum. If it enters into a contract or engages in any
trade or business which is beyond the powers conferred on it by the memorandum, such a
contract or the act will be ultra vires (Beyond Powers) the company and hence void.

Section 4(6) of the Companies Act, 2013 provides that the memorandum of association should
be in any one of the Forms specified in Tables A, B, C, D or E of Schedule I to the Act, as may
be applicable in relation to the type of company proposed to be incorporated or in a Form as
near thereto as the circumstances admit.

As per Section 4(1), the memorandum of a limited company must contain the following:
(a) Name Clause; (b) Situation Clause; (c) Objects clause; (d) Liability Clause; (e) Capital
Clause; and (f) in the case of a One Person Company, the name of the person who, in the event
of the death of the subscriber, shall become the member of the company.

The above clauses are compulsory and are designated as “conditions” prescribed by the Act, on
the basis of which a company is incorporated.

a) Name Clause
A company being a legal entity must have a name of its own to establish its separate identity.
The name of the company is a symbol of its independent corporate existence. The first clause
in the memorandum of association of the company states the name by which a company is to
be known.

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The company may adopt any suitable name provided it is not undesirable. In case of One
Person Company, the words ‘‘One Person Company’’ shall be mentioned in brackets below the
name of such company, wherever its name is printed, affixed or engraved. Ministry of
Corporate Affairs (MCA) has clarified that display of its name in English in addition to the
display in the local language will be a sufficient compliance with the requirements of the
section.

b) Situation Clause: The name of the State in which the registered office of the company is to
be situated must be given in the memorandum. But the exact address of the registered office is
not required to be stated therein. Within 15 days of its incorporation, and at all times thereafter,
the company must have a registered office to which all communications and notices may be
sent. The company must also furnish to the Registrar verification of its registered office within
a period of thirty days of its incorporation in such manner as may be prescribed.

c) Objects Clause: The third compulsory clause in the memorandum sets out the objects for
which the company has been formed. Under section 4(1)(c) of the Companies Act, 2013, all
companies must state in their memorandum the objects for which the company is proposed to
be incorporated and any matter considered necessary in furtherance thereof.

d) Liability Clause: The fourth compulsory clause must state that liability of the members is
limited, if it is intended that the company be limited by shares or by guarantee. The effect of
this clause is that, in a company limited by shares, no member can be called upon to pay more
than what remains unpaid on the shares held by him.

e) Capital Clause: This is the fifth compulsory clause which must state the amount of the
capital with which the company is registered, unless the company is an unlimited liability
company. The shares into which the capital is divided must be of fixed value, which is
commonly known as the nominal value of the share. The capital is variously described as
“nominal”, “authorised” or “registered”.

Declaration for Subscription

The subscribers to the memorandum declare: “We, the several persons whose names and
addresses are subscribed below, are desirous of being formed into a company in pursuance of
this memorandum of association, and we respectively agree to take the number of shares in the
capital of the company set opposite our respective names”. Then follow the names, addresses,
description, occupations of the subscribers, and the number of shares each subscriber has
agreed to take and their signatures attested by a witness. (Refer to INC 13 of Companies
(Incorporation) Rules 2013)

The statutory requirements regarding subscription of memorandum are that:


— each subscriber must take at least one share;
— each subscriber must write opposite his name the number of shares which he agrees to take.
[Section 4(1)(e))]

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B. Articles of Association

According to Section 2(5) of the Companies Act, 2013, ‘articles’ means the articles of
association of a company as originally framed or as altered from time to time or applied in
pursuance of any previous company law or of this Act. 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.

Entrenchment Provisions
The articles may contain provisions for entrenchment to the effect that specified provisions of
the articles may be altered only if conditions or procedures that are more restrictive than those
applicable in the case of a special resolution, are met or complied with. [Section 5 (3)]. The
Companies Act, 2013 recognizes an interesting concept of entrenchment.

Essentially, the entrenchment provisions allow for certain clauses in the articles to be amended
upon satisfaction of certain conditions or restrictions (such as obtaining a 100% consent)
greater than those prescribed under the Act. This provision acts as a protection to the minority
shareholders and is of specific interest to the investment community. This shall empower the
enforcement of any pre-agreed rights and provide greater certainty to investors, especially in
joint ventures.

5. Filing of documents

Section 7(1) that the following documents and information for registration shall be filed with
the Registrar within whose jurisdiction the registered office of a company is proposed to be
situated: Memorandum and Articles of Association of the company duly signed.

Section 7(1)(a) states that the memorandum and articles of the company duly signed by all the
subscribers to the memorandum in such manner as may be prescribed; Declaration from the
professional.

Section 7(1)((b) states that a declaration in the prescribed form by an advocate, a chartered
accountant, cost accountant or company secretary in practice, who is engaged in the formation
of the company, and by a person named in the articles as a director, manager or secretary of the
company, that all the requirements of this Act and the rules made under in respect of
registration and matters precedent or incidental thereto have been complied with in Form No
INC 8; Affidavit from the subscribers to the Memorandum.

Section 7(1)(c) states that an affidavit from each of the subscribers to the memorandum and
from persons named as the first directors, if any, in the articles that he is not convicted of any
offence in connection with the promotion, formation or management of any company, or that
he has not been found guilty of any fraud or misfeasance or of any breach of duty to any
company under this Act or any previous company law during the preceding five years and that
all the documents filed with the Registrar for registration of the company contain information
that is correct and complete and true to the best of his knowledge and belief in Form No INC 9.

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The address for correspondence till its registered office is established; Under Section 12, a
company shall, on and from the 15th day of its incorporation and at all times thereafter, have a
registered office capable of receiving and acknowledging all communications and notices as
may be addressed to it. The company can furnish to the registrar verification of registered
office with in 30 days of incorporation in the manner prescribed. As per rule 25(1) of
Companies (Incorporation) Rules 2014, the verification of registered office shall be filed in
Form no INC 22.

Particulars of subscribers

Section 7(1)(e) states that the particulars of name, including surname or family name,
residential address, nationality and such other particulars of every subscriber to the
memorandum along with proof of identity, as may be prescribed, and in the case of a
subscriber being a body corporate, such particulars as may be prescribed;

Section 7(1)(f) states that the particulars of the persons mentioned in the articles as the first
directors of the company, their names, including surnames or family names, the Director
Identification Number, residential address, nationality and such other particulars including
proof of identity as may be prescribed.

Section 7(1)(g) states that the particulars of the interests of the persons mentioned in the
articles as the first directors of the company in other firms or bodies corporate along with their
consent to act as directors of the company in such form and manner as may be prescribed in
FORM NO DIR 12.

Power of Attorney: With a view to fulfilling the various formalities that are required for
incorporation of a company, the promoters may appoint an attorney empowering him to carry
out the instructions/requirements stipulated by the Registrar. This requires execution of a
Power of Attorney on a non-judicial stamp paper of a value prescribed in the respective State
Stamp Laws.

6. Issue of Certificate of Incorporation by Registrar


If after filling the Requisite forms for incorporation with the Registrar of Companies along
with fees, ROC is satisfied with the contents of the documents filed, ROC will issue the
Certificate of incorporation in Form no.INC 11 as directed by Rule-18 of Companies
(Incorporation) Rules, 2014.

7. Declaration at the time of commencement of business

As per Rule-24 of Companies (Incorporation) Rules, 2014, the declaration filed by a director
shall be in Form No. INC.21 along with the fee as and the contents of the form shall be verified
by a Company Secretary in practice or a Chartered Accountant or a Cost Accountant in
practice: Provided that in the case of a company requiring registration from sectoral regulators

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such as Reserve Bank of India, Securities and Exchange Board of India etc, the approval from
such regulator shall be required.

Pursuant to Section 11(1)(a) of the Companies Act, 2013 and Rule 24 of the Companies
(Incorporation ) Rules, 2014, Declaration prior to the commencement of business or exercising
borrowing powers in Form No. INC.21 along with the following attachments:
• Specimen signature in form INC.10.
• Certificate of Registration issued by the RBI (Only in case of Non-Banking Financial
Companies)/ from other regulators

Conclusive Evidence
A Certificate of Incorporation given by the Registrar in respect of any association shall be
conclusive evidence that all the requirements of the Act have been complied with in respect of
registration and matters precedent and incidental thereto, and that the association is a company
authorised to be registered and duly registered under the Act.

ALTERATION OF MEMORANDUM OF ASSOCIATION


Section 13(1) of the Companies Act, 2013 provides that save as provided in section 61
(Dealing with power of limited company to alter its share capital), a company may, by a special
resolution and after complying with the procedure specified in this section, alter the provisions
of its memorandum. The memorandum of association of a company may be altered in the
following respects:
(1) By changing its name [Sections 13(2)].
(2) By altering it in regard to the State in which the registered office is to be situated [Section
13(4) & (7)].
(3) By altering its objects [Section 13 (1) & (9).
(4) By altering its share capital (Section 61).
(5) By re-organising its share capital (Sections 230 to 237).
(6) By reducing its capital (Section 66).

The provisions or conditions of the memorandum of association relating to the name clause,
registered office clause, the objects clause, limited liability clause, subscriber’s share clause as
provided in Section 4 of the Companies Act, 2013 or any other specific provisions contained
therein, can be altered by following the prescribed procedure laid down in the Act. Strict
compliance of the prescribed procedure is demanded by law. Failure to comply with the
express provisions made under the Act for the purpose of alteration of the provisions or
conditions contained in the memorandum will be deemed as a nullity.

Further section 13(6) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar the special resolution passed by the company under
section 13(1). Section 13(10) provides that no alteration made under this section shall have any
effect until it has been registered in accordance with the provisions of the said section. Further,
any alteration of the memorandum, in the case of a company limited by guarantee and not
having a share capital, purporting to give any person a right to participate in the divisible
profits of the company otherwise than as a member, shall be void. [Section 13 (11)]

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REGISTRATION OF ALTERATION
Section 13(6)(a) provides that a company shall, in relation to any alteration of its
memorandum, file with the Registrar :
(a) the special resolution passed by the company under section 13(1); and
(b) the approval of the Central Government under section 13(2), if the alteration involves any
change in the name of the company.

The special resolution shall be filed with the Registrar within thirty days of the passing or
making thereof in the prescribed manner and payment of prescribed fees within the time
specified under section 403.
As per section 13(9), the Registrar shall register any alteration of the memorandum with
respect to the objects of the company and certify the registration within a period of thirty days
from the date of filing of the special resolution in accordance with section 13 (6)(a).

Alteration of Articles of Association


A company has a statutory right to alter its articles of association. But the power to alter is
subject to the provisions of the Act and to the conditions contained in the memorandum.
Subsidiary company not to hold shares in its holding company Section 19 provides that no
company shall, either by itself or through its nominees, hold any shares in its holding company
and no holding company shall allot or transfer its shares to any of its subsidiary companies.
Any such allotment or transfer of shares of a company to its subsidiary company shall be void.

However, this will not apply in the following cases:


(a) where the subsidiary company holds such shares as the legal representative of a deceased
member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary company
of the holding company

It is further provided that the subsidiary company referred to above shall have a right to vote at
a meeting of the holding company only in respect of the shares held by it as a legal
representative or as a trustee, as referred to in clause (a) or clause (b).

In case of a holding company which is a company limited by guarantee or an unlimited


company, not having a share capital, the reference of ‘share’ shall be construed as a reference
to the interest of its members, whatever be the form of interest.

Formation of OPC
a) 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.
b) The other person whose name is given in the memorandum shall give his prior written
consent in prescribed form and the same shall be filed with Registrar of companies at
the time of incorporation.
c) Such other person may be given the right to withdraw his consent.

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d) 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.
e) Any such change in the name of the person shall not be deemed to be an alteration of
the memorandum.
f) Only a natural person who is an Indian citizen and resident in India (person who has
stayed in India for a period of not less than 182 days during the immediately preceding
one calendar year):

1) shall be eligible to incorporate a OPC.


2) shall be a nominee for the sole member of a OPC.

g) No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.
h) No minor shall become member or nominee of the OPC or can hold share with
beneficial interest.
i) Such Company 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. The procedure
of conversion is given in the Rules 6 & 7 of the Companies (Incorporation) Rules, 2014.

j) Such Company cannot carry out Non-Banking Financial Investment activities including
investment in securities of anybody corporate.

k) OPC cannot convert voluntarily into any kind of company unless two years have expired
from the date of incorporation, except where the paid up share capital is increased beyond
fifty lakh rupees or its average annual turnover during the relevant period exceeds two
crore rupees.

l) If One Person Company or any officer of such company contravenes the provisions, they
shall be punishable with fine which may extend to ten thousand rupees and with a further
fine which may extend to one thousand rupees for every day after the first during which
such contravention continues.
Appointment of Directors
Board of Directors’ or ‘Board’ in relation to a company, means the collective body of the
directors of the company. {Section 2(10)}.

Director means a director appointed by the Board of a company.{Section 2(34) of New Act}
Independent director mean an independent director referred to in Section 149(5).

Number of directors: There is no change in the minimum number of directors that a company
must have. Section 149 (1) provides that every public limited company shall have a minimum
number of 3 directors while a private limited company shall have a minimum number of 2
directors. The maximum number of directors permitted is now is 15 and the same can be
increased by passing a special resolution. Approval of Central government is not required.

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Mandatory requirements for Appointment: Director shall give to the company his consent and
DIN Number and also a declaration to the effect that he is not disqualified before his
appointment. Section 152(3)(4)(5).The Board must ensure that director to be appointed is not
hit by any disqualification specified in Section 164 and meets the requirements of the
company.

What are the various ways for appointing Directors?

The Articles of association generally contains provisions with regards to appointment,


retirement rights duties and remuneration of directors. Directors are appointed

- by naming first directors in the articles of association (If no mention is made by default,
individual subscribers (other than body corporate) to the memorandum will be first directors.
In case of One Person Company, individual being a subscriber to the Memorandum of
association, he shall be deemed to be its first director until the director or directors are duly
appointed.

- by the shareholders in General meeting ( Section 152(1))

- by the board of directors following categories (Section 152(2))

a. Additional directors, if articles confer such power(persons who fail to get elected at General
meeting can not be appointed as additional director)

b. Alternate directors, nominee directors, if articles confer such power or by a resolution


passed in the General meeting

c. Causal vacancy caused by resignation of a duly appointed director before expiry of his term

Composition of Board:

The Board of directors consists of whole time director/Managing director and other directors
including independent directors. Whole time directors as the name itself implies devote whole
time and are treated as employees. Similar is the position of Managing director and this
category of directors are entrusted with substantial powers of management to look after the day
to day affairs of the company.

Listed companies have to comply with Clause no.49 which deals with Corporate Governance.
As per Corporate Governance clause, the Board of directors of the company shall have an
optimum combination of executive and non-executive directors with not less than fifty percent
of the board of directors comprising of non-executive directors. If chairman of the Board is a
non-executive director, at least one-third of the Board should comprise of independent
directors and in case he is an executive director, at least half of the Board should comprise of
independent directors.

Unless the articles provide for retirement of all directors not less than 2/3rds of the total
number of directors shall be liable to retire by rotation at every Annual General meeting of a
public Limited company {Section 152 (6)} and are eligible to be reappointed. The remaining
1/3 directors shall be permanent directors. There is no change in the provisions relating to

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retirement of (1/3rd of 2/3rds) directors at every Annual General meeting. Directors to retire
shall be those who have been longest in the office

Category of directors: The Act has classified directors and given a name to directors either on
the basis of their function or on the basis of representation.

These are as follows:-

Independent directors {Section 149(6)}: Every Listed Public Company shall have at least
one-third of the total number of directors as independent directors. Government may prescribe
the minimum number of independent directors in case of any class or classes of public
companies. The new act prescribes the attributes of an Independent director.

The Rules which are currently on display for comments mandate that

- Public companies with a paid up capital of Rs.100 crores or more or

- Public companies which have in aggregate, outstanding loans or borrowings, debentures,


deposits in excess of Rs.200 crores.

Explanation to the rules further indicates that the criterion shall apply at the time of
appointment. But applicability continues even though the criterion limits prescribed may fall
below subsequent to the appointment. Rules also prescribed qualifications to be possessed

Attributes of independent director: He must be a person of integrity, and possess expertise and
experience. He should not be related to promoters, directors, holding or subsidiary company.
He must abide by the code of conduct specified in Schedule IV. Neither he nor his nor his
relatives should have pecuniary relationship. He shall not be entitled to any remuneration,
other than sitting fee, reimbursement of expenses for attending Board meetings and profit
related commission as approved by the members. His term of appointment is up to five
consecutive years and shall be eligible for re- appointment by a special resolution

Additional directors: The board of directors can appoint additional directors, if such power is
conferred on them by the articles of association. Such additional directors hold office only upto
the date of next annual general meeting. As per the new Act, the board can not appoint a person
who failed to get appointed as a director at a General meeting. Section 161(1)

Alternate directors: The Board of directors or shareholders in General meeting can appoint an
alternate director to represent a director who is out of the country and he will hold office only
up to the date of return of the original director and up to the term of original director. The
appointed alternate director can not represent any other directors in the same company. Further
restriction is that he also can not represent an independent director unless he is possesses the
attributes of an independent director. Section 161(2)

Woman directors: Companies with such criteria to be announced shall appoint woman
directors. A lot of women nowadays occupy top positions in corporate even without this
mandatory provision. It is a welcome provision. Rules displayed on the MCA web site indicate
a time frame for appointment of at least one woman director on the Board of the following
companies :-

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- Every listed company shall appoint at least one woman director within one year from the
commencement of the second proviso to Section 149(1)

- Every other company having paid up capital of 100 crores or more has to appoint within 3
years from the commencement of second proviso to Section 149(1) of the Act

Small shareholders director: A listed company may appoint one director elected by small
shareholders. By way of an explanation it is clarified that members with a holding shares
having a nominal value of not more than Rs.20,000/- or such sum as may be prescribed. The
selection procedure will be prescribed. (Section 151).Rules recently released rules clarify that a
listed company may suo motu or on the application of 500 small shareholders or 1/10 of total
number of shareholder whichever is lower, may appoint a small shareholders director. The
procedure for election of small shareholders director i.e. notice, declaration, and consent of
director are dealt with. The notable feature is that he shall be considered as an independent
director with tenure of 3 years. While disqualifications are spelt out, it is also stipulated that he
cannot hold the directorship representing more than 2 companies.

Nominee directors: The board can appoint nominee directors, if its articles permit. Otherwise
it has to amend its articles for such power. It is usual for the financial Institutions which lend
money to the companies to impose a condition to the effect that it can appoint its nominee to be
on the board of the company. The term of office of such nominee director shall be decided by
the institution only. {Section 161(3)}.

Directors in causal vacancy: If any vacancy is caused by death or resignation of a director


appointed by the shareholders in General meeting, before expiry of his term, the Board of
directors can appoint a director to fill up such vacancy. The appointed director shall hold office
only up to the term of the director in whose place he is appointed. Section {161(4)}

DIN requirements: In the new act Sections 154-159 deal with DIN requirements. Every
Director shall apply for allotment of DIN and intimate to all companies in which he is a
director or likely to be appointed as a director. Company is bound to intimate the same within
15 days of intimation to the Registrar of companies or to any authority as may be prescribed by
the Government.

Other important points:

- At least one director of the company shall be in India for a period of not less than 180 days in
the previous calendar year.

- While proposing the name of a person other than the retiring director for directorship, it
mandatory to deposit of Rs. 1,00,000/- either by the candidate or by the member proposing.
Deposit shall be refunded in the event the candidate is elected or secures more than 25% of
votes cast either by proxy or on poll. This increase from Rs.500/- is intended to eliminate
frivolous applications. (Section 160)

- New Act has added one more to the list of disqualifications one more. If a director is
convicted of the offence for dealing with related party transactions at any time during the last 5
years, it becomes a disqualification for appointment. Section 164((1)(g)

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- Although the maximum number of directorships a person can hold is increased to 20 (old
limit 15), it has come with a rider that number of directorships in public companies shall be
limited to 10.(Section 165). Further the company can restrict limit by passing a special
resolution

- Manner of resignation and its effective date has been incorporated in Section 168 of the Act
itself putting to rest the controversies surrounding this aspect. Director may resign from office
by giving a notice in writing to the company and it becomes effective from the date of receipt
by the board or any effective date mentioned in the resignation. The new rules provide that
company has to file resignation of director with the ROC company within 30 days of receipt of
notice in form no.11.8. The director shall inform about his resignation by filing prescribed
form no. 11.7 with the Roc. The word used in the Rule 11.13 is “May”. Instead of May, “shall”
should have been used in its place. This measure helps director who resigns to disown any
decisions / liabilities arising out of such decisions after his resignation.

Powers of Board of Directors

Section 179 empowers the board to exercise its powers in all areas of the Act, except where it
is specifically mentioned in the Act or in the memorandum or articles that the power shall be
exercised at a general meeting by the shareholders.

The Board of Directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at meetings of the Board, namely:
a) to make calls on shareholders in respect of money unpaid on their shares;
b) to authorise buy-back of securities under section 68;
c) to issue securities, including debentures, whether in or outside India;
d) to borrow monies;
e) to invest the funds of the company;
f) to grant loans or give guarantee or provide security in respect of loans;
g) to approve financial statement and the Board’s report;
h) to diversify the business of the company;
i) to approve amalgamation, merger or reconstruction;
j) to take over a company or acquire a controlling or substantial stake in another
company;
k) any other matter which may be prescribed

Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of
directors, the managing director, the manager or any other principal officer of the company or
in the case of a branch office of the company, the principal officer of the branch office, the
powers specified in clauses (d) to (f) on such conditions as it may specify:

Provided further that the acceptance by a banking company in the ordinary course of its
business of deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise, or

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the placing of monies on deposit by a banking company with another banking company on
such conditions as the Board may prescribe, shall not be deemed to be a borrowing of monies
or, as the case may be, a making of loans by a banking company within the meaning of this
section.

Explanation I : Nothing in clause (d) shall apply to borrowings by a banking company from
other banking companies or from the Reserve Bank of India, the State Bank of India or any
other banks established by or under any Act.

Explanation II : In respect of dealings between a company and its bankers, the exercise by the
company of the power specified in clause (d) shall mean the arrangement made by the
company with its bankers for the borrowing of money by way of overdraft or cash credit or
otherwise and not the actual day-to-day operation on overdraft, cash credit or other accounts by
means of which the arrangement so made is actually availed of.

Rule 8 of the Companies (Meeting of Board and its powers) Rules, 2014

Provides that in addition to the powers specified under section 179(3) of the Act, the following
powers shall also be exercised by the Board of Directors only by means of resolutions passed
at meetings of the Board

i. to make political contributions;


ii. to appoint or remove key managerial personnel (KMP);
iii. to take note of appointment(s) or removal(s) of one level below the Key Management
Personnel;
iv. to appoint internal auditors and secretarial auditor;
v. to take note of the disclosure of director’s interest and shareholding;
vi. to buy, sell investments held by the company (other than trade investments),
constituting five percent or more of the paid up share capital and free reserves of the
investee company;
vii. to invite or accept or renew public deposits and related matters;
viii. to review or change the terms and conditions of public deposit;
ix. to approve quarterly, half yearly and annual financial statements or financial results as
the case may be

Restriction on Powers of Board:


According to section 180(1) The Board of Directors of a company shall exercise the following
powers only with the consent of the company by a special resolution, namely:

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking
of the company or where the company owns more than one undertaking, of the whole or
substantially the whole of any of such undertakings.
Explanation: For the purposes of this clause, –
“undertaking” shall mean an undertaking in which the investment of the company exceeds
twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year
or an undertaking which generates 20% of the total income of the company during the previous

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financial year; the expression “substantially the whole of the undertaking” in any financial year
shall mean 20% or more of the value of the undertaking as per the audited balance sheet of the
preceding financial year;
(b) to invest otherwise in trust securities the amount of compensation received by it as a result
of any merger or amalgamation;

(c) to borrow money, where the money to be borrowed, together with the money already
borrowed by the company will exceed aggregate of its paid-up share capital and free reserves,
apart from temporary loans obtained from the company’s bankers in the ordinary course of
business:

Provided that the acceptance by a banking company, in the ordinary course of its business, of
deposits of money from the public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the
banking company within the meaning of this clause.
Explanation : For the purposes of this clause, the expression “temporary loans” means loans
repayable on demand or within six months from the date of the loan such as short-term, cash
credit arrangements, the discounting of bills and the issue of other short-term loans of a
seasonal character, but does not include loans raised for the purpose of financial expenditure of
a capital nature;

(d) to remit, or give time for the repayment of, any debt due from a director.

According to section 180(3) nothing contained in clause (a) of sub-section (1) shall affect –
the title of a buyer or other person who buys or takes on lease any property, investment or
undertaking as is referred to in that clause, in good faith; or the sale or lease of any property of
the company where the ordinary business of the company consists of, or comprises, such
selling or leasing.

Section 180(2) contains provisions on limits on borrowing the section provides that every
special resolution passed by the company in general meeting in relation to the exercise of the
powers referred to in clause (c) of sub-section (1) shall specify the total amount up to which
monies may be borrowed by the Board of Directors.

Any special resolution passed by the company consenting to the transaction as is referred to in
clause (a) of subsection (1) may stipulate such conditions as may be specified in such
resolution, including conditions regarding the use, disposal or investment of the sale proceeds
which may result from the transactions:

Provided that this sub-section shall not be deemed to authorise the company to effect any
reduction in its capital except in accordance with the provisions contained in this Act.[Section
180(4)]

No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section
(1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith

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and without knowledge that the limit imposed by that clause had been exceeded. [section
180(5)]
Duties of Board of Directors

The following duties and liabilities have been imposed on the directors of companies, by the
Indian Companies Act of 2013, under its Section 166: ---

 A director of a company shall act in accordance with the Articles of Association (AOA)
of the company.
 A director of the company shall act in good faith, in order to promote the objects of the
company, for the benefits of the company as a whole, and in the best interests of the
stakeholders of the company.
 A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
 A director of a company shall not involve in a situation in which he may have a direct
or indirect interest that conflicts, or possibly may conflict, with the interest of the
company.
 A director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates and if such
director is found guilty of making any undue gain, he shall be liable to pay an amount
equal to that gain to the company.
 A director of a company shall not assign his office and any assignment so made shall be
void.
 If a director of the company contravenes the provisions of this section such director
shall be punishable with fine which shall not be less than one Lakh Rupees but which
may extend to five Lac Rupees.

The duties set out in this Section are not exhaustive. Apart from the duties set out in Section
166, directors are also responsible for various obligations provided under other Sections of the
2013 Act. For example:

 The board needs to lay the financial statements for approval and adoption at the annual
general meeting of the shareholders (Section 129);
 The directors are responsible for devising proper systems to ensure compliance with the
provisions of all applicable laws and to ensure that such systems are adequate and are
operating effectively (Section 134);
 Director needs to ensure that the company complies with obligations relating to
corporate social responsibility provided under Section 135;
 The board is responsible for appointing first auditors (Section 139);
 A director needs to disclose his interest in a contract with the company (Section 184);
 A director is prohibited from engaging in forward dealing of securities (Section 194);
 The board is responsible for appointment of whole time key managerial personnel
(Section 203);
 The directors are responsible for issuance of notice ad holding of board meetings and
general meetings etc.

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INDEPENDENT DIRECTORS

Apart from the duties mentioned above, which are applicable to all directors, independent
directors are also additionally required to comply with code of conduct specified under
Schedule IV of the 2013 Act. The Schedule has stipulated 13 (thirteen) different duties to be
performed by an independent director. Some of these duties include:

(a) Regularly updating and refreshing the skills, knowledge and familiarity with the company.

(b) Strive to attend and participate actively in all meetings of the Board and the committees
and general meetings.

(c) Keeping well informed about the company and the external environment in which it
operates.

(d) Not to unfairly obstruct the functioning of a proper board or committee.

(e) To pay sufficient attention and ensure that adequate deliberations are held before approving
related party transactions and assure himself that the same are in the interest of the company.

(f) To ensure that the company has an adequate and functional vigil mechanism and also to
ensure that the interests of a person who uses such mechanism are not prejudicially affected on
account of such use.

(g) Not to disclose confidential information, including commercial secrets, technologies,


unpublished price sensitive information, etc., unless such disclosure is expressly approved by
the board or is required by law.

Apart from the duties, the Code also covers other aspects, such as it provides guidelines for
professional conduct, role and functions of independent directors, manner of appointment,
reappointment, resignation/removal, need for separate meetings of independent directors and
evaluation of independent directors by the entire board.

As seen from the above, various duties and responsibilities have been cast on independent
directors, including protecting interests of minority shareholders, harmonizing conflict of
interests of stakeholders, acting as a mediator in cases of conflicting interests etc considering
the importance of their role from a corporate governance perspective.

LIABILITY OF DIRECTORS

Contravention of provisions of Section 166 (relating to codified duties) is punishable with a


fine which shall not be less than Rs 1 Lakh but which may extend to Rs 5 lakhs.

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Further, penal provisions throughout the 2013 Act have been made more stringent and provide
for increased penalties as compared to the 1956 Act. On an average, 5 the minimum amount of
fine that is imposed under certain Sections is Rs 25,000 which in certain cases extends to Rs 25
crores or even more.

Set out below is the list of few contraventions, where the penalties are Rs 1 crore or more:

(a) Violation of provisions relating to not-for-profit companies (Section 8);

(b) Violation of provisions relating to subscription of securities on private placement (Section


42);

(c) Issue of duplicate share certificates with an intent to defraud (Section 46 (5));

(d) Failure to repay deposits within specified time (Section 74 (3));

(e) Contravention of provisions relating to insider trading (Section 195 (2)).

Apart from monetary penalties, certain offences even attract imprisonment. Most of the
offences leading to imprisonment under the 2013 Act are non-cognizable (that is would need
warrant to arrest) but there are certain serious offences which are cognizable in nature and
would not require a warrant to arrest. These offences are mainly connected to fraud or intent to
defraud.

Some of such offences are listed below:

(a) Furnishing of any false or incorrect particulars of any information or suppressing any
material information in any of the documents filed with the Registrar of Companies in relation
to the registration of a company (Section 7 (6));

(b) Including in the prospectus any statement which is untrue or misleading in form or context
in which it is included or where any inclusion or omission of any matter is likely to mislead
(Section 34);

(c) Fraudulently inducing persons to invest any money (Section 36);

(d) Default under Section 56 relating to transfer and transmission of shares with an intent to
defraud;

(e) Offences relating to reduction of share capital (Section 66).

The company has the right to initiate legal action against directors, in case of breach of their
duties. Apart from this, the 2013 Act has also introduced the novel concept of ‘class action
suits’ under Section 245. Under this concept, a group of shareholders (constituting a minimum
of 100 shareholders or such minimum percentage of total shareholders as may be prescribed)

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can bring an action on behalf of all affected parties, against the company and/or its directors,
for any fraudulent or wrongful act or omission of conduct on its/their part.

Further, the 2013 Act proposes to set up a National Company Law Tribunal which is expected
to provide speedier and more efficient remedy. Apart from the 2013 Act, there are several other
statutes, such as Negotiable Instruments Act, Consumer Protection Act, which lay down
increased liabilities on directors.

COMPANY MEETINGS

GENERAL MEETING: AGM (Sec 96 & 97)

Applicability: Every Company other than One Person Company.

Key Provisions: Every Company to which this section applies shall hold its 1st AGM within 9
months from the closure if financial year and subsequent AGM within 6 months form the
closure of financial year. The gap between two meetings shall not be more than 15 months and
in case of first AGM, it is not necessary to hold AGM in the year of incorporation. ROC has
power to give extension upto 3 months for holding AGM except first AGM on special reason.

Every AGM shall be called during business hour i.e. 9.00 a.m. to 6.00 p.m. on any day except
national holiday and shall be held at registered office or other place within the city, town or
village in which the registered office of the company is situated.

Central Govt. has power to exempt any company form the provision of subsection (2) of
section 96 of the Act, 2013. In case of default in holding AGM, Tribunal may call AGM on
application of any member of the company and give ancillary or consequential directions as it
may think expedient and such directions may include a direction that one member can present
in person or by proxy shall constitute quorum.

REPORT ON AGM (Sec 121) Apart from minutes of AGM, Listed Companies are required to
prepare report on each AGM in a manner prescribed in rule 31 of Companies (Management &
Administration) Rules, 2014 including the confirmation to the effect that the same was
convened, held and conducted as per the provisions of this Act and rules made there under. The
copy of report shall be filed with ROC within 30 days from the date of conclusion of AGM
failure to submit that report attract fine on Company of Rs. 1 lakh minimum which may extend
to five lakh and on every defaulting officer of Rs. 25 thousand minimum which may extend to
1 lakh.

MEETING BY TRIBUNAL (Sec 98): In case of impracticality to call the meeting of company
other than AGM, the Tribunal may either suo-motu or on application of any director or
member of the company who would be entitled to vote at the meeting order a meeting of the
company to be called, held and conducted in such manner as Tribunal may think fit and give
any ancillary or consequential directions modifying or supplementing in relation to the calling,
holding and conducting of the meeting, the operation of provisions of Act or Articles of the
Company. Such directions may include that one member in present or proxy shall be deemed
quorum.

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EGM: (Sec 100)

By Board: Board may whenever think necessary may call general meeting of the Company.

By Requisition: Sec 100 with Rule No. 17 of Companies (Management & Administration)
rules 2014 Board shall proceed to call EGM at the requisition made by members holding on
the date of receipt of requisition atleast 1/10 of share capital carrying voting right (in case of
company having share capital) or 1/10 of total voting power (in case of company not having
share capital) as on the date of receipt of requisition. If Board fail to proceed to call an EGM
within in a period of twenty one day from the date of receipt of valid requisition in regard to
any matter on a day not later than 45 days from the date of receipt of such requisition, the
meeting may be called and held by requisitions themselves within a period of three months
from the date of requisition. Requisition shall set out the matter for which meeting is to be
called and shall be signed by requisitions and shall be sent to the registered office of the
Company. EGM called by requisition will cancelled if adjourned due to want of quorum.

NOTICE OF GENERAL MEETING (SEC 101 WITH RULE NO. 18 OF COMPANIES


(MANAGEMENT & ADMINISTRATION) RULES, 2014:

21 clear days notice either in writing or through electronic mode* (E-mode) in such manner as
prescribed in rules. Notice shall specify the day, date, time and place and the hour of the
meeting and a statement of business to be transacted at such meeting and shall be given to
Every Member of the Company, Legal representative of any deceased member or the assignee
of an insolvent member and to the auditors and every director of Company. Accidental
omission to give notice or non-receipt of such notice shall not invalidate the proceeding of the
meeting.

*Rule 18 of: Companies (Management & Administration) Rules, 2014 E-mode shall mean any
communication sent by a Company through its authorized and secured computer programme
which is capable of producing confirmation and keeping record of such communication. Notice
may be sent through e-mail as text or as an attachment to e-mail or as notification providing
electronic link or URL for accessing such notice. E-mail shall be addressed to the person
entitled to receive such e-mail as per records of company or as provided by depository.

Company shall provide an advance opportunity at least once in a financial year, to member to
register his e-mail address and changes therein. E-mail shall state name of company, type of
notice of meeting, place and the date of meeting. If mail is sent in the form of a Non-editable
attachment to the e-mail, such attachment shall be in the portable document format or in a non-
editable format together with a link or instruction for receipt for downloading relevant version
of software. Mail may send through in-house facility or its registrar and transfer agent or any
other Authorised agency for providing bulk email facility.

Notice of General Meeting of the Company shall be simultaneously placed on the website of
the Company, if any, and on the website notified by C.G.

STATEMENT TO BE ANNEXED TO NOTICE (Sec 102)

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In case of any business other than Ordinary Business a statement setting out following material
facts concerning each item of business to be transacted at a general meeting shall be annexed to
the notice convening such meeting, namely:

(i) Nature of concern or interest, financial or otherwise, if any, in respect of each items
of every director and the manager, if any and every other KMP and relatives of the
Director, manager or KMP.
(ii) Any other information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon.
(iii) Where any special business in the meeting of Company affects or relates any other
company then shareholding of promoter, directors, manager and KMP shall be
stated in the said statement, if that shareholding is 2% or more.
(iv) Where any item of business refers to any documents, which is to be considered at
the meeting, the time and placed where the documents can be inspected shall also
be specified in the statement.

Special Business in AGM means all businesses other than consideration of financial
statements, report of Board and Auditors, declaration of any dividend, appointment of
Directors in place of retiring and appointment of and fixation of remuneration of Auditors.

In case of any other General Meeting all business shall be special. In case of benefit arises due
to non-disclosure of aforesaid material facts in the statement by promoters/directors/ manager/
KMP than the same shall be held in trust for the benefit of the Company.

Default in complying the provisions of this section every promoter, director, manager or other
KMP who is in default shall be penalize with fine which may extend to Rs. 50000 or five times
of amount of benefit accruing to promoters/directors/manager/KMP or any of their relatives,
whichever is more.

QUORUM: (Sec 103)

In case of public Company if on date of meeting:

- Members <_ 1000 then 5 members personally present.

- Members>1000 but upto 5000 then 15 members personally present.

- Members>5000 then 30 members personally present.

In case of Private Company 2 members personally present shall constitute quorum.

Articles may provide larger quorum If quorum is not present within half an hour then meeting
shall adjourned in same day in the next week on same time and place or such other time and
place as board may determine but at least 3 days notice is required to be given to members
either personally or by newspapers advertisement in English and one vernacular language
having circulation at the place where registered office of the company is situated.

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In case of absence of quorum at adjourned meeting, the members present shall be quorum.
Meeting called by requisition shall be cancelled in case of absence of quorum.

APPOINTMENT OF CHAIRMAN OF GENERAL MEETING (Sec 104)

Members personally present at the meeting shall elect one of themselves to be the Chairman
thereof on show of hands. In case of poll is demanded, it shall be taken forthwith in accordance
with provisions of this Act and the Chairman elected on show of vote shall be chairman until
some other person is elected as a result of poll and that other person shall be chairman for rest
of the meeting. Articles of a Company can provide different manner for appointing Chairman.

PROXIES (Sec 105 with rules 19 of Companies (Management & Administration) rules, 2014))

Member entitled to attend and vote at a meeting of company shall be entitled to appoint
another person as proxy to attend and vote at the meeting. Proxy shall not have right to speak
and vote except on a poll. C.G. may prescribe the companies whose member shall not appoint
proxy other then member of that company and C.G. has prescribed the company registered
under section 8.

A person can act as proxy of maximum 50 members if their aggregate holding is not exceeding
10 % of total share capital of company caring voting rights. A member who holds more than 10
% of total share capital carrying voting rights may appoint a single person as his proxy but that
proxy shall not act as proxy of other person. Appointment of proxy shall be in form MGT-11.

Notice of Meeting shall contain a statement that a member entitled to attend and vote is entitled
to appoint a proxy or where that is allowed, one or more proxies to attend and vote instead of
him and that proxy need not be member. Default of mentioning of such statement every officer
of company in default shall be liable to fine upto Rs. 5000. Provisions in articles requiring
longer period then 48 hours before the meeting for a depositing of proxy or other document
relating to proxy with company shall be deemed as 48 hours.

POSTAL BALLOT (Sec 110 read with rule no. 22 of Companies (Management &
Administration) Rules 2014)

Notwithstanding anything contained in this Act. A Company shall in respect of items of


businesses as the C.G. may by notification, declare to be transacted only by means of postal
ballot and if Company voluntary want in respect of any item of business, other than Ordinary
Business and any other in respect of which Directors or Auditors have a right to be heard at
any meeting, transact by means of postal ballot in such manner as prescribed in rule 22 of
Companies (Management & Administration) Rules 2014) instead of transacting at General
Meeting.

MEETING OF BOARD OF DIRECTORS AND COMMITTEES OF BOARD

BOARD MEETING (Sec 173) Applicability for all Companies including OPC Provisions:

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First Board Meeting: within thirty days of the date of its incorporation.

Subsequent Board Meeting: 4 Board meeting in ever year and maximum gap between two
Meetings shall be 120 days. One Person Company, Small Company and Dormant Company
may convene Board meeting at least once in half calendar year and gap between two meetings
is not less then ninety days.

Power of central government: C.G. has power to direct that the provisions of sub-section (1) of
Section 173 shall not apply in relation to any class or description of Company or shall apply
subject to such exceptions, modifications or conditions.

Board of Director may participate either personally or by video conferencing or other audio-
video means, as prescribed in Rule No. 3 of Companies (Meeting of Board and its Power)
Rules, 2004, which are capable of recording and recognizing and storing. C.G. may specify by
notifications of such matter which may not be dealt with by video conferencing or other audio-
video means.

Notice of Meeting: Not less than 7 days notice writing to every director at his usual address
registered with company and such notice shall be sent by hand delivery or by post or by e-
mode.

Board meeting may be called at shorter notice to transact urgent business subject to condition
that at least one independent director, if any, shall be present at the meeting and in case of
absence of independent directors from such a meeting of board, decisions taken at such a
meeting shall be circulated to all directors and shall be final only on ratification thereof by at
least one independent director, if any.

Failure to give notice may attract penalty of Rs. 25000/- on every officer whose duty is to do
so. Section 173 (5) is not applicable to OPC in which only one director is on the board.

Quorum of Board Meeting: 1/3rd of total strength or 2 whichever is higher and participation by
video conferencing shall also be counted. Continuing Directors may act notwithstanding any
vacancy on the Board, but if and so long as their number is reduced below the quorum fixed by
the Act for a meeting of Board, continuing director may act for the purpose of increasing the
number of directors to that fixed for quorum or of summoning a General Meeting and no other
purpose. Where at any time interested directors exceed 2/3 or equal to 2/3rd of total strength
then those who are not interested and present at the meeting being not less than two shall be
quorum during such time.

Where meeting of board couldn’t be held for want of quorum and articles is silent in that then
the meeting shall automatically stand adjourned to the same day at the same time and place in
the next week or if that day is national holiday, till the next succeeding day, which is not a
national holiday, at the same time and place. For calculation of quorum any fraction of a
number shall be rounded off as one and total strength shall not include directors whose places
are vacant.

AUDIT COMMITTEE MEETING (Sec 177 read with rule 6 of Companies (meeting of Board
and its power)

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Applicability: - All Listed Companies

- All public Companies with a paid-up capital of 10 crore or more

- All public Companies having turnover of 100 crore rupees or more

- All public companies, having in aggregate, outstanding loans or borrowings or debentures


or deposit exceeding 50 crore or more as existing on the date of last audited financial
statements.

Composition: Minimum 3 directors with majority of directors shall be independent. Majority


of members of audit committee including chairperson shall have ability to read and understand
the financial statement.

Timeline: Every audit committee of a company existing before the commencement of this Act
shall be reconstituted as per the provisions of this Act within one year form the commencement
of this Act.

Power & Function:

Audit committee shall accordance with the terms of reference specified in writing by board
which shall include:

a) The recommendation for appointment, remuneration and terms of appointment of


auditors;

b) Receive and monitor the auditor’s independence and performance and effectiveness of
audit;

c) Examination of financial statement and the report of auditors;

d) Approval of any subsequent modification of transactions of the Company with related


parties;

e) Scrutiny of inter corporate loans and investments;

f) Valuation of undertakings or assets of Company wherever necessary;

g) Evaluation of internal control and risk management systems;

h) Monitoring of end use of funds raised through public offers and related matters.

i) Audit Committee shall have authority to investigate into any matters in relation to
matters abovementioned a) to h) or any other matters refereed to it by Board and for these
purpose to obtain external professional advice and full access to the information and
records.

Audit Committee may call comments of auditors about internal control systems, the scope of
audit, including observation of auditors and review of financial statement before their
submission to the Board and may also discuss any related issues internal or statutory auditors
and management of company.

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Disclosure in Board Report:

Board report shall disclose the composition of audit committee and shall also disclose the fact
of not accepting its recommendation and the reason thereof.

VIGIL MECHANISM: (Sec 177 with rule no. 7 of Companies (Meeting of Board and its
Power) rules, 2014

Applicability: - Every Listed Company

- Every Company which accept deposit from public or which have borrowed money form
Banks and PFIs in excess of Rs. 50 crore

Shall establish a vigil mechanism for their Directors and employees to report their genuine
concerns or grievances.

The vigil mechanism shall provide adequate safeguard and mechanism against victimization of
persons who use such mechanism and make provision to direct access to chairperson of Audit
Committee in appropriate and exceptional cases.

Companies which are required to constitute audit Committee shall oversee the mechanism
through the committee and if any of the members of the committee have a conflict of interest
in a given case they should rescue themselves and the others on the committee would deal with
the matter on hand.

In case of other companies, Board of Directors shall nominate a Director to play the role of
audit committee for the purpose of vigil mechanism to whom other Directors or employees
may report about their concern.

NOMINATION / REMUNERATION / STAKEHOLDERS RELATIONSHIP COMMITTEE

Applicability:

- All Listed Companies

- All public Companies with a paid-up capital of 10 crore or more

- All public Companies having turnover of 100 crore rupees or more

- All public companies, having in aggregate, outstanding loans or borrowings or debentures


or deposit exceeding 50 crore or more as existing on the date of last audited financial
statements.

Composition: 3 or more non-executive Directors out of which atleast ½ shall be independent.


And Chairperson of the Company may be member but shall not be appointed Chairperson of
such committee.

Function: Nomination & Remuneration committee shall identify persons who are qualified to
become Directors or may be appointed in senior management in accordance with criteria laid

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down and recommend to the Board for their appointment or removal and shall carry out their
evaluation.

The Committee shall formulate criteria for determining qualifications, positive attributes and
independence of directors and recommend to the board a policy relating to remuneration for
directors, KMP and other employees and while formulating the policy ensure reasonableness
and sufficiency of remuneration to retain and motivate Directors and quality to run Company
relationship of remuneration to performance and remuneration of Directors, KMP and other
senior management. The Policy shall be disclosed in Board Report also.

STAKEHOLDERS COMMITTEE

Applicability: Company which consist of more than 1000 shareholders, Debenture holders,
Deposit holders and any other security holders at any time during a financial year.

Composition: Such members as may be decided by Board and the Chairperson shall be a non-
executive Director

Function: The Committee shall consider and resolve the grievances of security holders and the
Chairperson of each of the Committees constituted under section 178 or in his absence any
other member of the committee authorized by him in its behalf shall attend the General
Meetings of the Company.

Penalty for contravention of section 177 and 178: Fine of minimum Rs. 1 lakh and may extend
to 5 lakh on Company and on every officer who is in default shall be punishable with
imprisonment for a term which may extend to 1 year or with fine no less than Rs. 25000 which
may extended to 1 lakh or with both.

RESOLUTION BY CIRCULATION (SEC 175 WITH RULE 5 OF COMPANIES (BOARD


MEETING AND ITS POWER) RULES, 2014 Resolution by circulation shall not be deemed
valid unless it is circulated in draft together with necessary documents related thereto to all
directors or members of the committee as the case may be, at their address registered with
company in India by hand delivery/post/courier/ e-mode (may include email / fax) and has
been approved by majority of Directors or members of committee who are entitled to vote on
the resolution.

If 1/3 or more of total number of directors require that any resolution by circulation must be
decided at Board meeting, the Chairperson shall put the same to be decided at a meeting of
Board. Resolution passed by circulation shall be noted at subsequent Board meeting and form
part of minute of such meeting.

Resolutions under the Companies Act, 2013

Before going further, first of all let us understand what a Resolution is.

A Company being an artificial person, any decision taken by it shall be in the form of a
Resolution. Accordingly, a resolution may be defined as an agreement or decision made by the

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directors or members (or a class of members) of a company. A proposed resolution is a motion.


When a resolution is passed a company is bound by it. The resolutions could be on just about
any subject in case of Board meetings since they are ultimately responsible for running the
Company. The Act generally specifies the matters in respect of which resolutions are required
to be passed by the members in general meetings.

Basically, there are three types of resolutions: Ordinary Resolution, Special Resolution and
Unanimous Resolution. In case of Board Meetings, there is no concept of Special Resolutions
and also unanimous resolutions are required in very few cases. However, in case of general
meetings, all three are covered.

Section 114 of the Companies Act, 2013 defines an Ordinary and Special Resolutions. It states:
“(1) A resolution shall be an ordinary resolution if the notice required under this Act has been
duly given and it is required to be passed by the votes cast, whether on a show of hands, or
electronically or on a poll, as the case may be, in favour of the resolution, including the casting
vote, if any, of the Chairman, by members who, being entitled so to do, vote in person, or
where proxies are allowed, by proxy or by postal ballot, exceed the votes, if any, cast against
the resolution by members, so entitled and voting.

(2) A resolution shall be a special resolution when—

(a) the intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members of the resolution;

(b) the notice required under this Act has been duly given; and

(c) the votes cast in favour of the resolution, whether on a show of hands, or electronically or
on a poll, as the case may be, by members who, being entitled so to do, vote in person or by
proxy or by postal ballot, are required to be not less than three times the number of the votes, if
any, cast against the resolution by members so entitled and voting.”

Other than these two, there is also a concept of a unanimous resolution implying approval of
all the members present and voting, without a single vote cast against it.

Initially, as per Companies Act 1956 only one resolution required unanimous approval in the
general meeting and the same has also been covered under section 162 (1) of the Companies
Act 2013 which states that: “At a general meeting of a company, a motion for the appointment
of two or more persons as directors of the company by a single resolution shall not be moved
unless a proposal to move such a motion has first been agreed to at the meeting without any
vote being cast against it.”

However, in addition to above, for private companies, the Companies Act 2013 also inserts
one more resolution which requires unanimous approval of all the members.

As per sub-section 4 of section 5 for inclusion of “entrenchment provision” in the Articles of


Association of an already existing Company, it should be “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

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company.” Other than these all other specified matters require either an ordinary or a special
resolution.

Winding up of a company

What is winding up of a company?

Winding up of a company is the process through which life of a company comes to an end and
its property is administered for the benefit of its members & creditors. An Administrator, called
a liquidator is appointed and he takes control of the company, collects its assets, pays its debts
and finally distributes any surplus among the members in accordance with their rights.

What is the law governing the procedure of Winding up in India?

Section 270 of the Companies Act 2013, lays down the procedure for winding up of a
company. It provides two ways of winding up

 By the tribunal
 Voluntary

CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL (SECTION 271):


A company may be wound up by the Tribunal on a petition filed under Section 272 of the Act.
The company may be wound up by Tribunal –

 If the company is unable to pay its debts;


 If the company has resolved by special resolution that the company be wound up by the
Tribunal;
 If the company has acted against the interests of the sovereignty and integrity of India, its
security of the State, friendly relations with foreign States, public order, decency or morality;
 If the Tribunal has ordered the winding up of the company under Chapter XIX i.e. in case of a
sick company;
 If, on application by the Registrar or the Government, the Tribunal is of the opinion that the
affairs of the company has been conducted in a fraudulent manner or the company was formed
for fraudulent and unlawful purpose or the persons concerned in the formation or management
of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and
that it is proper that the company be wound up;
 If the company has made a default in filing with the Registrar its financial statements or annual
returns for immediately preceding five consecutive financial years; or
 If the Tribunal is of the opinion that it is just and equitable to wind up the company.

Unable to Pay Debt (sub – section 2 of Section 271):

A company shall be deemed to be unable to pay its debts –

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a) If the company has to pay the sum within twenty – one days after the receipt of demand or
to provide adequate security or re – structure or compound the debt to the reasonable
satisfaction of the creditor. The demand may be served:

i. A creditor by assignment or otherwise,

ii. to whom company is indebted for an amount exceeding one lakh rupees then due,

iii. by causing it to be delivered at its registered officer, by registered post or otherwise,

iv. a demand requiring the company to pay the amount so due.

b) If any execution or other process issued on a decree or order of any court or tribunal in
favour of a creditor of the company is returned unsatisfied in whole or in part; or

c) If it is proved to the satisfaction of the Tribunal that the company is unable to pay its debt,
and the Tribunal has taken into account the contingent and prospective liabilities of the
company while determining this.

PETITION FOR WINDING UP (SECTION 272):

A petition to the Tribunal for the binding up of a company shall be presented by –

a) The company;

b) Any creditor or creditors, including any contingent or prospective creditor or creditors;

c) Any contributory or contributories;

d) All or any of the person in above clauses (a), (b) and (c) together;

e) The Registrar;

f) Any person authorised by the Central Government in that behalf; or

g) In case the company has acted against the interests of the sovereignty and integrity of
India, its security of the State, friendly relations with foreign States, public order, decency or
morality , by the Central Government or State Government.

A secured creditor, debenture holder and debenture trustee shall be deemed to be creditor for
this Section.
A contributory shall be entitled to present a petition for winding up of a company, whether –
i. He hold fully paid – up shares, or

ii. The company have no asserts at all

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iii. The company have no surplus assets left for distribution among shareholders.

The Shares in respect of which, a person is contributory or contributories were—

i. originally allotted to them, or

ii. have been held by him and registered in his name for at least six months during the
eighteen months immediately before commencement of the winding up, or

iii. have devolved on him through the death of a former holder.

The Registrar shall not be entitle to present a petition for winding up on the grounds specified
in clauses (b), (d) or (g) of sub – section of Section 271. the Registrar shall not present a
petition on the ground that the company is unable to pay its debts unless it appears to him
either from the financial condition of the company as disclosed in its balance sheet or from the
report of an inspector appointed under section 210 that the company is unable to pay its debts.
The Registrar shall obtain the previous sanction of the Central Government to the presentation
of a petition. The Central Government shall not accord its sanction unless the company has
been given a reasonable opportunity of making representations.

A petition presented by the company for winding up before the Tribunal shall be admitted only
if accompanied by a statement of affairs in such form and in such manner as may be
prescribed.

Before a petition for winding up of a company presented by a contingent or prospective


creditor is admitted, the leave of the Tribunal shall be obtained for the admission of the petition
and such leave shall not be granted, unless in the opinion of the Tribunal there is a prima facie
case for the winding up of the company and until such security for costs has been given as the
Tribunal thinks reasonable.

A copy of the petition made under this section shall also be filed with the Registrar and the
Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal
within sixty days of receipt of such petition.

POWERS OF TRIBUNAL (SECTION 273):

The Tribunal, on receipt of a petition for winding up, may pass any of the following orders,
namely—
 dismiss it, with or without costs;
 make any interim order as it think fit;
 appoint a provisional liquidator of the company till the making of a winding up order;
 make an order for the winding up of the company with or without cost; or
 any other order as it think fit.

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The Tribunal shall make the order within ninety days from the date of presentation of the
petition.

Before appointing a provisional liquidator, the Tribunal shall give notice to the company and
afford a reasonable opportunity to it to make its representations. However, for special reasons
to be recorded in writing, the Tribunal may dispense with such notice.

The Tribunal shall not refuse to make a winding up order on the ground only that the assets of
the company have been mortgaged for an amount equal to or in excess of those assets, or that
the company has no assets.

Where a petition is presented on the ground that it is just and equitable that the company
should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the
opinion that some other remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of pursuing the other remedy.

DIRECTIONS FOR FILING STATEMENT OF AFFAIRS (SECTION 274):

Where a petition for winding up is filed before the Tribunal by any person other than the
company, the Tribunal shall, if satisfied that a prima facie case for winding up of the company
is made out, by an order direct the company to file its objections along with a statement of its
affairs within thirty days of the order.

The Tribunal may allow a further period of thirty days in a situation of contingency or special
circumstances.

The Tribunal may direct the petitioner to deposit such security for costs as it may consider
reasonable as a precondition to issue directions to the company.

A company, which fails to file the statement of affairs, shall forfeit the right to oppose the
petition and such directors and officers of the company as found responsible for such non-
compliance, shall be liable for punishment.

The directors and other officers of the company, in respect of which an order for winding up is
passed by the Tribunal, shall submit at the cost of the company, the books of account of the
company completed and audited up to the date of the order to liquidator within a period of
thirty days of such order.

If any director or officer of the company contravenes the provisions of this section, the director
or the officer of the company who is in default shall be punishable with imprisonment for a
term which may extend to six months or with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees, or with both. The complaint may be
filed in this behalf before the Special Court by Registrar, provisional liquidator, Company
Liquidator or any person authorised by the Tribunal.

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CIRCUMSTANCES IN WHICH COMPANY MAY BE WOUND UP VOLUNTARILY


(SECTION 304):

A company may be wound up voluntarily,—

if the company in general meeting passes a resolution requiring the company to be


wound up voluntarily:
as a result of the expiry of the period for its duration fixed by its articles, or
on the occurrence of any event in respect of which the articles provide that the
company should be dissolved; or
the company passes a special resolution that the company be wound up voluntarily.

DECLARATION OF SOLVENCY (SECTION 305):

In case of a proposed voluntary winding up, majority of its directors but not less than two
directors, shall at a Board meeting make a declaration verified by an affidavit that they have
made full inquiry into the affairs of the company and they have formed an opinion that the
company has no debt or whether it will be able to pay its debts in full from the proceeds of
assets sold in voluntary winding up.

Conditions for Declaration of Solvency:

This declaration shall have effect only if:

(a) it is made within five weeks immediately preceding the date of the passing of the resolution
for winding up the company and it is delivered to the Registrar for registration before that date;

(b) it contains a declaration that the company is not being wound up to defraud any person or
persons;

(c) it is accompanied by a copy of the report of the auditors of the company prepared in
accordance with the provisions of this Act, on the profit and loss account of the company for
the period commencing from the date up to which the last such account was prepared and
ending with the latest practicable date immediately before the making of the declaration and
the balance sheet of the company made out as on that date which would also contain a
statement of the assets and liabilities of the company on that date; and

(d) where there are any assets of the company, it is accompanied by a report of the valuation of
the assets of the company prepared by a registered valuer.

Unreasonable Declaration:

Where the company is wound up in pursuance of a resolution passed within a period of five
weeks after the making of the declaration, but its debts are not paid or provided for in full, it

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shall be presumed, until the contrary is shown, that the director or directors did not have
reasonable grounds for his or their opinion while making declaration of solvency.

Punishment for wrong declaration:


Any director of a company making a declaration under this section without having reasonable
grounds for the opinion that the company will be able to pay its debts in full from the proceeds
of assets sold in voluntary winding up shall be punishable with imprisonment for a term which
shall not be less than three years but which may extend to five years or with fine which shall
not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both.

MEETING OF CREDITORS (SECTION 306):


The company shall along with the calling of meeting of the company at which the resolution
for the voluntary winding up is to be proposed, cause a meetings of its creditors either on same
day or on the next day. The company shall cause a notice of the meeting to be sent by
registered post to the creditors with the notice of the meeting of the company.
The Board of Directors of the company shall—

a) cause to be presented a full statement of the position of the affairs of the company together
with a list of creditors of the company, if any, copy of declaration under section 305 and the
estimated amount of the claims before such meeting; and

b) appoint one of the directors to preside at the meeting.

Where two-thirds in value of creditors of the company are of the opinion that—

(a) it is in the interest of all parties that the company be wound up voluntarily, the company
shall be wound up voluntarily; or

(b) the company may not be able to pay for its debts in full from the proceeds of assets sold in
voluntary winding up and pass a resolution that it shall be in the interest of all parties if the
company is wound up by the Tribunal, the company shall within fourteen days thereafter file
an application before the Tribunal.

The notice of any resolution passed at the meeting of creditors shall be given by the company
to the Registrar within ten days of the passing thereof.

If a company contravenes the provisions of this section, the company shall be punishable with
fine which shall not be less than fifty thousand rupees but which may extend to two lakh
rupees and the director of the company who is in default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not be less
than fifty thousand rupees but which may extend to two lakh rupees, or with both.
PUBLICATION OF RESOLUTION TO WIND UP VOLUNTARILY (SECTION 307):

Where a company has passed a resolution for voluntary winding up and a resolution by
creditors is passed, it shall within fourteen days of the passing of the resolution give notice of

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the resolution by advertisement in the Official Gazette and also in a newspaper which is in
circulation in the district where the registered office or the principal office of the company is
situate.

COMMENCEMENT OF VOLUNTARY WINDING UP (SECTION 308):

A voluntary winding up shall be deemed to commence on the date of passing of the resolution
for voluntary winding up under section 304.

EFFECT OF VOLUNTARY WINDING UP (SECTION 309): In the case of a voluntary


winding up, the company shall from the commencement of the winding up cease to carry on its
business except as far as required for the beneficial winding up of its business. The corporate
state and corporate powers of the company shall continue until it is dissolved.

UNIT - II

THE INDIAN CONTRACT ACT, 1872

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The laws of contract in India are contained in the Indian Contract Act, 1872. This Act is based
mainly on English Common Law which is to a large extent made up of judicial precedents. It
extends to the whole of India except the State of Jammu and Kashmir and came into force on
the first day of September 1872. The Act is not exhaustive. It does not deal with all the
branches of the law of contract. There are separate Acts which deal with contracts relating to
negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Further
the Act does not affect any usage or custom of trade (Sec. 1). A minor amendment in Section
28 of the Act was made by the Indian Contract (Amendment) Act, 1996.

1. General principles of the law of contract are expressed by sections 1 to 75

(a) The contracts of Indemnity and Guarantee are given under Secs. 124-147.

(b) Sections 124-147 and 182-238 contains the principles regarding contracts of Bailment and
Pledge and Contracts of Agency respectively.

The provisions of Indian Contract Act are subjection to some assumptions. The various
provisions of the Indian Contract Act, it will be proper to see some of the basic assumptions
underlying the Act include : (i) Subject to certain limiting principles, there shall be freedom of
contract to the contracting parties and the law shall enforce only what the parties have agreed
to be bound. The law shall not lay down absolute rights and liabilities of the contracting
parties. Instead it shall lay down only the essentials of a valid contract and the rights and
obligations it would create between the parties in the absence of anything to the contrary
agreed to by the parties ; and (ii) Expectations created by promises of the parties shall be
fulfilled and their non-fulfilment shall give rise to legal consequences. If the plaintiff asserts
that the defendant undertook to do a certain act and failed to fulfil his promise an action at law
shall apply.

Section 2(h) of the Indian Contract Act defines a contract as, "An agreement which is
enforceable at law."

This definition has two important components which constitute the basis for a contract. They
are: (1) An agreement, and (2) Legal obligation.

1. Agreement: Every promise and every set of promises, forming the consideration for each
other, is an agreement [Sec. 2 (e)]

On analysing the above definition the following characteristics of an agreement become


evident:

(a) Plurality of persons: There must be two or more persons to make an agreement because one
person cannot enter into an agreement with himself.

(b) Consensus-ad-idem : Both the parties to an agreement must agree about the subject-matter
of the agreement in the same sense and at the same time.

2. Legal Obligation: As stated above, an agreement to become a contract must give rise to a
legal obligation. Obligation is an undertaking to do or to abstain from doing some definite act.
The obligation must be such as is enforceable by law. In other words, it must be a legal

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obligation and not merely moral, social or religious. To take an example, "Please, come to my
house", says Ram to Mohan, "and we shall go out for a walk together". Mohan came to the
house of Ram but Ram could not leave the house because of some important engagement.
Mohan cannot sue Ram in damages for his not fulfilling the promise, the reason being that
there had been no intention between Mohan and Ram to create any legal obligation by the
agreement as made between them. In the circumstances, there was, in eye of law no contract
between Ram and Mohan.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

Students must remember that all agreements are not contracts. Only that agreement which is
enforceable at law is a contract. In other words, the parties to the agreement must have
intended that it shall have legal consequences and be Legally enforceable. An agreement which
is not enforceable at law cannot be a contract. Thus, the term agreement is wider in scope than
contract. All contracts are agreements but all agreements are not contact.

An agreement, to be enforceable by law, must possess the essential elements of a valid contract
as contained in section 10 of the Indian Contract Act.

According to Section 10, "All agreements are contract if they are made by the free consent of
the parties, competent to contract, for a lawful consideration and with a lawful object and are
not expressly declared to be void."

As the details of these essentials form the subject-matter of our subsequent chapters, it is
proposed to discuss them in brief here.

The essential elements of a valid contract are as follows:

1. Offer and acceptance: There must be a 'lawful offer' and a 'lawful acceptance' of the offer,
thus resulting in an agreement. The adjective 'lawful' implies that the offer and acceptance
must satisfy the requirements of the Contract Act in relation thereto.

2. Intention to create legal relations: There must be an intention among the parties that the
agreement should be attached by legal consequences and create legal obligations. Agreements
of a social or domestic nature do not contemplate legal relations, and as such they do not give
rise to a contract. An agreement to take dinner at a friend's house is not an agreement intended
to create legal relations and therefore is not a contract. Agreements between husband and wife
also lack the intention to create legal relationship and thus do not result in contracts.

3. Consensus ad idem: The minds of both the parties must be ad idem. In other words, the two
parties must have agreed about the subject matter of the contract at the same time and in the
same sense. For instance, if A who owns two cars, one Ambassador and the other Fiat, offers to
sell B one car, A intending it to be the Ambassador, B accepts the offer thinking that it is the
Fiat, there is no consensus and hence no contract.

4. Competency of Parties: The parties to the agreement must be competent to contract. If either
of the parties to the contract is not competent to contract, the contract is not valid. According to
section 11 following are the persons who are competent to contract –

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(a) who have attained the age of majority according to the law to which they are subject;

(b) who are of sound mind;

(c) who are not disqualified from contracting by any law to which they are subject.

5. Lawful consideration: The third essential element of a valid contract is the presence of
'consideration'. Consideration has been defined as the price paid by one party for the promise
of the other. An agreement is legally enforceable only when each of the parties to it gives
something and gets something. The something given or obtained is the price for the promise
and is called 'consideration'. Subject to certain exception, gratuitous promises are not
enforceable at law.

The consideration may be an act (doing something) or forbearance (not doing something) or a
promise to do or not to do something. It may be past, present or future. But only those
considerations are valid which are lawful. The consideration is lawful, unless - it is forbidden
by law; or is of such a nature that, if permitted it would defeat the provisions of any law; or is
fraudulent; or involves or implies injury to the person or property of another; or is immoral; or
is opposed to public policy (Sec. 23).

6. Free Consent: An agreement must have been made by free consent of the parties. A consent
may not be free either on account of mistake in the minds of the parties or on account of the
consent being obtained by some unfair means like coercion, fraud, misrepresentation or undue
influence. In case of mutual mistakes, the contract would be void, while in case the consent is
obtained by unfair means, the contract would be voidable.

7. Lawful object: For the formation of a valid contract it is also necessary that the parties to an
agreement must agree for a lawful object. The object for which the agreement has been entered
into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply
injury to the person or property of another (Sec. 23). If the object is unlawful for one or the
other reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a
house to a prostitute to carry on protection, he cannot recover the rent through a court of law.

8. Written and Registered: According to the Indian Contract Act, a contract may be oral or in
writing. But in certain special cases it lays down that the agreement, to be valid, must be in
writing or/and registered. For example, it requires that an agreement to pay a time barred debt
must be in writing and an agreement to make a gift for natural love and affection must be in
writing and registered (Sec. 25). Similarly, certain other Acts also require writing or/and
registration to make the agreement enforceable by law which must be observed.

Thus, (i) an arbitration agreement must be in writing as per the Arbitration and Conciliation
Act, 1996; (ii) an agreement for a sale of immovable property must be in writing and registered
under the Transfer of Property Act, 1882 before they can be legally enforced.

9. Not declared to be void: The agreement must not have been declared to be expressly void.
Agreements mentioned in sections 24 to 30 have been expressly declared to be void.

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10. Certainty: Section 29 of the Contract Act provides that "Agreements, the meaning of which
is not certain for capable of being made certain, are void". In order to give rise to a valid
contract the terms of the agreement must not be vague or uncertain. It must be possible to
ascertain the meaning of the agreement, for otherwise, it cannot be enforced.

Illustration :A agrees to sell B a hundred tons of oil. There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty.

11. Possibility of Performance: Yet another essential feature of a valid contract is that it must
be capable of performance. Section 56 lays down that "An agreement to do an act impossible
in itself is void". If the act is impossible in itself, physically or legally, the agreement cannot be
enforced at law.

Illustration : A agrees with B to discover treasure by magic. The agreement is not enforceable.

All the elements mentioned above must be present in order to make a valid contract. If any one
of them is absent the agreement does not become a contract.

KINDS OF CONTRACTS

Contracts Classified on the basis of Enforceability:

From the point of view of enforceability a contract may be valid or voidable or void or
unenforceable or illegal.

1. Valid contract: An agreement enforceable at law is a valid contract. An agreement becomes a


contract when all the essentials of a valid contract as laid down in section 10 are fulfilled. A
offers to sell his house for Rs. 10,000 to B. B agrees to buy it for this price. It is a valid
contract. A contract to enter into a contract is, however, not a valid contract.

2. Void contract: A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable. It is a contract without any legal effects. A contract may be valid at
the time when it is made but it may become void subsequent to its formation Thus, a contract
with one who had been an alien friend but later on becomes an alien enemy would be a case of
a void contract.

However, a void contract is not necessarily unlawful, it is destitute of legal effects. The law
will not enforce such a contract, nor can it be made valid by the parties.

A void contract should be distinguished from void agreement. An agreement not enforceable at
law is a void agreement. In the case of a void agreement no contract comes into existence. An
agreement with a minor is void. But in the case of void contract, a contract does come into
existence but subsequently ceases to be enforceable by law. An agreement which is void never
matures into a contract. An agreement which becomes illegal in the course of performance is a
case of avoid contract, while an agreement which is null and void ab initio is a case of a void
agreement. Void contracts may better be called void agreements to avoid contradiction in
terms.

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3. Voidable contract: According to Section 2(i), "an agreement which is enforceable by law at
the option of one or more of the parties thereto, but not at the option of the other or others, is a
voidable contract". Thus, a voidable contract is one which is enforceable by law at the option
of one of the parties. Until it is avoided or rescinded by the party entitled to do so by exercising
his option in that behalf, it is a valid contract.

Usually a contract becomes voidable when the consent of one of the parties to the contract is
obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable
at the option of the aggrieved party i.e., the party whose consent was so caused (Secs. 19 and
19A). But the aggrieved party must exercise his option of rejecting the contract (i) within a
reasonable time, and (ii) before the rights of third parties intervene, otherwise the contract
cannot be repudiated.

Illustrations : (a) A. threatens to shoot B if he does not sell his new Bajaj Scooter to A for Rs.
2,000. B agrees. The contract has been brought about by coercion and is voidable at the option
of B.

4. Unenforceable contract: It is a contract which is otherwise valid, but cannot be enforced


because of some technical defect like absence of a written form or absence of a proper stamp.
Such contracts must be sued upon by one or both of the parties. Such contracts cannot be
proved in the court. Such contracts will not be enforced by the courts until and unless the
defect is rectified.

Void agreement: "An agreement not enforceable by law is said to be void" (Sec.2 (g)). Thus a
void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of
law such an agreement is no agreement at all from its very inception. There is absence of one
or more essential elements of a valid contract, except that to 'free consent', in the case of a void
agreement. Thus, an agreement with a minor is void ab-initio as against him, because a minor
lacks the capacity to contract. Similarly, an agreement without consideration is void ab-initio,
of course with certain exceptions as laid down in Section 25.

5. Illegal Contract: A contract which is either prohibited by law or otherwise against the policy
of law is an illegal contract. It is void ab-initio. Thus, a contract to commit dacoity is an illegal
contract and cannot be enforced at law. An illegal contract should be distinguished from a void
contract. Both are unenforceable at law but there is something more in an illegal contract.
Every illegal contract is a void contract but every void contract may not be illegal contract e.g.
a wagering agreement is void but not illegal or an agreement with a minor is void but not
illegal. Every void contract is not illegal unless its object or consideration is (a) immoral or (b)
opposed to public policy etc. A void contract does not affect a collateral contract. But when a
contract is illegal collateral contracts depending thereon are also void. An illegal contract is
like an infectious disease and is fatal not only to the main contract but to collateral contract as
well.

Example : X borrows Rs. 10,000 from Y for the purpose of smuggling goods.

Y knows the purpose of the loan. The agreement between X and Y is collateral to the main
agreement which is illegal. The collateral agreement is also illegal.

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Difference between voidable contract and void agreement

1. A void agreement has from the very beginning no legal effects. It is unenforceable at law. A
voidable contract is one which one of the parties may affirm or reject at his option. It is valid
and enforceable till it is repudiated or rescinded.

2. The defect in the case of voidable contract is curable and may be condoned. But a void
agreement is void ab initio and its defects are incurable.

3. In the case of a void agreement even a third party cannot acquire any right from person
claiming under such contract while in the case of voidable contract, a third party can acquire a
valid title from a person claiming under such a contract.

4. Since a void agreement is unenforceable at law there does not arise any question of
compensation on account of the non-performance of the agreement. But in case of a voidable
contract, a person is entitled to compensation for loss or damages suffered by him on account
of the non-performance of the contract.

5. A voidable contract does not affect the collateral transaction. But where the agreement is
void on account of illegality of the object, the collateral transaction will also become void.

Contracts Classified on the basis of performance:

1. Unilateral contract: A unilateral contract is one in which a promise on one side is exchanged
for an act on the other wide. In such contracts one party to the contract has performed his part
and an obligation is outstanding against the other party. Thus, where a doctor in a private
clinic, examines a patient and gives the medicine, the patient alone remains liable to pay the
fees. It is a case of unilateral contract.

2. Bilateral contract: In such a contract a promise on one side is exchanged for a promise on
the other. It is a contract in which there is an obligation on the part of both the parties to do or
to refrain from doing a particular act. A promises to paint a picture in return for which B
promises to pay Rs. 500. Here a promises to paint the picture and B promises to pay. Each
party is thus both a promisor and a promisee.

3. Executed contract: A contract is said to be executed when one party to the contract has
performed his share of the obligation and the other party is still to perform his share of the
promise. In executed contracts, the contract does not come into existence until one party to it
has done all that he can be required to do. Thus, where A advertises a reward of Rs. 500 to
anyone who finds his missing dog, and when B knowing the offer brings the missing dog, A
becomes liable to pay Rs. 500.

4. Executory contract: It is a contract where some future act is to be done. It is one which is
either wholly unperformed, or there remains something to be one of both the sides. Thus,
where an agreement is made to build a house in six months, it is an executory contract.

Contracts Classified on the basis of Mode of Creation

From the point of view of mode of creation a contract may be anyone of the following types :

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1. Express contract: Where both the offer and acceptance constituting an agreement
enforceable at law are made in words spoken or written, it is an express contract. For example
A tells B on telephone that he offers to sell his car for Rs. 1,00,000 and B in reply informs A
that he accepts the offer, there is an express contract.

2. Implied contract: Where both the offer and acceptance constituting an agreement
enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it
is an implied contract. Thus, where A, coolie in uniform takes up the luggage of B to be carried
out of the Railway station without being asked by B, and B allows him to do so, then the law
implies that B agrees to pay for the services of A, and there is an implied contract. Similarly,
where M, a professional shoe shiner starts polishing the shoes of N without being requested to
do so, and N allows M to polish his shoes knowing that M expects to be paid for the service,
there comes into existence an implied contract and N is under obligation to pay to M.

3. Constructive or quasi-contract: It is a contract in which there is no intention on either side to


make a contract, but the law imposes a contract. In such a contract rights and obligations arise
not by any agreement between the parties but by operations of law. Thus, a finder of lost goods
is under an obligation to find out the true owner and return the goods. Similarly, where certain
books are delivered to a wrong addressee, the addressee is under an obligation either to pay for
them or return them.

Offer and Acceptance

Proposal or Offer

According to Section 2(e) of the Indian Contract Act, ”When one person signifies to another
his willingness to do job, or to abstain from doing, anything with a view to obtaining the assent
of the other to such act or abstinence, he is said to make a proposal.”

Elements/Main features of a Proposal

1. Existence of two parties: For a valid offer, there must be two parties. A person cannot
make an offer to himself.

2. Communication: The offer must be communicated to the offence. If it is never


communicated to the offence, it cannot be accepted and no valid contract comes into
existence.

3. Willingness: The offer must show willingness of the offer or. Mere telling or sharing a
plan is not an offer.

4. Intention of Obtaining Assent: The offer must be made with a view to obtain the assent
of the offeree. The offer made out of a prank or as a joke is not valid offer, and
therefore if accepted, it can never make the valid contract.

5. May be positive or Negative: The offer may involve doing something or not doing
something-Section 2(o).The offer to do something is a positive offer or not to do
something is a negative offer.

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Legal Rules as to Offer

1. Offer Must be definite, Unambiguous and certain

They must be vague or indefinite. If the terms are vague, it is not capable of being accepted as
the vagueness would not create any contractual relationship.

2. Offer should not bind the other party to reply

The offer should not bind the other party to reply. In the same way, if the offer should not
contain terms, non- compliance of which may be assumed as acceptance.

3. Offer must be made to create legal relationship

While making the offer, the aim of the offerer should be to primarily create a legal obligation.
An offer that creates only social or moral obligations does not constitute a valid agreement or
contract.

4. The offer may be general or specific

An offer is called specific when it is made to an individual or a group of individuals. In case of


a specific offer, only the person or group of persons to whom the offer is made can accept or
reject the offer.

5. The offer may be express or implied.

An offer does not necessarily need to be express. it can also be implied. According to Section
9(a) specific offer can be made in words-written or oral.

6. The offer should be a request and not an order.

The person making the offer has the right to set conditions to the acceptance of the offer, but he
does not have any right to set conditions to the non-acceptance of the offer.

7. The offer must be for a possible act

Man can do only what is possible, and the laws accepts that. An offer or a proposal to do
impossible is devoid of practicality or meaning. To make an offer which is humanly impossible
is not recognized by law and as such there can be no compliance.

8. The offer must be communicated

An offer, to be complete, must be communicated to the person to whom it is made so that he


can accept or not accept the offer. Unless the offer is communicated by the offerer (or by his
agent) to the offeree, there can be no acceptance of the offer and as such, no agreement can be
reached.

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1. Express Offer: The offer made by using words spoken or written is known as an express
offer.

2. Implied Offer: The offer which could be understood by a conduct of parties or circumstances
of case is called the implied offer.

3. Specific Offer: The offer made to a specific person or a particular person or two or more
than two specific persons. The specific offer is made to an ascertained person.

4. General Offer: It is not necessary that the offer should be made to a specific person. The
offer can be made to the world at large. If the offer is made to the world at large, it is known as
the general or public offer.

5. Cross Offer: When two parties exchange identical offers in ignorance at the time of each
other’s offer, the offers are called cross offers. There is not binding contract in such a case, as
one’s offer cannot be construed as acceptance by the other.

6. Continuous Offer: It is the offer which is open for a continuous period of time,it is also
known as the open offer or the standing offer.

7. Counter Offer: When the offeree offers to qualified acceptance of the offer subject to
modifications and variations in the terms of original offer, he is said to have made a counter
offer. Counter-offer amounts to rejection of the original offer.

Acceptance:

A proposal or offer is said to have been accepted when the person to whom the proposal is
made signifies his assent to the proposal to do or not to do something [Section 2 (b)].

Rules governing acceptance

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1. Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is
valid only when it is absolute and unqualified and is also expressed in some usual and
reasonable manner unless the proposal prescribes the manner in which it must be accepted. If
the proposal prescribes the manner in which it must be accepted, then it must be accepted
accordingly.

2. The acceptance must be communicated

An acceptance must be communicated to the person who made the offer. An offer made by the
intended offeree without the knowledge that an offer has been made to him cannot be deemed
as an acceptance thereto.

3. Acceptance must be in the prescribed mode

Where the proposal prescribes the mode of acceptance, it must be accepted in that manner.
Where the proposal does not prescribe the manner, then it must be accepted in a reasonable
manner.

4. Mere silence is not acceptance

The acceptance of an offer cannot be implied from the silence of the offeree or his failure to
answer, unless the offeree has in any previous conduct indicated that his silence is the evidence
of acceptance.

5. The proposer cannot prescribe the method of refusal

The proposer needs to be informed if the offer made by him is accepted, but he cannot insist on
him being informed of its non-acceptance. It is the right of the offeree to accept the proposal or
not to accept it.

6. An offer once rejected cannot be accepted until it is renewed.

A rejected offer is dead offer and needs to be revived before it can be considered for
acceptance.

7. Acceptance may be express or implied

Express acceptance may be written or by word of mouth whereas implied acceptance could be
reflected by the action or behaviour of the person accepting the offer. The later is also called
tacit acceptance. According to Section 8 of the Act, it acceptance can be acceptance by
performing conditions or acceptance by receiving consideration.

8. An action without the knowledge of the proposal is no acceptance

Without the knowledge of the proposal, even if the action conforms to the conditions of the
proposal, it does not constitute an acceptance. Acceptance can be given only by the person to
whom the proposal is made.

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9. Acceptance can only be given by the person to whom the offer is made

This is true of a specific proposal which can only be accepted by the person to whom it is
made.

10. Acceptance must be made before the lapse or withdrawal of an offer.

If the person making the offer has set a time limit for its acceptance, the offer must be accepted
within that time.

Consideration

Section 2 (d) of the Indian Contract Act, 1872 defines consideration as ‘when at the desire of
the promisor, the promisee or any other person has done or abstained from doing, or does or
abstains from doing or promises to do or abstain from doing something, such an act or
abstinence or promise is called consideration for the promise’.

From the above definition it can be inferred that,

1. Consideration must be at the desire of the promisor.

(2) Consideration may move from one person to any other person

(3) Consideration may be past, present or future and

(4) Consideration should be real though not adequate.

Type of Consideration

1. Past Consideration: It is also known as executed consideration. One party to contract has
received the benefit before formation of contract.

2. Present Consideration: It is received at the time of formation of the contract. It is in process


of execution.

3. Future Consideration: It will be received by a party after the formation of the contract. It is
also called as executory consideration.

Legal Requirements Regarding Consideration:

1. Consideration means doing or not doing something: The consideration is some act or
abstinence. Some act means doing something while abstinence means not to do something.
Thus, a consideration can be positive or negative. To do something is known as positive
consideration while not to do something is known as negative consideration.

2. Consideration must move at the desire or Promisor: The consideration must move at the
desire of the Promisor. However, it is not necessary that it must for the benefit of the Promisor.
It can be for the benefit of a third person also.

3. Consideration can flow either from the promisee or any other person: The consideration for
a contract can move either from the promisee or from any other person. This point is made

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clear even by the definition of the word “consideration”, according to which at the desire of the
promisor, the promisee or any other person, doing something is consideration.

4. Consideration may be inadequate: Consideration need not necessarily be of the same value
as of the promise for which it is exchanged. But it must be something which can be inadequate
as well. Inadequate consideration would not invalidate an agreement but such inadequate
consideration could be taken into account by the court in deciding whether the consent of the
promisor was freely given.

5. Consideration may be Past, Present or Future: The consideration may be past, present or
future. A past consideration is valid in India while it is not regarded as valid in many other
countries.

Past consideration: When a consideration by a party for a present promise was given in the past
i.e. before the date of the promise, it is said to be a past consideration.

Present Consideration: A consideration to do or abstain from doing something given


simultaneously with the promise is a present consideration.

Future Consideration: When the consideration from one party to the other is to pass subsequent
to the act of doing or abstaining from doing something, it is called a future consideration.

6. Act Promisor bound to do is not consideration: If the promisor is legally bound or required
to perform something as a part of his duty, and he agrees to do so, it is not a valid
consideration. The consideration must be something different from promisor’s existing
obligation.

7. Consideration must be lawful: The consideration must be lawful. Lawful means as per the
provisions of an act. An unlawful act or benefit received in an unlawful manner is not regarded
as the consideration.

8. Consideration should be possible to perform: The consideration must be real and not
illusory. It means the consideration should not be impossible to perform. An act does not
recognize impossible performance. It may be physically impossible or can be legal impossible.

Validity of an Agreement without Consideration/Agreement without consideration-Exceptions

An agreement without consideration is void. Not only that, even inadequate consideration
would render the enforceability of the contract quite difficult as the free consent of the parties
would become suspect. The Act however contains certain exceptions to this important rule.
These are:

i. On account of natural love and affection: According to Section 25, “An agreement made
without consideration is void unless 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.”

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It follows, therefore, that the following four elements are essential for such agreement:

a) The agreement must be written.

b) The agreement must be registered under the prevailing law.

c) The parties to the agreement must be intimately related

d) There must be love and affection between the parties.

ii. Compensation paid for past voluntary services: A promise to compensate wholly or in part
for past voluntary services rendered by someone to promisor does not require consideration for
being enforced. However the past services must have been rendered voluntarily to the
promisor. Further the promisor must have been in existence at that time and he must have
intended to compensate.

iii. Promise to pay debts barred by limitation: Where there is a promise in writing to pay a debt,
which was barred by limitation, is valid without consideration.

iv. Creation of Agency: In term of section 185 of the Act, no consideration is necessary to
create an agency

v. In case of completed gifts, no consideration is necessary: This is clear from the Explanation
(1) to section 25 of the Act which provides that “nothing in this Section shall affect the validity
as between donor and done of any gift actually made.

CAPACITY OF PARTIES

Section 11 provides three specific categories of persons who are not competent to enter into
contracts, namely –

1) Minors;

2) People who are mentally incompetent; and

3) People disqualified by their legal status like insolvents.

A minor is a person who is not a major. According to The Indian Majority Act,1875, a minor is
one who has not completed his or her 18th year of age. A person attains majority on
completing his 18th year in India. In the following two cases, a person continues to be a minor
until he completes the age of 21 years.

(a) Where a guardian of a minor person or property has been appointed under the Guardians
and Wards Act, 1890; or

(b) Where the superintendence of a minor's property is assumed by a Court of Words.

Effects of minor's agreements

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A minor's agreement being void is wholly devoid of all effects. When there is no contract there
should be no contractual obligation on either side. The various rules regarding minor's
agreement are discussed below.

1. An agreement with or by a minor is void

Section 10 of the Contract Act requires that the parties to a contract must be competent and
Section 11 says that a minor is not competent. But neither section makes it clear whether the
contract entered into by a minor is void or voidable.

2. No ratification

An agreement with minor is completely void. A minor cannot ratify the agreement even on
attaining majority, because a void agreement cannot be ratified.

3. Beneficial agreements are valid contracts

Any agreement which is of some benefit to the minor and under which he is required to bear
no obligation, is valid. In other words, a minor can be a beneficiary e.g., a payee, an endorsee
of a promise under a contract

Example : (ii) X, a minor, insured his goods with an insurance company. The goods were
damaged. X filed a suit for claim. The insurance company took the plea that the person on
whose behalf the goods were insured was a minor. The court rejected the plea and allowed the
minor to recover the insurance money. [The General American Insurance Company Ltd. v.
Madan Lal Sonu Lal (1935) 59 Bom 656].

4. Liability for necessaries

The case of necessaries supplied to a minor or to any person whom such minor is legally bound
to support is governed by section 68 of the Indian contract Act. A claim for necessaries
supplied to a minor is enforceable at law. But a minor is not liable for any price that he may
promise and never for more than the value of the necessaries. There is no personal liability of
the minor, but only his property is liable. A minor is also liable for the value of necessaries
supplied to his wife.

The following have been held to be necessaries:

(i) Livery for an officer's servant.

(ii) Horse, when doctor ordered riding exercise.

(iii) Goods supplied to a minor's wife for her support.

(iv) Rings purchased as gifts to the minor's fiancee.

(v) A racing bicycle.

On the other hand, following have been held not to be necessaries :

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(i) Goods supplied for the purpose of trading.

(ii) A silver-gift goblet.

(iii) Cigars and tobacoo.

(iv) Refreshment to an undergraduate for entertaining.

5. The rule of estoppels(obstruction) does not apply to a minor

Where a minor by misrepresenting his age has induced the other party to enter into a contract
with him, he cannot be made liable on the contract. There can be no estoppel against a minor.
In other words, a minor is not estoppled from pleading his infancy in order to avoid a contract.

6. No Specific performance

A minor's contract being absolutely void, there can be no question of the specific performance
of such a contract. A guardian of minor cannot bind the minor by an agreement for the
purchase of immovable property; so the minor cannot ask for the specific performance of the
contract which the guardian had no power to enter into.

7. Liability for torts

A minor is liable in tort. Thus, where a minor borrowed a horse for riding only he was held
liable when he let the horse to one of his friends who jumped and killed the horse. Similarly, a
minor was held liable for his failure to return certain instruments which he had hired and
passed on to a friend. But a minor cannot be made liable for a breach of contract by framing
the action on tort. You cannot convert a contract into a tort to enable you to sue an infant.

8. Partnership

A minor being incompetent to contract cannot be a partner in a partnership firm, but under
section 30 of the Indian Partnership Act, he can be admitted to the benefits of partnership.

9. Minor agent

A minor can be an agent (Sec. 184). He shall bind the principal by his acts done in the course
of such an agency, but he cannot be held personally liable for negligence or breach of duty.
Thus in appointing a minor as an agent, the principal runs a great risk.

10. Minor and insolvency. A minor cannot be adjudicated as an insolvent, for, he is incapable
of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his
property is liable (Sec. 68).

11. Contract by minor and adult jointly. Where a minor and an adult jointly enter into an
agreement with another person, the minor has no liability but the contract as a whole can be
enforced against the adult (Jamna Bai vs Vasanta Rao). In Sain Das vs Ram Chand, [(1923). 4

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Lah. 334] where there was a joint purchase by two vendees, one of whom was a minor, it was
held that the vendor could enforce the contract against the major vendee.

12. Minor shareholder. A minor, being incompetent to contract, cannot be a shareholder of the
company. A company can also refuse to register transfer or transmission of shares in favour of
a minor unless the shares are fully paid.

It follows from it that a minor, acting through his lawful guardian, may become a shareholder
of the company, in case of transfer or transmission of fully paid shares to him. Logically also,
if a minor could legally hold property in his name, it would be wrong to debar him from
holding fully paid up shares in his own name.

PERSONS OF UNSOUND MIND

As stated earlier, the section 11 disqualifies a person who is not of sound mind from entering
into a contract. Contracts made by persons of unsound mind like a minor's contract are void.
The reason is that a contract requires assent of two minds but a person of unsound mind has
nothing which the law recognises as a mind.

Section 12 deals with the question as to what is sound mind for the purpose of entering into a
contract. It lays down that, "A person is said to be of sound mind for the purpose of making a
contract if, at the time when he makes it he is capable of understanding it and of forming a
rational judgement as to its effect upon his interests".

The Section further states that :

(i) "A person who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound mind." Thus a patient in a lunatic asylum, who is at intervals of
sound mind, may contract during those intervals.

(ii) "A person who is usually of sound mind, but occasionally of unsound mind, may not make
a contract when he is of unsound mind". Thus, a sane man, who is delirious from fever, or who
is so drunk that he cannot understand the terms of a contract, or form a rational judgement as to
its effect on his interest, cannot contract while such delirium or drunkenness lasts.

Unsoundness of mind may arise from:

(a) Idiocy – It is God given and permanent, with no intervals of saneness. The mental powers
of an idiot are completely absent because of lack of development of the brain;

(b) Lunacy or Insanity – It is a disease of the brain. A lunatic loses the use of his reason due to
some mental strain or disease. Of course he may have lucid intervals of sanity:

(c) Drunkenness – It produces temporary incapacity, till the drunkard is under the effect of
intoxication, provided it is so excessive as to suspend the reason for a time and create
impotence of mind;

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(d) Hypnotism – It also produces temporary incapacity, till the person is under the impact of
artificially induced sleep;

(e) Mental decay on account of old age, etc.

Effects of agreements made by persons of unsound mind: An agreement entered into by a


person of unsound mind is treated on the same footing as that of minor's and therefore an
agreement by a person of unsound mind is absolutely void and inoperative as against him but
he can derive benefit under it (Jugal Kishore vs Cheddu, 1903, ALL L.J.43). The property of a
person of unsound mind is, however, always liable for necessaries supplied to him or to any
one whom he is legally bound to support, under Section 68 of the Act.

DISQUALIFIED PERSONS

The third type of incompetent persons, as per Section 11, are those who are "disqualified from
contracting by any law to which they are subject". These are:

1. Alien enemies: An alien living in India is competent to contract with citizens of India. He
can maintain an action on a contract entered into by him during peace time. But if a war is
declared, an alien enemy cannot enter into any contract with an Indian citizen. Contracts
entered into before the declaration of war are either stayed or terminated but contracts entered
into during the war are unenforceable.

2. Foreign sovereigns and ambassadors: These persons are immune from the jurisdiction of
local courts, unless they voluntarily submit to its jurisdiction. These persons have right to
contract but can claim the privilege of not being sued. The rules regarding suits by or against
foreign sovereigns are laid down in sections 84 to 87 of Civil-Procedure Code.

Example: E, who was a diplomat and was on the staff of a foreign embassy rented a house
belonging to M.M. sued him for arrears of rent. It was held that no action could be brought
against him as he was protected by diplomatic privileges. [Engelke v. Musman (1928) A.C.
433].

3. Convict: A convict is one who is found guilty and is imprisoned. During the period of
imprisonment, a convict is incompetent (a) to enter into contracts, and (b) to sue on contracts
made before conviction. On the expiry of the sentence, he is at liberty to institute a suit and the
Law of Limitation is held in abeyance during the period of his sentence.

4. Married women: Married women are competent to enter into contracts with respect to their
separate properties (Stridhan) provided they are Major and are of sound mind. They cannot
enter into contracts with respect to their husbands' properties. A married woman can, however,
act as an agent of her husband and bind her husband's property for necessaries supplied to her,
if he fails to provide her with these.

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5. Insolvents: An insolvent cannot enter into a contract as his property vests in the official
receiver or official assignee. This disqualification of an insolvent is removed after he is
discharged.

6. Joint-stock company and corporation incorporated under a special Act: (like L.I.C., U.T.I.).
A company/Corporation is an artificial person created by law. It cannot enter into contracts
outside the powers conferred upon it by its Memorandum of Association or by the provisions
of its special Act as the case may be. Again, being an artificial person (and not a natural
person) it cannot enter into contracts of a strictly personal nature e.g. marriage. FREE
CONSENT

According to section 13, "Two or more persons are said to consent when they agree upon the
same thing in the same thing in same sense." Thus, consent involves identity of minds in
respect of the subject matter of the contract. In English Law, this is called 'consensus-ad-idem'.

Effect of Absence of consent: When there is no consent at all, the agreement is void ab-initio,
i.e. it is not enforceable at the option of either party.

Example: X has one Maruti car and one fiat car. He wants to sell fiat car. Y does not know that
X has two cars. Y offers to buy X's Maruti car Rs 50,000. X accepts the offer thinking it to be
an offer for his Fiat car.
Here, there is no identity of mind in respect of the subject of the subject matter. Hence there is
no consent at all and the agreement is void ab-initio.

Meaning of Free consent:


It is one of the essential elements of a valid contract as it is evidenced by section 10 which
provides that all agreements are contracts if they are made by the free consent of the parties...
according to section 14, consent is said to be free when it is not caused by (a) Coercion, or (b)
Undue influence, or (c) Fraud, or (d) Misrepresentation, or (e) Mistake.

Effect of Absence of free consent:


When there is consent but it is not free (i.e. when it is caused by coercion or undue influence or
fraud or misrepresentation), the contract is usually voidable at the option of the party whose
consent was so caused.

1. COERCION: Meaning of coercion [section 15]: It means compelling a person to enter into
a contract, by use of physical force/activities forbidden by Indian penal code, OR threatens to
do activities forbidden by I.P.C, OR threatens to damages the property.

Effect of coercion: Voidable and can be canceled at the option of aggrieved party. OR A
'suicide and a 'threat to commit suicide' are not punishable but an attempt to commit suicide is
punishable under the Indian penal code.

2. UNDUE INFLUENCE: Meaning of Undue influence [section 16(1)]: The term 'undue
influence' means dominating the will of the other person to obtain an unfair advantage over the

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other. According to section 16(1), a contract is said to be induced by undue influence where the
relations subsisting between the parties are such that one of them is in a position to dominate
the will of the other, and the dominant party uses that position to obtain an unfair advantage
over the other.
When two-partner are in relation, and one of them is dominant and other is in weaker position
and dominant person takes undue-Advantage, then it is called "Undue- influence."

Effect of undue influence [section 19A]: when consent to an agreement is caused by undue
influence, the agreement is a contract voidable at the option of the party whose consent was so
caused.

Comparison between coercion and undue influence:


Similarities: In case of both coercion and undue influence, the consent is not free and the
contract is voidable at the option of the aggrieved party.

3. FRAUD: Meaning and essential elements of fraud [section 17] : The term 'fraud' means a
false representation of fact made willfully with a view to deceive the other party. Fraud
includes following:

Wrong suggestion about a fact, knowing that it is not-true;


E.g. X sells to Y locally manufactured goods as imported goods charging a higher price, it
amounts to fraud. OR A seller claimed that his projector is made in Singapore, and sold it for
Rs. 100,000/- However the fact is that "Projector was made in south India".

Any activity declared fraud as per other law; under companies act and insolvency acts, certain
kinds of transfers have been declared to be fraudulent.

Note: In case of fraud, the seller is always liable even though buyer has an opportunity to
check the fraud. Any activity fitted (supported) to deceive. It covers those acts which deceive
but are not covered under any other clause.

Effect of Fraud [section-19]

The effects of fraud are as follows:


(a) The party whose consent was caused by fraud can rescind (cancel) the contract but he
cannot do so in the following cases:
 Where silence amounts to fraud, the aggrieved party cannot rescind the contract if he
had the means of discovering the truth with ordinary diligence;
 Where the party gave the consent in ignorance of fraud;
 Where the party after becoming aware of the fraud takes a benefit under the contract;
 Where an innocent third party before the contract is rescinded acquires for
consideration some interest in the property passing under the contract.
 Where the parties cannot be restored to their original position.

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(b) The party whose consent was caused by fraud may, if he thinks fit, insist that the contract
shall be performed and that he shall be put in the position in which he would have been if the
representation made had been true.

The party whose consent was caused by fraud, can claim damage if he suffers some loss.

Weather silence is fraud? Comment:

General concept: According to explanation to section 17, "Mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not fraud".

In other words, Silence is not fraud. It is buyer, who must check the goods & suitability.
E.g. X purchased a used computer from Z thinking it as a computer imported from USA, Z
failed to disclose the fact to X. On knowing the fact X wants to repudiate the contract. So, here
X cannot repudiate/rescind/cancel the contract.

Exceptions to the general rule:


The general rule that silence does not amount to fraud has the following exceptions. Where the
circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak. Such duty arises in the following two cases:

When silence is equivalent to speech: E.g. "A student of BBA select a Business law-book and
asks the seller". If seller don't stop me from buying this book, I will assume that "it is best".
The seller remained silent here the student will treat "silence" as speech. If the book was
inferior, then it is a case of fraud.

Disclosure of dangerous nature: E.g. Shyam sold his horse to Ram a buyer for Rs. 11000/-
Shyam knows that horse was "wicked" but fails to disclose it to buyer. Here seller has
committed fraud by remaining silent.

4. Misrepresentation:

The term "misrepresentation" means a false representation of fact made innocently or non-
disclosure of a material fact without any intention to deceive the other party. Section 18 defines
the term "misrepresentation" as follows
"Misrepresentation" means and includes-

The positive assertion, in a manner not warranted by the information of the person making it,
of that which is not true, though he believes it to be true;

Any breach of duly which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him, by misleading another to his prejudice or to the
prejudice of anyone claiming under him;

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Causing, however innocently, a party to an agreement, to make a mistake as to the substance of


the thing which is the subject of the agreement.

Essential elements of misrepresentation:

By a party to a contract: The representation must be made by a party to a contract or by anyone


with his connivance or by his agent. Thus, the misrepresentation by a stranger to the contract
does not affect the validity of the contract.

False representation: There must be a false representation and it must be made without the
knowledge of its falsehood i.e. the person making it must honestly even it is to be true.

Representation as to fact: The representation must relate to a fact. In other words, a mere
opinion, a statement of expression or intention does not amount to misrepresentation.

"Innocent misstatement made into good faith OR without any intention to cause loss"
E.g. A farmer says that his land is very productive and produces 100 quintal per acre. This is
misrepresentation and buyer can cancel the contract.

Note: When the buyer has an opportunity to check the misrepresentation, but he fails then
buyer cannot cancel the contract.

E.g. An owner of factory, while selling his factory, express his opinion as my factory produces
1000 kg per ann-um and requested the buyer to find out exact production by checking
"production-record". If the buyer fails to check the production record then buyer cannot blame
seller.

Effect of misrepresentation [section 19]


The effects of misrepresentation are as follows:

Right to rescind the contract: The party whose consent was caused by misrepresentation can
rescind (cancel) the contract but he cannot do so in the following cases:

 where the party whose consent was caused by misrepresentation had the means of
discovering the truth with ordinary diligence;
 where the party gave the consent in ignorance of misrepresentation;

 where the party after becoming aware of the misrepresentation, takes a benefit under
the contract;

 where an innocent third party, before the contract is rescinded, acquires for
consideration some interest in the property passing under the contract;

 where the parties cannot be restored to their original position.

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(b) Right to insist upon performance: The party whose consent was caused by
misrepresentation may if he thinks fit, insist that the contract shall be performed, and that he
shall be put in the position in which he would have been if the representation made had been
true.

Comparison between fraud and misrepresentation


Similarities: There are basically two similarities in case of fraud and misrepresentation as
follows:

 In both the cases, a false representation is made by a party;

 In both the cases, the contract is voidable at the option of the party whose consent is
obtained by fraud or misrepresentation.

5. Mistake:

Meaning of mistake [section 20]


A mistake is said to have occurred where the parties intending to do one thing by error do
something else. Mistake is "erroneous belief" concerning something.

Classification of Mistake of Law:


(a) Mistake of Indian Law (In sense of penalty): The contract is not voidable because
everyone is supposed to know the law of his country. e.g. disobeying traffic rules"

(b) Mistake of Foreign Law (void-ab-initio): A mistake of foreign law is treated as mistake
of fact, i.e. the contract is void if both the parties are under a mistake as to a foreign law
because one cannot be expected to know the law of other country.

Mistake of fact
Mistake of fact be either Unilateral mistake or Bilateral mistake.
Unilateral mistake [section 22]: The term 'unilateral mistake' means where only one party to
the agreement is under a mistake. According to section 22, "A contract is not voidable merely
because it was caused by one of the parties to it being under a mistake as to matter of fact."

Bilateral mistake [section 22]: The term 'bilateral mistake' means where both the parties to the
agreement are under a mistake. According to section 20, "where both the parties to an
agreement are under a mistake as to a matter of fact essential to the agreement, the agreement
is void."

Following may be cases of bilateral mistakes-


(i) Common mistake as to the existence of the subject.
(ii) Common mistake as to the fact fundamental to the agreement.
(iii) Mutual or non-identical mistake as to the identity of the subject matter.

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(iv) Mistake as to quality of subject-matter or promise.


(v) Mistake as to non-disclosure in contracts of utmost good faith.

Legality of object

According to section 10 of The Indian Contract Act, all agreements are contracts if they are
made by the free consent of parties competent to contract, for a lawful consideration and with a
lawful object and are not hereby expressly declared to void. It should be for lawful
consideration and with a lawful object.

What consideration and objects are lawful and what not (Section 23)

The consideration or object of an agreement is lawful, unless:

1. It is forbidden by law: When something is forbidden by law, an agreement to do that is


unlawful. An agreement to do what has been prohibited by the Indian Penal Code or by some
other law cannot be enforced.

2. Defeat the provisions of law: If the object or consideration of an agreement is of such a


nature that, if it is permitted, it would defeat the provisions of any law, such an agreement is
void. Certain acts may not be expressly forbidden by law, but if they result in circumventing
any law, they cannot be encouraged

3. Is fraudulent: If the consideration or object of an agreement is to commit a fraud, the


agreement is void. An agreement to avoid competition with one another cannot be considered
to be either fraudulent or opposed to public policy.

4. Agreement injurious to the person or property of another: If the consideration or the object
of an agreement is to cause an injury to the person or property of another, the agreement is
unlawful, and therefore void. Injury here means harm which is unlawful, for example, an
agreement to commit fraud or a tort

5. Immoral or opposed to public policy: If the consideration or object of an agreement is


regarded by a court to be immoral or opposed to public policy, the agreement is unlawful and
void. Public policy means the policy of the law at a stated time. An act which is injurious to the
interest of the society is against public policy. If an agreement is prejudicial to social or
economic interest of the community, it will be against public policy to enforce such an
agreement. On the one hand a persons right of contractual freedom should be maintained, on
the other hand if the contract is against public policy the law must not allow that to be
enforced.

Agreement declared void

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As per Section 2(g) of The Indian Contract Act , 1872 “An agreement not enforceable by law is
said to be void”, and as per Section 2(j) of The Act “A Contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable”.

Types of agreements expressly declared void:

1. Agreements by or with persons incompetent to contract.

A contract can also be void due to the impossibility of its performance. E g: If a contract is
formed between two parties A & B but during the performance of the contract the object of the
contract becomes impossible to achieve (due to action by someone or something other than the
contracting parties), then the contract cannot be enforced in the court of law and is thus void.

2. Agreement entered into through a mutual mistake of fact between the parties.

Any agreement with a bilateral mistake is void.(Section 20) :- Where both the parties to an
agreement are under a mistake as to matter of fact essential to agreement , the agreement is
void.

3. Agreement , the object or consideration of which is unlawful(Section 23)

A consideration is unlawful if-

 It is forbidden by law
 It would defeat the provisions of any law.
 It is fraudulent
 It causes injury to the person or property of another
 The court regards it as immoral
 The court regards it as opposed to Public Policy.
 Agreement made without consideration

4. Agreement in restraint of marriage

Every agreement in restraint of marriage of any person other than a minor, is void(Section 26)

5. Agreement in restraint of trade.

Every agreement by which anyone is restrained from exercised a Lawful profession, trade or
business of any kind is void(Section 27)

6. Agreement in restraint of legal proceedings.(Section 28)

Every Agreement: by which any party is restricted absolutely from enforcing his legal rights
under any contract is void. Which limits the time within which an action may be brought is
void.

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7. Wagering agreements (Section 30)

An agreement between two persons under which money or money’s worth is payable by one
person to another on the happen or non happening of a future uncertain event is called a
wagering agreement.(Section 30)

8. Impossible agreements (Section 36)

Such an agreement can not be enforced since it is void whether the impossibility of the event
was known to the parties or not is immaterial.

Contingent Contract

According to Section 31 of Indian Contract Act, 1872. A contingent contract is a contract to


do or not to do something, if some even; collateral to such contract does or does not happen.

Example -

A contracts to pay B RS. 10000 if B's house is burnt. This is contingent contract.

Elements of contingent contract -

1. There should be a contract to do or not to do something, if some event, does or does not
happen.

2. Event should be collateral to such contract.

Enforcement of contracts contingent on an event happening -

According to Section 32 of the said Act, Contingent contracts to do or not to do anything in an


uncertain future event happens, cannot be enforced by law unless and until that event has
happened. If the event becomes impossible, such contracts becomes impossible, such contracts
become void.

Illustration:

A) A make a contract with B to buy B's horse if A survives C. This contract cannot be enforced
by law unless and until C dies in A's lifetime .

B) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse
has been offered, refuses to buy him. The contract cannot be enforced by law unless and until
C refuses to buy the horse.

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C) A contracts to pay B a sum of money when B marries C, C dies without being married to B.
The contract becomes void.

Elements:

i) When any contract to do and if an uncertain future event happens, cannot be enforced by law,
unless and until that event has happened

ii) When any contract not to do anything in an uncertain future event happens, cannot be
enforced by law unless and until that event has happened.

Contact become void -- If the event becomes impossible, such contract becomes impossible.

Enforcement of Contracts contingent on an event not happening (Section 33)

Contingent contracts to do or not to do anything if an uncertain future event does not


happen, can be enforced when the happening of that event becomes impossible, and not before.

Illustration

A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The
contract can be enforced when the ship sinks.

Essentials --

i) Contingent contract to do anything if an uncertain future event does not happen can be
enforced when the happening of the event becomes impossible and not before.

ii) Contingent contract not to do anything if an uncertain future event does not happen can be
enforced when the happening of that event becomes impossible and not before.

When event on which contract is contingent to be deemed impossible, if it is the future conduct
of a living person (Section 34) -

If the future event on which a contract is contingent is the way in which a person will
act at an unspecified time, the event shall be considered to become impossible when such
person does anything which renders it impossible that he should so act within any definite
time, or otherwise than under future contingencies.

Illustration

A agrees to pay B a sum of money if B marries C, C married D. The marriage of B to C


must now be considered impossible , although it is possible that D may Die and C may
afterwards marry B.

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When contracts become void which are contingent on happening of specified event within
fixed time (Section 35) -

Contingent contracts to do or not to do anything, if a specified uncertain event happens


within a fixed time become void if at the expiration of the time fixed such event has not
happened, or if, before the time fixed, such event becomes impossible.

When Contracts may be enforced, which are contingent on specified event not happening
within fixed time - Contingent contracts to do or not to do anything if a specified uncertain
event does not happen within a fixed time may be enforced by law when the time fixed has
expired and such event has not happened or before the time fixed has expired if it becomes
certain that such event will not happen.

Examples

i) A promises to pay B a sum of money if certain ship returns within a year. The contract may
be enforced if the ship regards within the year and becomes void if the ship is brunt with in the
year.

ii). A promise to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within a year or is burnt within the year

Agreements contingent on impossible event void (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 agreement at
the time when it is made

Examples -

i) A agrees to pay B, 1000 rupees if two straight lines should enclose a space. The agreement is
void.

ii) . A agrees to pay B 1000 rupees if B will marry A's daughter C. C was dead at the time of
the agreement the agreement is void

Performance and discharge of Contracts

Sec 37:- That the parties to a contract must either perform or offer to perform, their respective
promises unless such performance is dispensed with or excused under the provisions of
contract Act, or of any other law.

Performance: - Two types

1. Actual performance – actually performed – liability of such a party comes to an end.

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2. Attempted performance or tender of performance refusal to accept offer of performance by


promise [38]

Promisor is not responsible for non performance and they can sue the promisee for breach of
contract – nor he (promisor) thereby lose his rights under the contract.

Essential of Valid tender

Tender or offer of performance to be valid must satisfy the following conditions:-

(i) It must be unconditional

Ex :- ‘X’ offers to ‘Y’ the principal amount of the loan. This is not a valid tender since the
whole amount of principal and interest is not offered.

(ii) It must be made at a proper time and place.

Ex:- If the promisor wants to deliver the goods at 1 am. This is not a valid tender unless it was
so agreed;

(iii) Reasonable opportunity to examine goods.

Ex:- Delivery of something to the promise by the promisor promise must have reasonable
opportunity of inspection.

(iv) It must be for the whole obligation :- goods and amount.

Ex:- ‘X’ a debtor, offer’s to pay ‘Y’ the debt due in installments and tenders the first
installment. This is not a valid tender minor deviation – not invalid [Behari lal v ram gulam]

(v) It must be made to the promise or his duty authorized agent.

Ex:- It must be person who is willing to person his part of performance.

(vi) In case of payment of money, tender must be of the exact amount due and it must be in the
legal tender.

Type of Tender

™ A). Tender of goods and services

When a promisor offers to delivery of goods or service to the promise, it is said to be tender of
goods or services, if promisee does not accept a valid tender, It has the following effects:

(i) The promisor is not responsible for non – performance of the contract.

(ii) The promisor is discharged from his obligation under the contract. Therefore, he need not
offer again.

(iii) He does not lose his right under the contract. Therefore, he can sue the promise.

™ B). Tender of money

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Tender of money is an offer to make payment. In case a valid tender of money is not accepted,
it will have the following effects:

(i) The offeror is not discharged from his obligation to pay the amount.

(ii) The offeror is discharged from his liability for payment of interest from the date of the
tender of money.

BY WHOM CONTRACT MAY BE PERFORMED ?

The promise under a contract may be performed, as the circumstances may permit, by the
promisor himself, or by his agent or his legal representative.

1. Promisor himself : If there is something in the contract to show that it was the intention of
the parties that the promise should be performed by the promisor himself, such promise must
be performed by the promisor. This means contracts which involve the exercise of personal
skill or diligence, or which are founded on personal confidence between the parties must be
performed by the promisor himself.

2. Agent : Where personal consideration is not the foundation of a contract, the promisor or his
representative may employ a competent person to perform it.

3. Representatives : A contract which involves the use of personal skill or is founded on


personal consideration comes to an end on the death of the promisor. As regards any other
contract the legal representatives of the deceased promisor are bound to perform it unless a
contrary intention appears from the contract. (Section 37, para 2). But their liability under a
contract is limited to the value of the property they inherit from the deceased.

4. Third persons : When a promisee accepts performance of the promise from a third person, he
cannot afterwards enforce it against the promisor. That is, performance by a stranger, accepted
by the promisee, produces the result of discharging the promisor, although the latter has neither
authorised not ratified the act of the third party.

Example : A received certain goods from B promising to pay Rs. 10,000/-. Later on, A
expressed his inability to make payment. C, who is known to A, pays Rs, 6,000/- to B on
behalf of A. However, A was not aware of the payment. Now B is intending to sue A for the
amount of Rs. 10,000/- whether he can do so? Advice. As per Section 41 of the Indian Contract
Act, 1872, when a promisee accepts performance of the promise from a third person, he cannot
afterwards enforce it against the promisor. That is, performance by a stranger, accepted by the
promisee, produces the result of discharging the promisor, although the latter has neither
authorised nor ratified the act of the third party. Therefore, in the present instance, B can sue
only for the balance amount i.e., Rs. 4,000/- and not for the whole amount.

5. Joint promisors : When two or more persons have made a joint promise, then unless a
contrary intention appears from the contract, all such persons must jointly fulfil the promise. If
any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the

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promise. If all of them die, the legal representatives of all of them must fulfil the promise
jointly. (Section 42).

Examples :

1. A promises to B to pay Rs. 1,000 on delivery of certain goods. A may perform this
promise either himself or causing someone else to pay the money to B. If A dies before
the time appointed for payment, his representative must pay the money or employ some
other person to pay the money. If B dies before the time appointed for the delivery of
goods, B’s representative shall be bound to deliver the goods to A and A is bound to pay
Rs. 1,000 to B’s representative.

EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE

According to Section 38 of the Act, where a promisor has made an offer of


performance to the promisee, and the offer has not been accepted, then the promisor is
not responsible for non performance; nor does he thereby lose his rights under the
contract. Every such offer must fulfil certain conditions which are as follows, namely:
(i) it must be unconditional;
(ii) it must be made at a proper time and place under such circumstances that
the persons to whom it is made, may have a reasonable opportunity of
ascertaining that the person by whom it is made is able and willing, there
and then to do the whole of what he is bound by his promise to do.
(iii) if the offer is an offer to deliver anything to the promisee, then the promisee
must have a reasonable opportunity of seeing that the thing offered is the
thing which the promisor is bound by his promise to deliver. An offer to one
of several joint promisees has the same legal consequences as an offer to all
of them.

EFFECT OF A REFUSAL OF PARTY TO PERFORM PROMISE

Primarily, it gives rise to certain rights to the other party. Let us now consider what
those rights are. When a party to a contract has refused to perform or has disabled
himself from performing his promise in entirety, the promisor may put an end to the
contract, unless he has signified by words or conduct, his acquiescence in its
continuance (Section 39). From language of Section 39 it is clear that in the case
under consideration, the following two rights accrue to the aggrieved party, namely,
(a) to terminate the contract;
(b) to indicate by words or by conduct that he is interested in its continuance.

In case the promisee decides to continue the contract, he would not be entitled to put
an end to the contract on this ground immediately. In either case, the promisee would
be able to claim damages that he suffers as a result on the breach.

LIABILITY OF JOINT PROMISORS

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If two or more persons have made a joint promise, ordinarily all of them during their
life-time must jointly fulfill the promise. After death of any one of them, his legal
representative jointly with the survivor or survivors should do so (Sec. 42). After the
death of the last survivor the legal representatives of all the original co-promisors
must fulfil the promise.

For example, X, Y and Z who had jointly borrowed money must, during their life-
time jointly repay the debt. Upon the death of X his representative, say, S along with
Y and Z should jointly repay the debt and so on. This rule is applicable only if the
contract reveals no contrary intention.
We have seen that Section 42 deals with voluntary discharge of obligations by joint
promisors. But if they do not discharge their obligation on their own volition, what
will happen? This is what Section 43 resolves.

Accordingly,
(i) When two or more persons make a joint promise, the promisee may, in the absence
of express agreement to the contrary, compel any one or more of such joint promisors
to perform the whole of the promise.

(ii) If one of the joint promisors is made to perform the whole contract, he can call for
a contribution from others. For example, A, B and C jointly execute a promissory note
for Rs. 3,000 in favour of D. A is compelled to pay the whole amount. A, in such a
case would be able to realise Rs. 1,000 each from B and C. This rule may, however, be
modified by mutual agreement between the joint promisors.

(iii) If any of the joint promisors makes a default in making his contribution the
remaining joint promisors must bear the loss arising from such a default in equal
shares. In the above example, where A, B and C jointly executed the promissory note
for Rs. 3,000 and if C was unable to pay anything, then A would be able to realise
from B by way of contribution Rs. 1,500 instead of Rs. 1,000. We thus observe that
the effect of Section 43 is to make the liability in the event of a joint contract, both
joint and several, in so far as the promisee may, in the absence of a contract to the
contrary, compel anyone or more of the joint promisors to perform the whole of the
promise.

The effect of release of one of the joint promisors is dealt with in Section 44
which is stated below:

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.

RIGHTS OF JOINT PROMISEES

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The law is contained in Section 45 which is reproduced below : “When a person has
made a promise to two or more persons jointly, then unless a contrary intention
appears from the contract, the right to claim performance rests, as between him and
them, with them during their joint lives, and after the death of any of them with the
representatives of such deceased person jointly with the survivor or survivors, and
after the death of the last survivor, with the representatives of all jointly”. For
example, A, in consideration of Rs. 5,000 lent to him by B and C, promises B and C
jointly repay the sum with interest on a specified day but B dies. In such a case right
to demand payment shall rest with B’s legal representatives, jointly with C during C’s
life-time, and after the death of C, with the legal representatives of B and C jointly.

TIME AND PLACE FOR PERFORMANCE OF THE PROMISE

The law on the subject is contained in Section 46 to 50 provisions whereof are


summarised below:

(i) If no time is specified in a contract for the performance of the promise, the promise
must be performed within a reasonable time. The expression reasonable time is to be
interpreted having regard to the facts and circumstances of a particular case.

(ii) If a promise is to be performed on a specified date but the hour is not mentioned,
the promisor may perform it at any time during the usual hours of business, on such
day. For example, if the delivery of goods is offered say after sunset, the promisee
may refuse to accept delivery, for the usual business hours are, between 10 a.m. and 5
p.m. Moreover, the delivery must be made at the usual place of business.

(iii) When no place is fixed for the performance of a promise, it is the duty of the
promisor to ask the promisee to fix a reasonable place for the performance of the
promise. The foregoing rules regarding the time and place for the performance of
promise apply, only when the promisor undertakes to perform the promise without an
application being made by the promisee.

(iv) Where the promisor has not undertaken to perform the promise without an
application by the promisee, and the promise is to be performed on a certain day it is
the duty of the promisee to apply for performance at a proper place and within the
usual hours of business.

PERFORMANCE OF RECIPROCAL PROMISES

The law on the subject is contained in Sections 51 to 54. The provisions thereof are
summarised below
:
(i) General observations : A contract may consist of an act and a promise, or it may

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consist of two promises, one being the consideration for the other. Thus, when A sells
500 quintals of rice to B who promises to pay the price after a month, the contract
would consist of an act performed by A and a promise made by B. On the other hand,
if A promises to deliver 500 quintals of rice and B promises to pay the price on
delivery, the contract would consist of two promises, one made by A to B and the
other given by B to A. Such promises are called reciprocal promises. Here, the
promise of A is the consideration for the promise of B and vice versa.
(ii) Simultaneous performance of reciprocal promises : Reciprocal promises may
have to be performed simultaneously, or one after the other. Where A promises to
deliver rice and B promises to pay the price on delivery, both the promises are to be
performed simultaneously, and both A and B must be ready and willing to perform
their respective promises. Such promises constitute concurrent conditions and the
performance of one of the promises is conditional on the performance of the other. If
one of the promises is not performed the other too need not be performed. If A, in the
above-mentioned illustration, is unwilling to deliver the rice on payment, A will be
guilty of breach of promise and the breach would relieve B of the obligation to
perform his promise and would enable B to treat the contract as at an end.

(iii) Performance of reciprocal promises where the order of performance is


expressly fixed : When the order of performance of the reciprocal promises is
expressly fixed by the contract, they must be performed in that order. For instance, A
and B contract that A shall build a house for B at a fixed price. A’s promise to build
the house must be performed before B can be called upon to perform his promise to
pay for it. The promise being dependent on each other, any breach thereof by A would
relieve B of the obligation to keep up his own promises, and would enable B to avoid
the contract.

(iv) Performance of reciprocal promises when the order of performance is fixed


by implication : The order of performance may sometimes be indicated not expressly,
but by the nature of the transaction. For example, A and B contract that A shall make
over his stock-in-trade to B at a fixed price, and B promises to give security for the
payment of the price. A’s promise to make over his stock need not be performed, until
the security is given by B, for the nature of the transaction required that A should have
the security from B before he delivers his stock.

(v) Effect of one party preventing another from performing promise : When in a
contract, consisting of reciprocal promises, one party prevents the other from
performing his promise, the contract becomes voidable at the option of the party so
prevented. The latter becomes entitled to get compensation from the other party for
any loss he sustains in consequence of the non-performance of the contract. For
instance, in a contract for the sale of standing timber, the seller is to cut and cord it,
whereupon buyer is to take it away and pay for it. The seller cords only a part of the
timber and neglects to cord the rest. In that event the buyer may avoid the contract
and claim compensation from the seller for any loss which he may have sustained for
the non-performance of the contract.

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EFFECT OF FAILURE TO PERFORM AT A TIME FIXED IN A CONTRACT IN


WHICH TIME IS ESSENTIAL

The law on the subject is contained in Section 55 which is reproduced below :


When a party to a contract promises to do certain thing at or before the specified time,
or certain things at or before the specified time, and fails to do any such thing at or
before the specified time, the contract, or so much of it as has not been performed,
becomes voidable at the option of the promisee, if the intention of the parties was that
time should be of essence of the contract.

If it was not the intention of the parties that time should be of essence of the contract,
the contract does not become voidable by the failure to do such thing at or before the
specified time; but the promisee is entitled to compensation from the promisor for any
loss occasioned to him by such failure.

But ordinarily, from an examination of a contract, it is difficult to ascertain whether


time is intended to be of essence by the parties at the time of its formation. In every
case, the intention is to be gathered from the terms of the contract.
In a mercantile contract, the general rule in this regard is that stipulations as to time,
except as to time for payment of money, are essential conditions, since punctuality is
of the utmost importance in the business world. Thus, on a sale of goods that are
notoriously subject to rapid fluctuation of market price, e.g. gold, silver, shares
having a ready market the time of delivery is of the essence of the contract.

But in mortgage bond, the time fixed for the repayment of the mortgage money can by
no means be regarded as an essential condition; consequently, the mortgaged property
can be regained even after the due date. Similarly, in a contract to sell land any clause
limiting the time of completion is not strictly enforced. But even in a contract for the
sale of land, time can be made the essence of the contract by express words.

Contract cannot be avoided where time is not essential : Where time is not
essential, the contract cannot be avoided on the ground that the time for performance
has expired: the promisee is only entitled to compensation from the promisor for any
loss caused by the delay. But it must be remembered that even where time is not
essential it must be performed within a reasonable time; otherwise it becomes
voidable at the option of the promisee.

Effect of acceptance of performance out of time : Even where time is essential the
promisee may waive his right to repudiate the contract, when the promisor fails to
perform the promise within the stipulated time. In that case, he may accept
performance at any time other than that agreed. In such an event, he cannot claim
compensation for any loss occasioned by the non-performance of the promise at the

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time agreed, unless at the time of acceptance of the performance he has given a notice
to the promisor of his intention to claim compensation.

IMPOSSIBILITY OF PERFORMANCE

Section 56 contemplates various circumstances under which agreement may be void,


since it is impossible to carry it out. The Section is reproduced below: “An agreement
to do an act impossible in itself is void. A contract to do an act which, after the
contract is made, becomes impossible, or, by reason of some event which the promisor
could not prevent, unlawful, becomes void when the act becomes impossible or
unlawful.”

(1) Impossibility existing at the time of contract: When the parties agree upon
doing of something which is obviously impossible in itself the agreement would be
void. Impossible in itself means impossible in the nature of things. The fact of
impossibility may be and may not be known to the parties.

(i) If known to the parties: It would be observed that an agreement constituted, quite
unknown to the parties, may be impossible of being performed and hence void. For
example, B promises to pay a sum of Rs. 5,000 if he is able to swim across the Indian
Ocean from Bombay to Aden within a week. In this case, there is no real agreement,
since both the parties are quite certain in their mind that the act is impossible of
achievement. Therefore, the agreement, being impossible in itself, is void.

(ii) If unknown to the parties: Where both the promisor and the promisee are
ignorant of the impossibility of performance, the contract is void.

(iii) If known to the promisor only : Where at the time of entering into a contract,
the promisor alone knows about the impossibility of performance, or even if he does
not know though he should have known it with reasonable diligence, the promisee is
entitled to claim compensation for any loss he suffered on account of non-
performance.
(2) Supervening impossibility: When performance of promise become impossible or
illegal by occurrence of an unexpected event or a change of circumstances beyond the
contemplation of parties, the contract becomes void e.g. change in law etc.

APPROPRIATION OF PAYMENTS

(i) Application of Payment where debt to be discharged is indicated: The law on


the subject is contained in Section 59 reproduced below: “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”.

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(ii) Application of payment where neither party appropriates: The law on the
subject is contained in Section 61, reproduced below: “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 payment shall be applied in
discharge of each proportionately.”

The aforesaid rule is to be applied when there is nothing to show the intention of the
parties. If the debts are of the same date the payment shall be applied in discharge of
each proportionately. For example, there are two debts one of Rs. 500 and the other of
Rs. 700 that were incurred on the same date the debtor pays Rs. 600. Out of this sum,
a sum of Rs. 250 should be applied in discharge of the first debt and the balance of
Rs. 350 in discharge of the second debt.

CONTRACTS WHICH NEED NOT BE PERFORMED

Under this heading, we shall discuss the principles of Novation, Rescission and
Alteration and Remission. The law is contained in Section 62 to 67 of the Contract
Act. Section 62 is reproduced below: “If the parties to a contract agree to substitute a
new contract for it, or to rescind or alter it, the original contract need not be
performed”.

(a) Effect of novation: The parties to a contract may substitute a new contract for the
old. If they do so, it will be a case of novation. On novation, the old contract is
discharged and consequently it need not be performed. Thus it is a case where there
being a contract in existence some new contract is substituted for it 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.

For example, A owes B Rs. 100. A, B and C agree that C will pay B and he will accept
Rs. 100 from C in lieu of the sum due from A. A’s liability thereby shall come to an
end, and the old contract between A and B will be substituted by the new contract
between B and C.

(b) Effect of rescission: A contract is also discharged by rescission. When the parties
to a contract agree to rescind it, the contract need not be performed. In the case of
rescission, only the old contract is cancelled and no new contract comes to exist in its
place. It is needless to point out that novation also involves rescission. Both in
novation and in rescission, the contract is discharged by mutual agreement.

(c) Effect of alteration of contract: As in the case of novation and rescission so also
in a case 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. The terms of contract may be so altered by mutual

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agreement that the alteration may have the effect of substituting a new contract for the
old one. In other words, the distinction between novation and alteration is very
slender.

Novation and alteration: The law pertaining to novation and alteration is contained
in Section 62 to 67 of the Indian Contract Act. In both these cases the original
contract need not be performed. Still there is a difference between these two.

1. Novation means substitution of an existing contract with a new one. Novation may
be made by changing in the terms of the contract or there may be a change in the
contracting parties. But in case of alteration the terms of the contract may be altered
by mutual agreement by the contracting parties but the parties to the contract will
remain the same.

2. In case of novation there is altogether a substitution of new contract in place of the


old contract. But in case of alteration it is not essential to substitute a new contract in
place of the old contract. In alteration may be a change in some of the terms and
conditions of the original agreement.

(d) Promisee may waive or remit performance of promise : The law on the subject
is contained in Section 63 reproduced below : “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 its any satisfaction which he
thinks fit”. In other words, a contract may be discharged by remission.

For instance, A sells his horse to B who promises to pay Rs. 500 for the horse. A may
accept, instead of Rs. 500 a necklace as the price of the horse.

DISCHARGE OF A CONTRACT

A contract may be discharged either by an Act of the parties or by an operation of law


in the different base set out below:

(i) Discharge by performance: It takes place when the parties to the contract fulfil
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 substitute a new contract for it, or to refund or
remit or alter it, the original contract need not be performed. The principles of
Novation, Rescission, Alteration and Remission are already discussed.

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(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 specified


period as prescribed by the Limitation Act, 1963. If it is not performed and if no
action is taken by the promising within the specified period of limitation, he is
deprived of remedy at law. For example, if a creditor does not file a suit against the
buyer for recovery of the price within three years, the debt becomes time–barred and
hence irrecoverable.

(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:

We have seen contract must strictly perform according to its terms, But where the
promisor has neither performed his contract nor tendered performance and where the
performance is not excused by consent express or implied, or where the performance
is defective, there is a breach of the contract by him. Breach of contract may be
A). actual breach of contract or
B). anticipatory breach of contract.

Actual breach of Contract

(a) Actual Breach of Contract at the time when Performance is due where a person fails to
perform a contract, when performance is due the other party can hold him liable for
breach. But, if a party who has failed to perform the contract at the appointed time,
subsequently expresses willingness to perform the question whether he can do so or not
would depend upon whether time was of the essence of the contract or not. In all
mercantile contracts time is the essence of the contract and breach of contracts results
on failure to perform within the limited time.

(b) Actual Breach during the Performance of the contract- where a party apparently
performs the promise but the other party says that it is not a proper performance
according to the contract, the question arises whether there is a breach of the contract
exonerating the other party from performance of his part of the bargain.

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(ii) Constructive or Anticipatory Breach of Contract

It may sometimes happens that even before the time of performance arrives the promisor may
do some act which makes the performance impossible or may definitely renounce the contract
or show his intention not to perform it.

Thus where A promised to assign to B within 7 years from the date of promise all his interests
in 4 houses for Rs. 10,000 and before the end of the years assigned all his interests to another
person, it was held that without waiting for the 7 years to elapse B could sue for breach of the
promise.

REMEDIES FOR BREACH OF CONTRACT

Where there is a breach of contract on the part of one party, the injured party becomes entitled
to any one or more of the following reliefs:

1. Rescission of the contract with the result that the injured party is freed from all obligations
under the contract;

2. Suits for damages;

3. Suit upon a quantum meruit;

4. Suit for specific performance of the contract;

5. Suit for an injunction.

1. Rescission

In one party has broken his contract, the other party may treat the breach as discharge, and
refuse to perform his part of the contract. He may also successfully defend an action for non-
performance, or an action brought for specific performance. Sec.75 further entitles him to
compensation for any damage he may have sustained through the non-fulfillment of the
contract.

For instance, A singer, contracts with B manager of a theatre, to sing at his theatre for two
nights in every week during the next two months, and B engages to pay her Rs. 100 for each
nights’s performance. On the sixth night, A willfully absents herself from the theatre, and B in
consequence, rescinds the contract. B is entitled to claim compensation for the damage which
he has sustained through the non-fulfillment of the contract.

2. Damages

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Where a contract has been broken, the party who suffers by such breach is entitled, under
Sec.73 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 make the contract, to be likely to result from the
breach of it.

But compensation is not to be given for any remote or indirect loss or damage sustained by
reason of the breach. Compensation is also available against a party for breach of a quasi-
contract. Sec73 is based on the leading case of Hadley V. Baxendale (1854) 9 Ex. 34 the facts
the which are as follows:

The plaintiff, an owner of a mill, delivered a broken shaft to the defendant common carrier to
take to a manufacturer to copy it and make a new one. The carrier delayed delivery of the shaft
beyond a reasonable time, as a result of which the mill was idle for a longer period than should
have been necessary. The plaintiff did not make known to the defendant carrier that delay
would result in a loss of profits. Held, the carrier was not liable for loss of profits during the
period of delay.

Alderson, B observed in this case, “When two parties have made a contract, which one of them
has broken, the damage which the other party ought to receive in respect of such breach should
be either such as may fairly be considered as arising naturally, i.e., according to the usual
course of things from such breach of contract itself, or such as may reasonably be supposed to
have been in the contemplation of both the parties a the time the contract was entered into as a
probable result of the breach.” This statement of law is known as the Rule in Hadley v.
Baxendale.

The Principle enunciated in Sec. 73 is that a party who suffers by the breach of contract is
entitled to:

a) Such damages as naturally arose in the usual course of things, as a result of the breach;

b) and if he claims special damages for any loss sustained (which would not ordinarily flow
from the breach) he must prove that the other party knew at the time of making the contract
that the special loss was likely to result from the breach of the contract;

c) Such compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach;

d) Compensation for quasi-contract as damage is the same as for a contract.

Following examples has been given under Sec. 73 of the Act

A contracts to sell and deliver 50 maunds of saltpetre to B at a certain paid on delivery a breaks
his promise. B is entitled to receive from A, by of the price for which B might have obtained
50 maunds of saltpetre of like quality a the time when the saltpetre ought to have been
delivered.

Liquidated Damages and Un-liquidated Damages

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Where there is breach of contract by one party, the other party is entitled to sue for damages.
Therefore, unless the court passes a decree for a specified amount, the claim for damages is
merely a right to sue and not a debt or actionable claim. Consequently, this claim can be
assigned or transferred, since it is not a debt under the law.

The suit may be for liquidated damages or un-liquidated damages.

Liquidated damages are damages agreed upon by the parties in the contract itself to be paid by
the party breaking the contract in case of breach. The plaintiff has only to prove the breach of
contract, and no proof of loss is required. But liquidated damages must appear to be a genuine
pre-estimate of the loss that will be caused to one party if the contract is broken by the other.
Where no damages are fixed by the contract, but the amount of compensation claim for a
breach of contract is left be assessed by the court, damages claimed are called unliquidated
damages.

Unliquidated damages may be classified as follows:

a) Ordinary Or Compensatory Damages

In deciding a suit for damages, the court has to answer two questions: (I) Proximity and
remoteness of damage (ii) Measure of damages. The judge has to first decide whether or not
the damage has resulted from proximate consequences of the breach, for remote consequences
are not regarded. Once the court has decided that the damage is sufficiently proximate, it will
the turn to the measure of damages, that is the amount of money that will compensate the
plaintiff. The question of remoteness of damage is governed by the maxim recognised in
Hadely v. Baxendale and Sec. 73 our contract Act. in jure unon remota causa, sed proxima
spectatur- “In law not the remote cause, but the proximate cause is taken notice of.”

Thus, if the damage of loss suffered by reason of the breach of the contract is remote or
indirect no compensation would be allowed. The aggrieved party however, would in case of
breach of contract, be entitled to recover compensation for damage or loss caused to him
thereby, if such loss or damage arose naturally and directly in the usual course of things from
such breach, of which the parties to the contract knew, at the time of making the contract, to be
likely to result from breach of contract.

Measure of damages

The measure of damages is the estimated loss directly and naturally resulting in the ordinary
course of events, from the breach of contract. The injured party is to be put in the same
financial position as he would have been if the contract had been performed according to its
terms.

In the case of sale and purchase, the damages, payable would be the difference between the
contract price and the market price at the date of the breach. The damages are calculated as on
the date of breach and any subsequent change of circumstances tending to an increase or
reduction of damage cannot be taken note of.

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A cow was sold with condition that it was free from disease. The cow was suffering from foot
and mouth disease at the time of sale. Not only the cow die but it also infected other cows of
the buyer. Held damages could be recovered for the entire loss.

b) Special Damages

Special damages are those resulting from a breach of contract under some special
circumstances. If at the time of entering into a contract a person has notice of special
circumstances which make special loss the likely result of the breach in the ordinary course of
things, than upon his breaking the contract and the special loss following the breach, he will be
required to make good the special loss. If therefore there be any special damage which is
attributable to the wrongful act, then special damages, if proved, will be awarded. Hence if an
unusual damage is likely to be sustained as the result of a breach of contract, its nature should
be communicated to the other party before the contract is made so that he contracts subject to
the prospective liability. Thus, if in Hadley v. Baxendale, the mill-owner had told the carrier
that delay would result in a loss of profits through stoppage of the mill, he would have
recovered damages for such a loss.

(c) Exemplary or Punitive Damages

These damages are sum awarded beyond the pecuniary loss sustained by the injured party.
Ordinarily, damages for breach of contract are intended to compensate the plaintiff, not to
punish the defendant. The object of exemplary damages is to punish the defendant and to deter
him and others from similar conduct in the future. Award of exemplary damages is made in
only two cases: (I) Breach of promise of marriage cases, (ii) where a bank wrongfully
dishonors a commercial customer’s cheque.

In a breach of promise to marry, the amount of the damages will depend upon the extent of
injury to the party’s feelings. It is really and additionally sum known as a solatium awarded to
the jilted women as a solace for her injured feelings.

In the case of wrongful dishonor of a cheque of a customer who is a trader the rule is the
smaller the cheque dishonored the greater the damage.

(d) Nominal Damages

Nominal damages consist of a small of money, e.g., a rupee. They are a token award where
there has been an infringement of contractual right, but no actual loss has been suffered. These
damages are awarded to establish the right to decree for breach of contract.

(e) Contemptuous Damages

Damages are said to be contemptuous, when the court finds that a breach has been committed,
but that the breach is so insignificant or petty that a reasonable man would not have filed a suit.
A rupee or even less may be awarded to mark the court’s disapproval of the plaintiffs conduct
in bringing the action. The law does not take account of trifling things; and where it does, It
awards also something of a contemptuous character. Such damages have been awarded to male
plaintiffs in breach of marriage actions.

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Liquidated Damages and PENALTY

Where the parties have fixed at the time of contract the damages that would be payable in case
of breach, a question may arise (in English law at least) whether the provision amounts to
“liquidated damages” or a “penalty” Courts in English give effect to liquidated damages, but
they relieve against penalty.

The test of the two is that where the amount fixed is a genuine per-estimate of the loss in case
of breach; it is liquidated damages and will be allowed, and if the amount fixed is without any
regard to probable loss, but in terrarium, is a penalty and will not be allowed.

In Indian law, there is no such difference between liquidated damage and penalty, as Sec. 74
specifically provides payment of only “reasonable” compensation “sec. reads:

“When 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 damage or loss is proved to
have been caused thereby, to received from the party who has broken the contract a reasonable
compensation not excluding 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 stipulation by way of
penalty.....”

The party suffering from breach is entitled to get the actual damages he has suffered. With
regard to the amount named in the contract, the compensation payable is the reasonable
amount up to the stipulated amount whether it is by way of liquidated damages or penalty.

a) A contracts with B to pay BB Rs. 1,000 if he fails to pay B Rs. 500 on a given day. A fails to
pay B Rs. 500 on that day. B is entitled to recover from A such compensation not exceeding
Rs. 1000 as the Court considers reasonable.

b) A contracts with B that, if A practices as a surgeon within Calcutta he will pay B Rs. 5,000 A
practices as a surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs. 5000
as the court considers reasonable.

c) A gives a recognizance binding him a penalty of Rs. 500 to appear in Court on a certain day.
He forfeits his recognizance. He is liable to pay the whole penalty

Payment of Interest

With regard to the payment of interest the following rules have been laid down.

1. Payment of interest in case of default. Where a contract provides that the amount should be
paid by a particular date and in default, it will be payable with interest, the court will give
effect to the stipulation if the interest is reasonable. Where the interest is exorbitant the Court
will give relief.

2. Payment of interest as higher rate Where the bound provides that in default of the payment
of the principal by a stated date enhanced interest should be payable, if the enhanced interest is
made payable from the date of default and is reasonable, it is regarded compensation and is

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allowed. But if the enhanced interest is exorbitant, e.g. increase from 12 percent to 75 percent,
it will be penalty and relief will be granted against it.

3. Payment of compound interest. The Court do not lean towards compound interest, they do
not award in the absence of stipulation but where there is a stipulation for its payment it is the
absence of disentitling circumstances, allowed i.e. it will be allowed only if it is the absence of
disentitling circumstances allowed, i.e. it will be allowed only if it is not an enhanced rate.

3. Suit for Quantum Meruit

Quantummeruit as much as he has earned. Suing on quantum meruit is the suing for the value
of so much as is done. The in jured party can use for quantum meruit, i.e. if the injured party
has done can estimated at a money value of so much as he has already done.

A places an order with B for the supply of 100 chairs to be delivered by installments. B
delivers 20 chairs when A informs him that he will require no more. In this case A’s erudition
discharges B from the obligation to supply the remaining chairs. He can sue A for the breach of
contract for the value of 20 chairs already supplied. The later will be called suit for quantum
meruit.

4. Suit for Specific Performance

Instead of, or addition to awarding damages to the injured party a decree for specific
performance may be granted. Specific performance means the actual carrying out by the parties
carrying out their agreement. This remedy, however, is discretionary and will not granted in the
following cases.

1. Where monetary compensation is an adequate remedy. 2. Where the Court can not supervise
the execution of the contract, e.g. a building contract. 3. Where the contract is for personal
services. 4. Where one of the parties is a minor.

Specific performance is usually granted in contracts connected with land, e.g. purchase of
particular plot of house, or to take debentures in company. In the case of sale of goods, it will
only be granted in the case of specific goods and is not ordered as a rule unless the goods are
unique and cannot easily be purchased in the marked or are of special value to the party suing
by reason of personal or family associations.

5. Suit for Injunction

An injunction is a mode of securing the specific performance of a negative terms of the


contract. It is an order of the court whereby an individual is required to refrain from the further
doing of the act complained of. It may be used to prevent many wrongful acts, e.g. torts, but in
the context of contract the remedy will be granted to enforce a negative stipulation in a contract
in a case where damages would not be an adequate remedy. Thus , where a party to a contract
is doing something which he had promised not to do, the court may in its discretion, issue and
order to the defendant restraining him from doing what he promised not to do. Its application
may be extended to contracts where is no actual negative stipulation but where one may be
inferred. In Metropolitan Electric Supply Company v. Ginder (1901) 2 Ch. 799, G agreed to

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make the whole electric required by his premises from the plaintiffs. Held, this was in
substance an agreement not to take energy from any other person and it could be enforced by
injunction.

Indemnity

The term ‘Indemnity` Simply means ‘Making Somebody Safe` or ‘Paying Somebody back`.

Section 124 of contract Act defines that ‘‘A contract by which one party. Promises to save the
other from loss caused to him by the conduct of the promise himself by the conduct of any
other person, is called a conduct of indemnity”.

The party who gives indemnity or who promises to compensate for or to make good the loss, is
called. Indemnifier and the party for whose protection or safety the indemnity is given or the
party whose loss is made good is called ‘Indemnified’ or ‘indemnity holder’.

Important features of an indemnity contract –

1. Two party.
2. Promises for pay compensation of loss/damage.
3. Loss/damage may be the own or other person.
4. Creation of liabilities.
5. It must be faith.
6. All essential features of valid contract.
7. Compensation for actual loss/damage.
8. It may be express or implied. Loss/damage may be caused by some event, or accident,
or some natural phenomenon or disaster.

Rights of Indemnified (Indemnity-Holder) [Sec.125]

An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the
following rights –

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1. Right to recover damages – he is entitled to recover all damages which he might have
been compelled to pay in any suit in respect of any matter covered by the contract.
2. Right to recover costs – He is entitled to recover all costs incidental to the institution
and defending of the suit.
3. Right to recover sums paid under compromise – he is entitled to recover all amounts
which he had paid under the terms of the compromise of such suit. However, the
compensation must not be against the directions of the indemnifier. It must be prudent
and authorized by the indemnifier.
4. Right to sue for specific performance – he is entitled to sue for specific performance if
he has incurred absolute liability and the contract covers such liability. The promisee in
a contract of indemnity, acting within the scope of his authority, is entitled to recover
from the promisor-

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which
the promise to indemnify applies

(2) 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 authorized him to
bring or defend the suit ;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not

It is important to note here that the right to indemnity cannot be claimed of dishonesty, lack of
good faith and contravention of the promisor’s request. However, the right cannot be negatived
in case of oversight

Liabilities/Duties of Indemnified

 Liabilities to pay all damages/losses.


 Liabilities to pay all costs related to contract.
 Liabilities to pay all sum which is received by sell for contract from indemnified.

Guarantee:

The object of the contract of guarantee is to enable. A person to obtain an employment, or a


loan, or some goods or service on credit.

According to section 126 of the contract Act ‘‘A contract of guarantee is a contract to perform
the promise, or discharge the liability, of a third person in case of his default.”

The person who gives the guarantee is called the ‘Surety’ or ‘guarantor’ & the person in respect
of whose default the guarantee is given is called the principal debtor or he is the party on

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whose behalf. Guarantee is given and the person to whom the guarantee is given is called the
‘Creditor’.

Essential features of a Guarantee Contract

 Three parties
 Three agreement
 Concurrence of the three parties
 Control may be experts or implies
 It may be oral or written
 Liability of surety is secondary is dependent on principal debtor’s default.
 Guarantee must be in the knowledge of debtor.
 All essential of a valid contract.
 Guarantee must not be obtained by means of misrepresentation.
 Existence of a primary liability.

Kinds of Guarantee:

Specific or Simple Guarantee: When a guarantee is given in respect to a single debt or specific
transaction is to come to an end when the guarantee debt is paid or the promise is duly
performed. It is called a specific or simple guarantee.

Continuing guarantee: Section 129, of the contract Act defines a guarantee which towards to a
series of transaction, is called a continuing guarantee, thus, a continuing guarantee is not
confined to a single transaction but keeps on moving to several transaction continuously.

Revocation of Guarantee:

Revocation of guarantee means cancellation of guarantee already accrued, it may be noted that
the specific guarantee cannot be revoked if the liability has already secured. However a
continuing guarantee can be revoked and on the revocation of such a guarantee. The liability of
the surety or guarantor comes to an end for the future transaction.

The surety continues to be liable for the transactions which have taken place up to the time of
revocation. A continuing guarantee may be revoked in any of the following ways a Guarantee
may be revoked in any of the following ways-

 By notice of revocation.
 By death of surely.
 By discharge of surely in various circumstances
 By novation (Sec.62)
 By variance in terms (Sec. 133)
 By release/discharge of principal Debtor (Sec.-134)
 When the creditor events in to an agreement with the principal debtors (Sec.13..)
 By creditor act or omission impairing surety’s eventual remedy (Sec. 139)

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 By loss of security “(Sec. 141)


 By invalidation of contract (Sec.142,143,144)

AG ENCY
Meaning of Agency: Agency is relation between an agent his principal created by an
agreement. Section 182 of the Contract Act defines an Agent as ‘‘A person employed to do any
act for another, or to represent another in dealings with third persons. The person for whom
such act is done, or whom is so represented is called the principal”.

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Essential Features of Agency

The principal
The agent
An agreement
Consideration not necessary
Representative capacity
Good faith
The competence of the principal

Modes or Methods or Creation of Agency

1. Agency by express agreement [Section 186 and 187]

A contract of agency may be made by express words, whether written or oral.

2. Agency by implied agreement [Section 187]

‘‘An authority is said to be implied when it is to be inferred from the circumstances of the case.

(a) Agency by estoppels: When a principal by his conduct or act cause a third person to believe
that a certain person is his authorized agent the agency is aid to be an agency by estoppels.

(b) Agency by necessity: It mean the agency which comes into existence when certain
circumstances compel a person to act as an agent for an other without his express authority.

(c) Agency by holding out: When a principal by his active conduct or act and without any
objection permits another to act as his agent, the agency is the result of principal’s conduct as
to the agent.

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3. Agency by ratification [Section 196]

Ratification means confirmation of an act which has already been done. Sometimes, an act is
done by a person on behalf of another person but without another person’s knowledge and
authority. If he accepts and confirm the act, he is said to have ratified it.

4. Agency by operation of law:

In certain circumstances the law treats a person as an agent of another person.

For example, (a) when a partnership is formed, every partner automatically becomes agent o
another partner. (b) when a company is formed its promoters are treated as its agents by
operation of law

RIGHTS AND DUTIES OF AGENT

Rights of an Agent

Right to retain money received on principal’s account.


Right to receive remuneration.
Right of lien on principal’s property.
Right to be indemnified.
Right to compensation for injury caused by principal’s neglet.

Duties of an Agent

1. To follow the direction of the principal.


2. To conduct the business of agency with reasonable skill and diligence.
3. To render accounts on demand
4. To communicate with the principal.
5. Not to deal on his own account
6. To pay the amounts received for the principal
7. Not to delegate his authority
8. Not to act in excess of authority
9. Duty on termination of agency by principal’s death or insanity.

TERMINATION OF AGENCY

Termination of agency means revocation (cancellation) of authority of the agent the modes of
termination of agency may be classified are as :

(a) Termination of Agency by the act of the Parties.

 By revocation o authority by the principal


 By renunciation (giving up) of business of agency by the agency

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 By mutual agreement

(b) Termination of agency by Operation of Law

 Completion of business of agency


 Death or insanity of principal or agent
 Insolvency of the principal
 Destruction of subject matcer
 Expiry of time
 Agency subsequently becoming unlawful.
 Termination of sub agent’s authority

Sale of Goods Act 1930

Till 1930,transactions relating to sale and purchase of goods were regulated by the Indian
Contract Act,1872.In 1930,Sections 76 to 123 of the Indian Contract Act, 1872 were repealed
and a separate Act called ‘The Indian Sale of Goods Act,1930 was passed. It came into force
on 1st July,1930. With effect from 22nd September,1963,the word ‘Indian’ was also removed.
Now, the present Act is called ’The sales of goods act,1930’. This Act extends to the whole of
India except the State of Jammu and Kashmir.

Scope of the Act

The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for
a price.” Sec 4

‘Contract of sale’ is a generic term which includes both a sale as well as an agreement to sell.

SALE: It is a contract where the ownership in the goods is transferred by seller to the buyer
immediately at the conclusion contract.

EXAMPLE: A sells his house to B for Rs. 10,00,000. It is a sale since the ownership of the
house has been transferred from A to B.

AGREEMENT TO SELL: It is a contract of sale where the transfer of property in goods is to


take place at a future date or subject to some condition thereafter to be fulfilled.

EXAMPLE: A agreed to buy from B a certain quantity of nitrate of soda. The ship carrying the
nitrate of soda was yet to arrive. This is `an agreement to sale`. In this case, the ownership of
nitrate of soda is to be to transferred to A on the arrival of the ship containing the specified
goods (i.e. nitrate of soda) [Johnson V McDonald (1842) 9 M & W 600, 60 RR 838]

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Difference between Sale and Agreement to Sell


1. Transfer of property
Sale: The property of goods passes from the seller to the buyer immediately. So the seller is no
more owner of the goods sold.

In an Agreement to Sell: The transfer of property of the goods is to take place at a future time
or subject to certain conditions to be fulfilled.

2. Type of goods

Sale : A sale can only be in case of existing and specific goods only.
In an Agreement to Sell : An agreement to sell is mostly in case of future and contingent goods
( associated or dependent ). Although it may refer to uncertain existing goods.

3. Risk of loss

Sale : In a sale if the goods are destroyed , the loss falls on the buyer even though the goods are
in the possession of the seller.
In an Agreement to Sell : In an Agreement to Sell if the goods are destroyed the loss falls on
the seller even though the goods are in the possession of the buyer.

4. Consequences of the breach

Sale : In a sale the buyer fails to pay the price of goods (or) if there is a breach of contract by
the buyer the seller can sue for the price even though the goods are still in his possession.
In an Agreement to Sell : If there is a breach of contract by the buyer the seller can only sue for
the damages and not for the price.

5. Right to re-sell
Sale : In a sale the seller cannot re-sell the goods.
In an Agreement to Sell : The buyer who takes the goods for consideration and without notice
of the prior agreement gets him a good title. The original buyer can only sue the seller for
damages.

6. General and particular property


Sale : The sale of contract plus conveyance and creates ‘Jus in rem’ i.e., gives right to the buyer
to enjoy the goods as against the word and large including the seller.
In an Agreement to Sell : An agreement to sell is merely a contract pure and simple and creates
‘Jus in personam’ i.e., gives a right to the buyer against the seller to sue for the damages.

7. Insolvency of buyer
Sale : In a sale if the buyer becomes insolvent before he pays for goods, the seller in the
absence of the lien over the goods, must return them to the official receiver or assignee. He can
only claim the reteable dividend for the price of the goods.

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In an Agreement to Sell : In an Agreement to Sell , If the buyer becomes insolvent and has not
yet paid the price the seller is not bound to part with the goods until he is paid for.
8. Insolvency of the seller
Sale : In a sale the seller becomes insolvent, the buyer being the owner is entitled to recover
the goods from the official receiver of the assignee.
In an Agreement to Sell : If the buyer who has paid the price, finds that the seller has become
insolvent he can only claim a rateable dividend and not the goods because property in them has
not yet passed to him.

Essential elements of Contract of sale

The general provisions of Indian Contract Act continue to be applicable to the contract of sales
of goods in so far as they are not inconsistent with the express provisions of Sale of Goods Act
(Section 3). Thus, for example, the provisions of Contract Act relating to capacity of the
parties, free consent, agreements in restraint of trade, wagering agreements and measure of
damages continue to be applicable to a contract of sale of goods. But the definition of
consideration stands modified to the extent that in a contract of sale of goods consideration
must be by way of ‘price’ i.e., only money consideration [Section 2(10) and 4]

1. Seller and buyer: There must be a seller as well as a buyer. ’Buyer’ means a person who
buys or agrees to buy goods[Section 2910].’Seller’ means a person who sells or agrees to sell
goods [Section 29(13)].

2. Goods: There must be some goods. ’Goods’ means every kind of movable property other
than actionable claims and money includes stock and shares, growing crops, grass and things
attached to or forming part of the land which are agreed to be severed before sale or under the
contract of sale [Section 2(7)].

3. Transfer of property: Property means the general property in goods, and not merely a special
property[Section 2(11)]. General property in goods means ownership of the goods. Special
property in goods means possession of goods. Thus, there must be either a transfer of
ownership of goods or an agreement to transfer the ownership of goods. The ownership may
transfer either immediately on completion of sale or sometime in future in agreement to sell.

4. Price: There must be a price. Price here means the money consideration for a sale of goods
[Section 2(10)].When the consideration is only goods, it amounts to a ‘barter’ and not sale.
When there is no consideration, it accounts to gift and not sale.

5. Essential elements of a valid contract: In addition to the aforesaid specific essential


elements, all the essential elements of a valid contract as specified under Section 10 of Indian
Contract Act,1872 must also be present since a contract of sale is a special type of a contract.

AN AGREEMENT TO SELL

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Where under a contract of sale the transfer of property in the goods is to take place at a future
time or subject to same condition thereafter to be fulfilled, the contract is called ‘an agreement
to sell’ [Section 7(3)]. It is an executory contract and refers to a conditional sale.

Examples:
(i) On 1 January, X agrees with Y that he will sell Y his scooter on 15 January for a sum of Rs
4,000. It is an agreement to sell, since X agrees to transfer the ownership of the scooter to y at
a future time.
(ii) X buys some furniture for Rs 5,000 and agrees to pay for that in the monthly instalments,
the ownership to pass to him on the payment of second instalment. There is an agreement to
sell for the furniture dealer.

Right to Resale
In a sale, the property is with the buyer and as such the seller (in possession of goods after
sale) cannot resell the goods. If he does so, the subsequent buyer having knowledge of the
previous sale does not acquire a title to the gods. The original buyer can sue and recover the
goods from the third person on owner, and can also sue the seller for the breach of contract as
well as for the tort conversion. The right to recover the goods from the third person is,
however, lost if the subsequent buyer had bought them bonfire without notice of the previous
sale (Section 30).

GOODS– SUBJECT MATTER OF CONTRACT OF SALE


Goods form the subject-matter of a contract of sale. According to Section 2(7), “goods” means
every kind of movable property other than actionable claims and money; and includes stocks
and shares, growing crops, grass and things attached to or forming part of land which are
agreed to be severed before sale or under the contract of sale. Trade marks, copy rights, patent
rights, goodwill, electricity, water, gas are all goods.

Actionable claim and money are not goods. An actionable claim is something which can only
be enforced by action in a Court of law. A debt due from one person to another is an actionable
claim and cannot be bought or sold as goods. It can only be assigned. Money here means
current money and not old rare coins.

The definition of the term ‘goods’ also suggests that it includes stocks and shares, growing
crops, grass and things attached to or forming part of land which are agreed to be severed from
land before sale. Growing crops and grass are included in the definition of the term ‘goods’
because they are to be severed from land. Trees which are agreed to be severed before sale or
under the contract of sale are goods [Badri Prasad v State of MP, AIR (1970) SC 706]

Goods may be classified into various types as shown below:


1. Existing goods; or
2. Future goods; or
3. Contingent goods

1. Existing goods

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Goods earned and possessed by the seller at the time of the making of the contact of sale are
called existing goods. Sometimes the seller may be in possession but may not be the owner of
the goods e.g. sale of goods by a mercantile agent. Existing goods may again be either specific,
or ascertained or unascertained.
a) Specific Goods
These are the goods which are identified and agreed upon at the time a contract of sale is made.
To be specific the goods must be actually identified; it is not sufficient that they are capable of
identification
e.g. If X who owns a number of horses, promises to sell one of them, the contract is for
unspecified goods.

b) Ascertained Goods
These are the goods which are identified in accordance with the agreement after the contract of
sale is made. Though commonly used as similar in meaning to specific goods, these are not
always the same.

c) Unascertained Goods
It means generic goods. These goods can be defined by description or even by sample. The
seller in the use of a contract for the sale of unascertained goods has the option, rather the right
to supply any goods of the kind or the quality contracted for. He is not bound to deliver any
particular goods and he may furnish any goods answering their description in the contract.

2. Future Goods
Goods to be manufactured, produced or acquired by the seller after the making of the contract
of sale are called ‘future goods’ [Sec 2(6)]. These goods may be either not yet in existence or
be in existence but not yet acquired by the seller. It is worth noting that there can be no present
sale of future goods because property cannot pass in what is not owned by the seller at the time
of the contract. So even if the parties purport to effect a present sale of future goods, in law it
operates only as an ‘agreement to sell [Sec 6(3)].

Examples:

X agrees to sell to Y all the mangoes which will be produced in this garden next year. It is
contract to sale of future goods, amounting to ‘an agreement to sell’.

P contracts on 1 January 1990, to sell to B ten bales of Egyptian cotton to be delivered and paid
for on 1 March, 1990. This is a valid contract of sale, amounting to ‘an agreement to sell’ even
though P has no cotton bales with him at the time of making the contract.

3. Contingent Goods
Goods, the acquisition of which by the seller depends upon an uncertain contingency are called
‘contingent goods’ [Sec. 6(2)]. Obviously they are a type of future goods and therefore, a
contract for the sale of contingent goods also operates as ‘an agreement to sell’ and not a ‘sale’
so far as the question of passing of property to the buyer is concerned. In other words, like the

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future goods, in the case of contingent goods also the property does not pass to the buyer at the
time of making the contract.

ASCERTAINMENT OF PRICE (SECTIONS 9 & 10)


‘Price’ means the monetary consideration for sale of goods’ [Section 2(10)]. By virtue of
Section 9, the price may be (1) fixed by the contract, or (20 agreed to be fixed in a manner
provided by the contract, e.g. by a valuer, or (3) determined by the course of dealings between
the parties.

Conditions & Warranties

It is usual for both seller and buyer to make representations to each other at the time of entering
into a contract of sale. Some of these representations are mere opinions which do not form a
part of contract of sale. Whereas some of them may become a part of contract of sale.
Representations which become a part of contract of sale are termed as stipulations which may
rank as condition and warranty e.g. a mere commendation of his goods by the seller doesn’t
become a stipulating and gives no right of action to the buyer against the seller as such
representations are mere opinion on the part of the seller. But where the seller assumes to assert
a fact of which the buyer is ignorant, it will amount to a stipulation forming an essential part of
the contract of sale.

Meaning of Conditions [Section 12(2)]

A condition is a stipulation

 Which is essential to the main purpose of the contract


 The breach of which gives the aggrieved party a right to terminate the contract.

Meaning of Warranty[Section 12(3)]

A warranty is a stipulation

 Which is collateral to the main purpose of the contract


 The breach of which gives the aggrieved party a right to claim damages but not a right
to reject goods and to terminate the contract.

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Conditions to be treated as Warranty [Section 13]

In the following three cases a breach of a condition is treated as a breach of a warranty:

1) Where the buyer waives conditions; once the buyer waives conditions, he cannot insist
on its fulfilment e.g. accepting defective goods or beyond the stipulated time amount to
waiving conditions.
2) Where the buyer elects to treat breach of the condition as a breach of warranty; e.g.
where he claims damages instead of repudiating the contract.
3) Where the contract is not severable and the buyer has accepted the goods or part
thereof, the breach of any condition by the seller can only be treated as breach of
warranty. It cannot be treated as a ground for rejecting the goods unless otherwise
specified in the contract. Thus, where the buyer after purchasing the goods finds that
some condition is not fulfilled, he cannot reject the goods. He has to retain the goods
entitling him to claim damages.

Express and Implied Conditions and Warranties

In a contract of sale of goods, conditions and warranties may be express or implied.

1. Express Conditions and Warranties: These are expressly provided in the contract. For
example, a buyer desires to buy a Sony TV Model No. 2020.Here,model no. is an
express condition. In an advertisement for Khaitan fans,guatantee for 5 years is an
express warranty.

2. Implied Conditions and Warranties: These are implied by law in every contract of sale of
goods unless a contrary intention appears from the terms of the contract. The various implied
conditions and warranties have been shown below:

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Implied Conditions

1. Conditions as to title [ Section 14 (a)]

There is an implied condition on the part of the seller that

 In the case of a sale, he has a right to sell the goods, and


 In the case of an agreement to sell, he will have a right to sell the goods at the time
when the property is to pass.

2. Condition in case of sale by description [Section 15]

Where there is a contract of sale of goods by description, there is an implied condition that the
goods shall correspond with description. The main idea is that the goods supplied must be
same as were described by the seller. Sale of goods by description include many situations as
under:

i. Where the buyer has never seen the goods and buys them only onm the basis of description
given by the seller.

ii. Where the buyer has seen the goods but he buys them only on the basis of description given
by the seller.

iii. Where the method pf packing has been described.

3. Condition in case of sale by sample [Section 17]

A contract of sale is a contract for sale by sample when there is a term in the contract, express
or implied, to that effect. Such sale by sample is subject to the following three conditions:

 The goods must correspond with the sample in quality.


 The buyer must have a reasonable opportunity of comparing the bulk with the sample.

The goods must be free from any defect which renders them unmerchantable and which would
not be apparent on reasonable examination of the sample. Such defects are called latent defects
and are discovered when the goods are put to use.

4. Condition in case of sale by description and sample [Section 15]

If the sale is by sample as well as by description, the goods must correspond with the sample as
well as the description.

5. Condition as to quality or fitness [Section 16(1)]

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There is no implied condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale. In other words, the buyer must satisfy himself about the
quality as well as the suitability of the goods.

Exception to this rule:

There is an implied condition that the goods shall be reasonably fit for a particular purpose
described if the following three conditions are satisfied:

1. The particular for which goods are required must have been disclosed(expressly or
impliedly) by the buyer to the seller.
2. The buyer must have relied upon the seller’s skill or judgement.

The seller’s business must be to sell such goods.

6. Condition as to merchantable quality[Section 16(2)]

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
expression ‘ merchantable quality’ means that the quality and condition of the goods must be
such that a man of ordinary prudence would accept them as the goods of that description.
Goods must be free from any latent or hidden defects.

7. Condition as to wholesomeness

In case of eatables or provisions or foodstuffs, there is an implied condition as to


wholesomeness. Condition as to wholesomeness means that the goods shall be fit for human
consumption.

8. Conditions implied by custom [Section 16(3)]

Condition as to quality or fitness for a particular purpose may be annexed by the usage of
trade.

Implied warranties

a) Warranty as to quiet possession [Section14(b)]

There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods.
The reach of this warranty gives buyer a right to claim damages from the seller.

b) Warranty of freedom from encumbrances [Section 14(c)]

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There is an implied warranty that the goods are free from any charge or encumbrance in favour
of any third person if the buyer is not aware of such charge or encumbrance. The breach of this
warranty gives buyer a right to claim damages from the seller.

 Warranty as to quality or fitness for a particular purpose annexed by usage of trade


[Section 16(3)]
 Warranty to disclose dangerous nature of goods

In case of goods of dangerous nature the seller fails to do so, the buyer may make him liable
for breach of implied warranty.

Performance of the Contract of sale

Meaning Sec.2(2): Delivery means voluntary transfer of possession from one person to
another.

Duty of Seller Sec.31: It is the duty of the Seller to deliver the goods and of the buyer to accept
and pay for them in accordance with the contract of Sale.

It is the duty of the seller and buyer that the contract is performed. The duty of the seller is to
deliver the goods and that of the buyer to accept the goods and pay for them in accordance with
the contract of sale.

Unless otherwise agreed, payment of the price and the delivery of the goods and concurrent
conditions, i.e., they both take place at the same time as in a cash sale over a shop counter.

Mode of delivery : Sec. 33: Delivery of Goods sold may be made by –

(a) doing anything which the parties agree shall be treated as delivery ; or

(b) which has the effect of putting the Goods in the possession of the Buyer or of any person
authorized to hold them on his behalf

Delivery (Sections 33-39) Delivery is the voluntary transfer of possession from one person to
another. Delivery may be actual, constructive or symbolic.

Actual or physical delivery takes place where the goods are handed over by the seller to the
buyer or his agent authorized to take possession of the goods.

Constructive delivery takes place when the person in possession of the goods acknowledges
that he holds the goods on behalf of and at the disposal of the buyer.

For example, where the seller, after having sold the goods, may hold them as bailee for the
buyer, there is constructive delivery.

Symbolic delivery is made by indicating or giving a symbol. Here the goods themselves are
not delivered, but the “means of obtaining possession” of goods is delivered, e.g, by delivering

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the key of the warehouse where the goods are stored, bill of lading which will entitle the holder
to receive the goods on the arrival of the ship.

Rules as to delivery

The following rules apply regarding delivery of goods:

(a) Delivery should have the effect of putting the buyer in possession.

(b) The seller must deliver the goods according to the contract.

(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of the
buyer to claim delivery.

(d) Where the goods at the time of the sale are in the possession of a third person, there will be
delivery only when that person acknowledges to the buyer that he holds the goods on his
behalf.

(e) The seller should tender delivery so that the buyer can take the goods. It is no duty of the
seller to send or carry the goods to the buyer unless the contract so provides. But the goods
must be in a deliverable state at the time of delivery or tender of delivery. If by the contract the
seller is bound to send the goods to the buyer, but no time is fixed, the seller is bound to send
them within a reasonable time.

(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods must
be delivered at the specified place during working hours on a working day. Where no place is
mentioned, the goods are to be delivered at a place at which they happen to be at the time of
the contract of sale and if not then in existence they are to be delivered at the place at which
they are manufactured or produced.

(g) The seller has to bear the cost of delivery unless the contract otherwise provides. While the
cost of obtaining delivery is said to be of the buyer, the cost of the putting the goods into
deliverable state must be borne by the seller. In other words, in the absence of an agreement to
the contrary, the expenses of and incidental to making delivery of the goods must be borne by
the seller, the expenses of and incidental to receiving delivery must be borne by the buyer.

(h) If the goods are to be delivered at a place other than where they are, the risk of deterioration
in transit will, unless otherwise agreed, be borne by the buyer.

(i) Unless otherwise agreed, the buyer is not bound to accept delivery in instalments.

Acceptance of Goods by the Buyer

Acceptance of the goods by the buyer takes place when the buyer:

(a) intimates to the seller that he has accepted the goods; or

(b) retains the goods, after the lapse of a reasonable time without intimating to the seller that

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he has rejected them; or

(c) does any act on the goods which is inconsistent with the ownership of the seller, e.g.,
pledges or resells. If the seller sends the buyer a larger or smaller quantity of goods than
ordered, the buyer may:

(a) Reject the whole; or

(b) Accept the whole; or

(c) Accept the quantity be ordered and reject the rest. If the seller delivers with the goods
ordered, goods of a wrong description, the buyer may accept the goods ordered and reject the
rest, or reject the whole.

Where the buyer rightly rejects the goods, he is not bound to return the rejected goods to the
seller. It is sufficient if he intimates the seller that he refuses to accept them. In that case, the
seller has to remove them.

Instalment Deliveries: When there is a contract for the sale of goods to be delivered by stated
instalments which are to be separately paid for, and either the buyer or the seller commits a
breach of contract, it depends on the terms of the contract whether the breach is a repudiation
of the whole contract or a severable breach merely giving right to claim for damages.

Suits for Breach of Contract

Where the property in the goods has passed to the buyer, the seller may sue him for the price.

Where the price is payable on a certain day regardless of delivery, the seller may sue for the
price, if it is not paid on that day, although the property in the goods has not passed.

Where the buyer wrongfully neglects or refuses to accept the goods and pay for them, the seller
may sue the buyer for damages for non-acceptance.

Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer
may sue him for damages for non-delivery.

Where there is a breach of warranty or where the buyer elects or is compelled to treat the
breach of condition as a breach of warranty, the buyer cannot reject the goods. He can set
breach of warranty in extinction or diminution of the price payable by him and if loss suffered
by him is more than the price he may sue for the damages.

If the buyer has paid the price and the goods are not delivered, the buyer can sue the seller for
the recovery of the amount paid. In appropriate cases the buyer can also get an order from the
court that the specific goods ought to be delivered.

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Anticipatory Breach

Where either party to a contract of sale repudiates the contract before the date of delivery, the
other party may either treat the contract as still subsisting and wait till the date of delivery, or
he may treat the contract as rescinded and sue for damages for the breach.

In case the contract is treated as still subsisting it would be for the benefit of both the parties
and the party who had originally repudiated will not be deprived of:

(a) his right of performance on the due date in spite of his prior repudiation; or

(b) his rights to set up any defence for non-performance which might have actually arisen after
the date of the prior repudiation.

Measure of Damages

The Act does not specifically provide for rules as regards the measure of damages except by
stating that nothing in the Act shall affect the right of the seller or the buyer to recover interest
or special damages in any case were by law they are entitled to the same. The inference is that
the rules laid down in Section 73 of the Indian Contract Act will apply.

UNIT - III

Negotiable Instruments Act - 1881


INTRODUCTION:

The Negotiable Instruments Act was enacted, in India, in 1881. Prior to its enactment, the
provision of the English Negotiable Instrument Act were applicable in India, and the present
Act is also based on the English Act with certain modifications. It extends to the whole of India
except the State of Jammu and Kashmir. The Act operates subject to the provisions of Sections
31 and 32 of the Reserve Bank of India Act, 1934. Section 31 of the Reserve Bank of India Act
provides that no person in India other than the Bank or as expressly authorised by this Act, the
Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory
note or engagement for the payment of money payable to bearer on demand. This Section
further provides that no one except the RBI or the Central Government can make or issue a
promissory note expressed to be payable or demand or after a certain time. Section 32 of the
Reserve Bank of India Act makes issue of such bills or notes punishable with fine which may
extend to the amount of the instrument. The effect or the consequences of these provisions are:

1. A promissory note cannot be made payable to the bearer, no matter whether it is payable on
demand or after a certain time.

2. A bill of exchange cannot be made payable to the bearer on demand though it can be made
payable to the bearer after a certain time.

3. But a cheque {though a bill of exchange} payable to bearer or demand can be drawn on a
person’s account with a banker.

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MEANING OF NEGOTIABLE INSTRUMENTS

According to Section 13 (a) of the Act, “Negotiable instrument means a promissory note, bill
of exchange or cheque payable either to order or to bearer, whether the word “order” or “
bearer” appear on the instrument or not.”

In the words of Justice, Willis, “A negotiable instrument is one, the property in which is
acquired by anyone who takes it bonafide and for value notwithstanding any defects of the title
in the person from whom he took it”.

Thus, the term, negotiable instrument means a written document which creates a right in
favour of some person and which is freely transferable. Although the Act mentions only these
three instruments (such as a promissory note, a bill of exchange and cheque), it does not
exclude the possibility of adding any other instrument which satisfies the following two
conditions of negotiability:

1. The instrument should be freely transferable (by delivery or by endorsement. and delivery)
by the custom of the trade; and

2. The person who obtains it in good faith and for value should get it free from all defects, and
be entitled to recover the money of the instrument in his own name.

As such, documents like share warrants payable to bearer, debentures payable to bearer and
dividend warrants are negotiable instruments. But the money orders and postal orders, deposit
receipts, share certificates, bill of lading, dock warrant, etc. are not negotiable instruments.
Although they are transferable by delivery and endorsements, yet they are not able to give
better title to the bonafide transferee for value than what the transferor has.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT

A negotiable instrument has the following characteristics:

1. Property: The possessor of the negotiable instrument is presumed to be the owner of the
property contained therein. A negotiable instrument does not merely give possession of the
instrument but right to property also. The property in a negotiable instrument can be
transferred without any formality. In the case of bearer instrument, the property passes by mere
delivery to the transferee. In the case of an order instrument, endorsement and delivery are
required for the transfer of property.

2. Title: The transferee of a negotiable instrument is known as ‘holder in due course.’ A bona
fide transferee for value is not affected by any defect of title on the part of the transferor or of
any of the previous holders of the instrument.

3. Rights: The transferee of the negotiable instrument can sue in his own name, in case of
dishonour. A negotiable instrument can be transferred any number of times till it is at maturity.
The holder of the instrument need not give notice of transfer to the party liable on the
instrument to pay.

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4. Presumptions: Certain presumptions apply to all negotiable instruments e.g., a presumption


that consideration has been paid under it. It is not necessary to write in a promissory note the
words ‘for value received’ or similar expressions because the payment of consideration is
presumed. The words are usually included to create additional evidence of consideration.

5. Prompt payment: A negotiable instrument enables the holder to expect prompt payment
because a dishonour means the ruin of the credit of all persons who are parties to the
instrument.

PRESUMPTIONS AS TO NEGOTIABLE INSTRUMENT

Sections 118 and 119 of the Negotiable Instrument Act lay down certain presumptions which
the court presumes in regard to negotiable instruments. In other words these presumptions need
not be proved as they are presumed to exist in every negotiable instrument. Until the contrary
is proved the following presumptions shall be made in case of all negotiable instruments:

1. Consideration: It shall be presumed that every negotiable instrument was made drawn,
accepted or endorsed for consideration. It is presumed that, consideration is present in every
negotiable instrument until the contrary is presumed. The presumption of consideration,
however may be rebutted by proof that the instrument had been obtained from, its lawful
owner by means of fraud or undue influence.

2. Date: Where a negotiable instrument is dated, the presumption is that it has been made or
drawn on such date, unless the contrary is proved.

3. Time of acceptance: Unless the contrary is proved, every accepted bill of exchange is
presumed to have been accepted within a reasonable time after its issue and before its maturity.
This presumption only applies when the acceptance is not dated; if the acceptance bears a date,
it will prima facie be taken as evidence of the date on which it was made.

4. Time of transfer: Unless the contrary is presumed it shall be presumed that every transfer of
a negotiable instrument was made before its maturity.

5. Order of endorsement: Until the contrary is proved it shall be presumed that the
endorsements appearing upon a negotiable instrument were made in the order in which they
appear thereon.

6. Stamp: Unless the contrary is proved, it shall be presumed that a lost promissory note, bill of
exchange or cheque was duly stamped.

7. Holder in due course: Until the contrary is proved, it shall be presumed that the holder of a
negotiable instrument is the holder in due course. Every holder of a negotiable instrument is
presumed to have paid consideration for it and to have taken it in good faith. But if the
instrument was obtained from its lawful owner by means of an offence or fraud, the holder has
to prove that he is a holder in due course.

8. Proof of protest: Section 119 lays down that in a suit upon an instrument which has been
dishonoured, the court shall on proof of the protest, presume the fact of dishonour, unless and
until such fact is disproved.

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TYPES OF NEGOTIABLE INSTRUMENT

Section 13 of the Negotiable Instruments Act states that a negotiable instrument is a


promissory note, bill of exchange or a cheque payable either to order or to bearer. Negotiable
instruments recognised by statute are: (i) Promissory notes (ii) Bills of exchange (iii) Cheques.
Negotiable instruments recognised by usage or custom are: (i) Hundis (ii) Share warrants (iii)
Dividend warrants (iv) Bankers draft (v) Circular notes (vi) Bearer debentures (vii) Debentures
of Bombay Port Trust (viii) Railway receipts (ix) Delivery orders.

This list of negotiable instrument is not a closed chapter. With the growth of commerce, new
kinds of securities may claim recognition as negotiable instruments. The courts in India usually
follow the practice of English courts in according the character of negotiability to other
instruments.

Promissory notes

Section 4 of the Act defines, “A promissory note is an instrument in writing (note being a
bank-note or a currency note) containing an unconditional undertaking, signed by the maker, to
pay a certain sum of money to or to the order of a certain person, or to the bearer of the
instruments.”

Essential elements:

An instrument to be a promissory note must possess the following elements:

1. It must be in writing: A mere verbal promise to pay is not a promissory note. The method of
writing (either in ink or pencil or printing, etc.) is unimportant, but it must be in any form that
cannot be altered easily.

2. It must certainly an express promise or clear understanding to pay: There must be an express
undertaking to pay. A mere acknowledgment is not enough. The following are not promissory
notes as there is no promise to pay.

If A writes: (a) “Mr. B, I.O.U. (I owe you) Rs. 500” (b) “I am liable to pay you Rs. 500”. (c) “I
have taken from you Rs. 100, whenever you ask for it have to pay” .

The following will be taken as promissory notes because there is an express promise to pay: If
A writes: (a) “I promise to pay B or order Rs. 500” (b) “I acknowledge myself to be indebted
to B in Rs. 1000 to be paid on demand, for the value received”.

(3) Promise to pay must be unconditional: A conditional undertaking destroys the negotiable
character of an otherwise negotiable instrument. Therefore, the promise to pay must not
depend upon the happening of some outside contingency or event. It must be payable
absolutely.

(4) It should be signed by the maker: The person who promise to pay must sign the instrument
even though it might have been written by the promisor himself. There are no restrictions
regarding the form or place of signatures in the instrument. It may be in any part of the
instrument. It may be in pencil or ink, a thumb mark or initials. The pronote can be signed by

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the authorised agent of the maker, but the agent must expressly state as to on whose behalf he
is signing, otherwise he himself may be held liable as a maker. The only legal requirement is
that it should indicate with certainty the identity of the person and his intention to be bound by
the terms of the agreement.

(5) The maker must be certain: The note self must show clearly who is the person agreeing to
undertake the liability to pay the amount. In case a person signs in an assumed name, he is
liable as a maker because a maker is taken as certain if from his description sufficient
indication follows about his identity. In case two or more persons promise to pay, they may
bind themselves jointly or jointly and severally, but their liability cannot be in the alternative.

(6) The payee must be certain: The instrument must point out with certainty the person to
whom the promise has been made. The payee may be ascertained by name or by designation. A
note payable to the maker himself is not pronate unless it is indorsed by him. In case, there is a
mistake in the name of the payee or his designation; the note is valid, if the payee can be
ascertained by evidence. Even where the name of a dead person is entered as payee in
ignorance of his death, his legal representative can enforce payment.

(7) The promise should be to pay money and money only: Money means legal tender money
and not old and rare coins. A promise to deliver paddy either in the alternative or in addition to
money does not constitute a promissory note.

(8) The amount should be certain: One of the important characteristics of a promissory note is
certainty—not only regarding the person to whom or by whom payment is to be made but also
regarding the amount.

However, paragraph 3 of Section 5 provides that the sum does not become indefinite merely
because (a) there is a promise to pay amount with interest at a specified rate. (b) the amount is
to be paid at an indicated rate of exchange. (c) the amount is payable by installments with a
condition that the whole balance shall fall due for payment on a default being committed in the
payment of anyone installment.

(9) Other formalities: The other formalities regarding number, place, date, consideration etc.
though usually found given in the promissory notes but are not essential in law. The date of
instrument is not material unless the amount is made payable at a certain time after date. Even
in such a case, omission of date does not invalidate the instrument and the date of execution
can be independently ascertained and proved.

On demand (or six month after date) I promise to pay Peter or order the sum of rupees one
thousand with interest at 8 per cent per annum until payment.

Bill of exchange:

Section 5 of the Act defines, “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”.

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A bill of exchange, therefore, is a written acknowledgement of the debt, written by the creditor
and accepted by the debtor. There are usually three parties to a bill of exchange drawer,
acceptor or drawee and payee. Drawer himself may be the payee.

Essential conditions of a bill of exchange:

(1) It must be in writing.

(2) It must be signed by the drawer.

(3) The drawer, drawee and payee must be certain.

(4) The sum payable must also be certain.

(5) It should be properly stamped.

(6) It must contain an express order to pay money and money alone.

For example, In the following cases, there is no order to pay, but only a request to pay.
Therefore, none can be considered as a bill of exchange: (a) “I shall be highly obliged if you
make it convenient to pay Rs. 1000 to Suresh”. (b) “Mr. Ramesh, please let the bearer have one
thousand rupees, and place it to my account and oblige”

However, there is an order to pay, though it is politely made, in the following examples: (a)
“Please pay Rs. 500 to the order of ‘A’. (b) ‘Mr. A will oblige Mr. C, by paying to the order of’
P”.

(7) The order must be unconditional.

Distinction between Bill of Exchange and Promissory Note

1. Number of parties: In a promissory note there are only two parties – the maker (debtor) and
the payee (creditor). In a bill of exchange, there are three parties; drawer, drawee and payee;
although any two out of the three may be filled by one and the same person,

2. Payment to the maker: A promissory note cannot be made payable the maker himself, while
in a bill of exchange to the drawer and payee or drawee and payee may be same person.

3. Unconditional promise: A promissory note contains an unconditional promise by the maker


to pay to the payee or his order, whereas in a bill of exchange, there is an unconditional order
to the drawee to pay according to the direction of the drawer.

4. Prior acceptance: A note is presented for payment without any prior acceptance by the
maker. A bill of exchange is payable after sight must be accepted by the drawee or someone
else on his behalf, before it can be presented for payment.

5. Primary or absolute liability: The liability of the maker of a promissory note is primary and
absolute, but the liability of the drawer of a bill of exchange is secondary and conditional.

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6. Relation: The maker of the promissory note stands in immediate relation with the payee,
while the maker or drawer of an accepted bill stands in immediate relations with the acceptor
and not the payee.

7. Protest for dishonour: Foreign bill of exchange must be protested for dishonour when such
protest is required to be made by the law of the country where they are drawn, but no such
protest is needed in the case of a promissory note.

8. Notice of dishonour: When a bill is dishonoured, due notice of dishonour is to be given by


the holder to the drawer and the intermediate indorsers, but no such notice need be given in the
case of a note.

Classification of Bills

Bills can be classified as: (1) Inland and foreign bills. (2) Time and demand bills. (3) Trade and
accommodation bills.

(1) Inland and Foreign Bills

Inland bill: A bill is, named as an inland bill if:

(a) it is drawn in India on a person residing in India, whether payable in or outside India, or

(b) it is drawn in India on a person residing outside India but payable in India.

The following are the Inland bills

(i) A bill is drawn by a merchant in Delhi on a merchant in Madras. It is payable in Bombay.


The bill is an inland bill. (ii) A bill is drawn by a Delhi merchant on a person in London, but is
made payable in India. This is an inland bill. (iii) A bill is drawn by a merchant in Delhi on a
merchant in Madras. It is accepted for payment in Japan. The bill is an inland bill.

Foreign Bill: A bill which is not an inland bill is a foreign bill. The following are the foreign
bills: 1. A bill drawn outside India and made payable in India.

2. A bill drawn outside India on any person residing outside India.

3. A bill drawn in India on a person residing outside India and made payable outside India.

4. A bill drawn outside India on a person residing in India.

5. A bill drawn outside India and made payable outside India.

Bills in sets (Sec 132 and 133): The foreign bills are generally drawn in sets of three, and each
sets is termed as a ‘via’.

As soon as anyone of the set is paid, the others becomes inoperative. These bills are drawn in
different parts. They are drawn in order to avoid their loss or miscarriage during transit. Each
part is despatched separately. To avoid delay, all the parts are sent on the same day; by different
mode of conveyance.

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Rules: Sections 132 and 133 provide for the following rules: (i) A bill of exchange may be
drawn in parts, each part being numbered and containing a provision that it shall continue
payable only so long as the others remain unpaid. All parts make one bill and the entire bill is
extinguished, i.e. when payment is made on one part- the other parts will become inoperative
(Section 132).

(ii) The drawer should sign and deliver all the parts but the acceptance is to be conveyed only
on one of the parts. In case a person accepts or endorses different parts of the bill in favour of
different persons, he and the subsequent endorsers of each part are liable on such part as if it
were a separate bill (Sec. 132).

(iii) As between holders in due course of the different parts of the same bill, he who first
acquired title to anyone part is entitled to the other parts and is also entitled to claim the money
represented by bill (Sec. 133).

(2) Time and Demand Bill

Time bill: A bill payable after a fixed time is termed as a time bill. In other words, bill payable
“after date” is a time bill.

Demand bill: A bill payable at sight or on demand is termed as a demand bill.

(3) Trade and Accommodation Bill

Trade bill: A bill drawn and accepted for a genuine trade transaction is termed as a “trade bill”.

Accommodation bill: A bill drawn and accepted not for a genuine trade transaction but only to
provide financial help to some party is termed as an “accommodation bill”.

Example: A, is need of money for three months. He induces his friend B to accept a bill of
exchange drawn on him for Rs. 1,000 for three months. The bill is drawn and accepted. The
bill is an “accommodation bill”. A may get the bill discounted from his bankers immediately,
paying a small sum as discount. Thus, he can use the funds for three months and then just
before maturity he may remit the money to B, who will meet the bill on maturity.

In the above example A is the “accommodated party” while B is the “accommodating party”.

It is to be noted that an recommendation bill may be for accommodation of both the drawer
arid acceptor. In such a case, they share the proceeds of the discounted bill.

Rules regarding accommodation bills are: (i) In case the patty accommodated continues to hold
the bill till maturity, the accommodating party shall not be liable to him for payment of, the bill
since the contract between them is not based on any consideration (Section 43).

(ii) But the accommodating party shall be liable to any subsequent holder for value who may
be knowing the exact position that the bill is an accommodation bill and that the full
consideration has not been received by the acceptor. The accommodating party can, in turn,
claim compensation from the accommodated party for the amount it has been asked to pay the
holder for value.

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(iii) An accommodation bill may be negotiated after maturity. The holder or such a bill after
maturity is in the same position as a holder before maturity, provided he takes it in good faith
and for value (Sec. 59)

In form and all other respects an accommodation bill is quite similar to an ordinary bill of
exchange. There is nothing on the face of the accommodation bill to distinguish it from an
ordinary trade bill.

Cheques:

Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified banker, and
not expressed to be payable otherwise than on demand”.

A cheque is bill of exchange with two more qualifications, namely,

(i) it is always drawn on a specified banker, and

(ii) it is always payable on demand. Consequently, all cheque are bill of exchange, but all bills
are not cheque.

A cheque must satisfy all the requirements of a bill of exchange; that is, it must be signed by
the drawer, and must contain an unconditional order on a specified banker to pay a certain sum
of money to or to the order of a certain person or to the bearer of the cheque. It does not
require acceptance.

Distinction Between Bills of Exchange and Cheque

1. A bill of exchange is usually drawn on some person or firm, while a cheque is always drawn
on a bank.

2. It is essential that a bill of exchange must be accepted before its payment can be claimed A
cheque does not require any such acceptance.

3. A cheque can only be drawn payable on demand, a bill may be also drawn payable on
demand, or on the expiry of a certain period after date or sight.

4. A grace of three days is allowed in the case of time bills while no grace is given in the case
of a cheque.

5. The drawer of the bill is discharged from his liability, if it is not presented for payment, but
the drawer of a cheque is discharged only if he suffers any damage by delay in presenting the
cheque for payment.

6. Notice of dishonour of a bill is necessary, but no such notice is necessary in the case of
cheque.

7. A cheque may be crossed, but not needed in the case of bill.

8. A bill of exchange must be properly stamped, while a cheque does not require any stamp.

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9. A cheque drawn to bearer payable on demand shall be valid but a bill payable on demand
can never be drawn to bearer.

10. Unlike cheques, the payment of a bill cannot be countermanded by the drawer.

Hundis:

A “Hundi” is a negotiable instrument written in an oriental language. The term hundi includes
all indigenous negotiable instrument whether they be in the form of notes or bills.

The word ‘hundi’ is said to be derived from the Sanskrit word ‘hundi’, which means “to
collect”. They are quite popular among the Indian merchants from very old days. They are used
to finance trade and commerce and provide a fascile and sound medium of currency and credit.

Hundis are governed by the custom and usage of the locality in which they are intended to be
used and not by the provision of the Negotiable Instruments Act. In case there is no customary
rule known as to a certain point, the court may apply the provisions of the Negotiable
Instruments Act. It is also open to the parties to expressly exclude the applicability of any
custom relating to hundis by agreement (lndur Chandra vs. Lachhmi Bibi, 7 B.I.R. 682).

PARTIES TO NEGOTIABLE INSTRUMENTS

1. Parties to Bill of Exchange

1. Drawer: The maker of a bill of exchange is called the ‘drawer’.

2. Drawee: The person directed to pay the money by the drawer is called the ‘drawee’,

3. Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more
parts than one, upon one of such pares and delivered the same, or given notice of such signing
to the holder or to some person on his behalf, he is called the ‘ acceptor’.

4. Payee: The person named in the instrument, to whom or to whose order the money is
directed to be paid by the instrument is called the ‘payee’. He is the real beneficiary under the
instrument. Where he signs his name and makes the instrument payable to some other person,
that other person does not become the payee.

5. Indorser: When the holder transfers or indorses the instrument to anyone else, the holder
becomes the ‘indorser’.

6. Indorsee: The person to whom the bill is indorsed is called an ‘indorsee’.

7. Holder: A person who is legally entitled to the possession of the negotiable instrument in his
own name and to receive the amount thereof, is called a ‘holder’. He is either the original
payee, or the indorsee. In case the bill is payable to the bearer, the person in possession of the
negotiable instrument is called the ‘holder’.

8. Drawee in case of need: When in the bill or in any endorsement, the name of any person is
given, in addition to the drawee, to be resorted to in case of need, such a person is called
‘drawee in case of need’. In such a case it is obligatory on the part of the holder to present the

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bill to such a drawee in case the original drawee refuses to accept the bill. The bill is taken to
be dishonoured by non-acceptance or for nonpayment, only when such a drawee refuses to
accept or pay the bill.

9. Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better
security when demanded by the notary, any person who is not liable on the bill, may accept it
with the consent of the holder, for the honour of any party liable on the bill. Such an acceptor is
called ‘acceptor for honour’.

2. Parties to a Promissory Note

1. Maker. He is the person who promises to pay the amount stated in the note. He is the debtor.

2. Payee. He is the person to whom the amount is payable i.e. the creditor.

3. Holder. He is the payee or the person to whom the note might have been indorsed.

4. The indorser and indorsee (the same as in the case of a bill).

3. Parties to a Cheque

1. Drawer. He is the person who draws the cheque, i.e., the depositor of money in the bank.

2. Drawee. It is the drawer’s banker on whom the cheque has been drawn.

3. Payee. He is the person who is entitled to receive the payment of the cheque.

4. The holder, indorser and indorsee (the same as in the case of a bill or note).

NEGOTIATION

Negotiation may be defined as the process by which a third party is constituted the holder of
the instrument so as to entitle him to the possession of the same and to receive the amount due
thereon in his own name.

According to section 14 of the Act, ‘when a promissory note, bill of exchange or cheque is
transferred to any person so as to constitute that person the holder thereof, the instrument is
said to be negotiated.’ The main purpose and essence of negotiation is to make the transferee of
a promissory note, a bill of exchange or a cheque the holder there of.

Negotiation thus requires two conditions to be fulfilled, namely:

1. There must be a transfer of the instrument to another person; and

2. The transfer must be made in such a manner as to constitute the transferee the holder of the
instrument.

Handing over a negotiable instrument to a servant for safe custody is not negotiation; there
must be a transfer with an intention to pass title.

Modes of negotiation

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Negotiation may be effected in the following two ways:

1. Negotiation by delivery (Sec. 47): Where a promissory note or a bill of exchange or a


cheque is payable to a bearer, it may be negotiated by delivery thereof. Example: A, the holder
of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The
instrument has been negotiated.

Delivery: Delivery is the voluntary transfer of the possession of the instrument.

Types: 1. Actual 2. Constructive 3. Conditional

2. Negotiation by endorsement and delivery (Sec. 48): A promissory note, a cheque or a bill of
exchange payable to order can be negotiated only be endorsement and delivery. Unless the
holder signs his endorsement on the instrument and delivers it, the transferee does not become
a holder. If there are more payees than one, all must endorse it.

Importance of delivery in negotiation

Delivery is a voluntary transfer of possession from one person to another. Delivery is essential
to complete any contract on a negotiable instrument whether it be contract of making
endorsement or acceptance. The property in the instrument does not pass unless the delivery is
fully completed. Section 46 of the Act provides that a negotiable instrument is not made or
accepted or endorsed unless it is delivered to a proper person. For instance, if a person signs a
promissory note and keeps it with himself, he cannot be said to have made a promissory note;
only when it is delivered to the payee that the promissory note is made.

Delivery may be actual or constructive. Delivery is actual when it is accompanied by actual


change of possession of the instrument. Constructive delivery is effected without any change of
actual possession.

ENDORSEMENT

The word ‘endorsement’ in its literal sense means, writing on the back of an instrument. But
under the Negotiable Instruments Act it means, the writing of one’s name on the back of the
instrument or any paper attached to it with the intention of transferring the rights therein. Thus,
endorsement is signing a negotiable instrument for the purpose of negotiation. The person who
effects an endorsement is called an ‘endorser’, and the person to whom negotiable instrument
is transferred by endorsement is called the ‘endorsee’.

Essentials of a valid endorsement

The following are the essentials of a valid endorsement:

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1. It must be on the instrument. The endorsement may be on the back or face of the instrument
and if no space is left on the instrument, it may be made on a separate paper attached to it
called allonage. It should usually be in ink.

2. It must be made by the maker or holder of the instrument. A stranger cannot endorse it.

3. It must be signed by the endorser. Full name is not essential. Initials may suffice. Thumb-
impression should be attested. Signature may be made on any part of the instrument. A rubber
stamp is not accepted but the designation of the holder can be done by a rubber stamp.

4. It may be made either by the endorser merely signing his name on the instrument (it is a
blank endorsement) or by any words showing an intention to endorse or transfer the instrument
to a specified person (it is an endorsement in full). No specific form of words is prescribed for
an endorsement. But intention to transfer must be present. When in a bill or note payable to
order the endorsee’s name is wrongly spelt, he should when he endorses it, sign the name as
spelt in the instrument and write the correct spelling within brackets after his endorsement.

5. It must be completed by delivery of the instrument. The delivery must be made by the
endorser himself or by somebody on his behalf with the intention of passing property therein.
Thus, where a person endorses an instrument to another and keeps it in his papers where it is
found after his death and then delivered to the endorsee, the latter gets no right on the
instrument.

6. It must be an endorsement of the entire bill. A partial endorsement i.e. which purports to
transfer to the endorse a part only of the amount payable does not operate as a valid
endorsement.

If delivery is conditional, endorsement is not complete until the condition is fulfilled.

Who may endorse?

The payee of an instrument is the rightful person to make the first endorsement. Thereafter the
instrument may be endorsed by any person who has become the holder of the instrument. The
maker or the drawer cannot endorse the instrument but if any of them has become the holder
thereof he may endorse the instrument. (Sec. 51).

The maker or drawer cannot endorse or negotiate an instrument unless he is in lawful


possession of instrument or is the holder there of. A payee or indorsee cannot endorse or
negotiate unless he is the holder there of.

Classes of endorsement:

An endorsement may be: (1) Blank or general. (2) Speical or full. (3) Partial. (4) Restrictive.
(5) Conditional.

(a) Blank or general endorsement (Sections 16 and 54).

It is an endorsement when the endorser merely signs on the instrument without mentioning the
name of the person in whose favour the endorsement is made. Endorsement in blank specifies

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no endorsee. It simply consists of the signature of the endorser on the endorsement. A


negotiable instrument even though payable to order becomes a bearer instrument if endorsed in
blank. Then it is transferable by mere delivery. An endorsement in blank may be followed by
an endorsement in full.

Example: A bill is payable to X. X endorses the bill by simply affixing his signature. This is an
endorsement in blank by X. In this case the bill becomes payable to bearer.

There is no difference between a bill or note indorsed in blank and one payable to bearer. They
can both be negotiated by delivery.

(b) Special or full endorsement (Section 16)

When the endorsement contains not only the signature of the endorser but also the name of the
person in whose favour the endorsement is made, then it is an endorsement in full. Thus, when
endorsement is made by writing the words “Pay to A or A’s order,” followed by the signature of
the endorser, it is an endorsement in full. In such an endorsement, it is only the endorsee who
can transfer the instrument.

Conversion of endorsement in blank into endorsement in full: When a person receives a


negotiable instrument in blank, he may without signing his own name, convert the blank
endorsement into an endorsement in full by writing above the endorser’s signature a direction
to pay to or to the order of himself or some other person. In such a case the person is not liable
as the endorser on the bill. In other words, the person transferring such an instrument does not
incur all the liabilities of an endorser. (Section 49).

Example: A is the holder of a bill endorsed by B in blank. A writes over B’s signature the
words “Pay to C or order.” A is not liable as endorser but the writing operates as an
endorsement in full from B to C.

Where a bill is endorsed in blank, or is payable to bearer and is afterwards endorsed by another
in full, the bill remains transferable by delivery with regard to all parties prior to such endorser
in full. But such endorser in full cannot be sued by any one except the person in whose favour
the endorsement in full is made. (Section 55).

Example: C the payee of a bill endorses it in blank and delivers it to D, who specially endorses
it to E or order. E without endorsement transfers the bill to F. F as the bearer is entitled to
receive payment or to sue the drawer, the acceptor, or C who endorsed the bill in blank but he
cannot sue D or E.

(c) Partial endorsement (Section 56)

A partial endorsement is one which purports to transfer to the endorsee a part only of the
amount payable on the instrument. Such an endorsement does not operate as a negotiation of
the instrument.

Example: A is the holder of a bill for Rs.1000. He endorses it “pay to B or order Rs.500.” This
is a partial endorsement and invalid for the purpose of negotiation.

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(d) Restrictive endorsement (Section 50)

The endorsement of an instrument may contain terms making it restrictive. Restrictive


endorsement is one which either by express words restricts or prohibits the further negotiation
of a bill or which expresses that it is not a complete and unconditional transfer of the
instrument but is a mere authority to the endorsee to deal with bill as directed by such
endorsement.

“Pay C,” “Pay C for my use,” “Pay C for the account of B” are instances of restrictive
endorsement. The endorsee under a restrictive endorsement acquires all the rights of the
endoser except the right of negotiation.

(e) Conditional or qualified endorsement

It is open to the endorser to annex some condition to his owner liability on the endorsement.
An endorsement where the endorsee limits or negatives his liability by putting some condition
in the instrument is called a conditional endorsement. A condition imposed by the endorser
may be a condition precedent or a condition subsequent. An endorsement which says that the
amount will become payable if the endorsee attains majority embodies a condition precedent. A
conditional endorsement unlike the restrictive endorsement does not affect the negotiability of
the instrument. It is also some times called qualified endorsement.

An endorsement may be made conditional or qualified in any of the following forms:

(i) ‘Sans recourse’ endorsement: An endorser may be express word exclude his own liability
thereon to the endorser or any subsequent holder in case of dishonour of the instrument. Such
an endorsement is called an endorsement sans recourse (without recourse). Thus ‘Pay to A or
order sans recourse, ‘pay to A or order without recourse to me,’ are instances of this type of
endorsement. Here if the instrument is dishonoured, the subsequent holder or the indorsee
cannot look to the indorser for payment of the same. An agent signing a negotiable instrument
may exclude his personal liability by using words to indicate that he is signing as agent only.
The same rule applies to directors of a company signing instruments on behalf of a company.
The intention to exclude personal liability must be clear. Where an endorser so excludes his
liability and afterwards becomes the holder of the instrument, all intermediate endorsers are
liable to him. Example: A is the holder of a negotiable instrument. Excluding personal liability
by an endorsement without recourse, he transfers the instrument to B, and B endorses it to C,
who endorses it to A. A can recover the amount of the bill from B and C.

(ii) Facultative endorsement: An endorsement where the endorser extends his liability or
abandons some right under a negotiable instrument, is called a facultative endorsement. “Pay A
or order, Notice of dishonour waived” is an example of facultative endorsement.

(iii) ‘Sans frais’ endorsement: Where the endorser does not want the endorsee or any
subsequent holder, to incur any expense on his account on the instrument, the endorsement is
‘sans frais’.

(iv) Liability dependent upon a contingency: Where an endorser makes his liability depend
upon the happening of a contingent event, or makes the rights of the endorsee to receive the

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amount depend upon any contingent event, in such a case the liability of the endorser will arise
only on the happening of that contingent event. Thus, an endorser may write ‘Pay A or order on
his marriage with B’. In such a case, the endorser will not be liable until the marriage takes
place and if the marriage becomes impossible, the liability of the endorser comes to an end.

Effects of endorsement

The legal effect of negotiation by endorsement and delivery is:

(i) to transfer property in the instrument from the endorser to the endorsee.

(ii) to vest in the latter the right of further negotiation, and

(iii) a right to sue on the instrument in his own name against all the other parties (Section 50).

Cancellation of endorsement:

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

Negotiation back:

‘Negotiation back’ is a process under which an endorsee comes again into possession of the
instrument in his own right. Where a bill is re-endorsed to a previous endorser, he has no
remedy against the intermediate parties to whom he was previously liable though he may
further negotiate the bill.

Lost instruments:

Where the holder of a bill or note loses it, the finder gets no title to it. The finder cannot
lawfully transfer it. The man who lost it can recover it from the finder. But if the instrument is
transferable by mere delivery and there is nothing on its face to show that it does not belong to
the finder, a holder obtaining it from the finder in good faith and for valuable consideration and
before maturity is entitled to the instrument and can recover payment from all the parties
thereof. If the instrument is transferable by endorsement, the finder cannot negotiate it except
by forging the endorsement.

The holder of the instrument when it is lost must give a notice of loss to all the parties liable on
it and also a public notice by advertisement. The holder of a lost bill remains owner in law and
as such on maturity can demand payment from the acceptor, and if is dishonoured he must give
notice of dishonour to prior parties. The owner of the lost bill has a right to obtain the duplicate
from the drawer and on refusal he can sue the drawer for the same.

Stolen instrument:

The position of thief of an instrument is exactly the same as that of a finder of lost instruments.
A thief acquires no title to an instrument if he receives payment on it the owner can sue him for
the recovery of the amount. But if an instrument payable to bearer is stolen and if transferred to
a holder in due course, the owner must suffer.

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Instruments obtained by fraud:

It is of the essence of all contracts including those on negotiable instruments, that they must
have been brought about by free consent of the parties compenent to contract. Any contract to
which consent has been obtained by fraud is voidable at the option of the person whose
consent was so obtained. A person who obtains an instrument by fraud gets a defective title.
But if such an instrument passes into the hands of a holder in due course, the plea of fraud will
not be available against him. If however, it could be shown that a person without negligence on
his part was induced to sign an instrument it being represented to him to be a document of a
different kind he would not be liable even to a holder in due course.

Instrument obtained for an unlawful consideration:

The general rules as to the legality of object or consideration of a contract apply to contracts on
negotiable instruments also. An instrument given for an illegal consideration is void and does
not covey a valid title to the holder. He cannot enforce payment against any party thereto.
Thus, a bill of exchange given in consideration of future illicit cohabitation is void. But if such
an instrument passes into the hands of a holder in due course, he obtains a good and complete
title to it.

Forged instrument:

Forgery confers no title and a holder acquires no title to a forged instrument. A forged
instrument is treated as anullity. Forgery with the intention of obtaining title to an instrument
would include: (1) fraudulently writing the name of an existing person, (2) signing the name of
a fictitious person with the intention that it may pass that of a real person, or

(3) signing one’s own name with the intention that the signature may pass as the signature of
some other person of the same name.

Example: A bill is payable to Ram Sunder or order. At maturity it wrongfully comes into the
possession of another Ram Sunder who knows that he has no claim on the bill. He puts his own
signature and the acceptor pays him. The bill is not discharged and the acceptor remains liable
to Ram Sunder who is the owner of the bill.

A forged instrument has no existence in the eyes of law. A title which never came into
existence cannot be improved even if it passes into the hands of a holder in due course. A
forges B’s signature on a promissory note and transfers the same to C who takes it in good faith
for value. C gets no title of the note even though he is a holder in due course.

Examples: (a) On a note for Rs.1000, A forges B’s signature to it as maker. C, a holder who
takes it bonafide and for value acquires no title to the note. (b) On a bill for Rs.1000 A’s
acceptance to the bill is forged. The bill comes into hands of B, a bonafide holder for value, B
acquires no title to the bill.

Forged endorsement:

The case of a forged endorsement is slightly different. If an instrument is endorsed in full, it


cannot be negotiated except by an endorsement signed by the person to whom or to whose

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order the instrument is payable, for the endorsee obtains title only through his endorsement. If
an endorsement is forged, the endorsee acquires no title to the instrument even if he is a
bonafide purchaser. On the other hand, if the instrument is a bearer instrument or has been
endorsed in blank, and there is a forged endorsement the holder gets a good title because
holder in such a case derives title by delivery and not by endorsement. Bankers are specially
protected against forged endorsement under section 85 of the Act.

Examples: (a) A bill is endorsed, “Pay X or order.” X must endorse the bill and if his signature
is forged, the bill is worthless. (b) A bill is payable to “X or order.” It is stolen from X and the
thief forges X’s endorsement and endorses it to Y who takes it in good faith and for value. Y
acquires no title to the bill. (c) A bill payable to “A or order” is endorsed in blank by A. It
comes into the hands of B. B by simple delivery passes it to C. C forges B’s endorsement and
transfers it to D. As D does not derive his title through the forged endorsement of B, but
through the genuine endorsement of A, he obtains a good title to the instrument in spite of the
intervening forged endorsement.

HOLDER IN DUE COURSE:

Section 9 of the Act defines ‘holder in due course’ as any person who

(i) for valuable consideration, (ii) becomes the possessor of a negotiable instrument payable to
bearer or the indorsee or payee thereof, (iii) before the amount mentioned in the document
becomes payable, and (iv) without having sufficient cause to believe that any defect existed in
the title of the person from whom he derives his title. (English law does not regard payee as a
holder in due course).

The essential qualification of a holder in due course may, therefore, be summed up as follows:

1. He must be a holder for valuable consideration: Consideration must not be void or illegal,
e.g. a debt due on a wagering agreement. It may, however, be inadequate. A donee, who
acquired title to the instrument by way of gift, is not a holder in due course, since there is no
consideration to the contract. He cannot maintain any action against the debtor on the
instrument. Similarly, money due on a promissory note executed in consideration of the
balance of the security deposit for the lease of a house taken for immoral purposes cannot be
recovered by a suit.

2. He must have become a holder (possessor) before the date of maturity of the negotiable
instrument: Therefore, a person who takes a bill or promissory note on the day on which it
becomes payable cannot claim rights of a holder in due course because he takes it after it
becomes payable, as the bill or note can be discharged at any time on that day.

3. He must have become holder of the negotiable instrument in good faith: Good faith implies
that he should not have accepted the negotiable instrument after knowing about any defect in
the title to the instrument. But, notice of defect in the title received subsequent to the

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acquisition of the title will not affect the rights of a holder in due course. Besides good faith,
the Indian Law also requires reasonable care on the part of the holder before he acquires title of
the negotiable instrument. He should take the instrument without any negligence on his part.
Reasonable care and due caution will be the proper test of his bona fides. It will not be enough
to show that the holder acquired the instrument honestly, if in fact, he was negligent or
careless. Under conditions of sufficient indications showing the existence of a defect in the title
of the transferor, the holder will not become a holder in due course even though he might have
taken the instrument without any suspicion or knowledge.

Example: (i) A bill made out by pasting together pieces of a tom bill taken without enquiry will
not make the holder, a holder in due course. It was sufficient to show the intention to cancel the
bill. A bill should not be taken without enquiry if suspicion has been aroused. (ii) A post-dated
cheque is not irregular. It will not preclude a bonafide purchase instrument from claiming the
rights of a holder in due course. It is to be noted that it is the notice of the defect in the title of
his immediate transferor which deprives a person from claiming the right of a holder in due
course. Notice of defect in the title of any prior party does not affect the title of the holder.

4. A holder in due course must take the negotiable instrument complete and regular on the face
of it.

Privileges of a holder in due course

1. Instrument purged of all defects: A holder in due course who gets the instrument in good
faith in the course of its currency is not only himself protected against all defects of title of the
person from whom he has received it, but also serves, as a channel to protect all subsequent
holders. A holder in due course can recover the amount of the instrument from all previous
parties although, as a matter of fact, no consideration was paid by some of the previous parties
to instrument or there was a defect of title in the party from whom he took it.

Once an instrument passes through the hands of a holder in due course, it is purged of all
defects. It is like a current coin. Who-so-ever takes it can recover the amount from all parties
previous to such holder (Sec. 53). It is to be noted that a holder in due course can purify a
defective title but cannot create any title unless the instrument happens to be a bearer one.

Examples: (i) A obtains Bs acceptance to a bill by fraud. A indorses it to C who takes it as a


holder in due course. The instrument is purged of its defects and C gets a good title to it. In
case C indorses it to some other person he will also get a good title to it except when he is also
a party to the fraud played by A. (ii) A bill is payable to “A or order”. It is stolen from A and
the thief forges A’s signatures and indorses it to B who takes it as a holder in due course. B
cannot recover the money. It is not a case of defective title but a case where title is absolutely
absent. The thief does not get any title therefore, cannot transfer any title to it. (iii) A bill of
exchange payable to bearer is stolen. The thief delivers it to B, a holder in due course. B can
recover the money of the bill.

2. Rights not affected in case of an inchoate instrument: Right of a holder in due course to
recover money is not at all affected even though the instrument was originally an inchoate

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stamped instrument and the transferor completed the instrument for a sum greater than what
was intended by the maker. (Sec. 20)

3. All prior parties liable: All prior parties to the instrument (the maker or drawer, acceptor and
intervening endorsers) continue to remain liable to the holder in due course until the instrument
is duty satisfied. The holder in due course can file a suit against the parties liable to pay, in his
own name (Sec. 36)

4. Can enforce payment of a fictitious bill: Where both drawer and payee of a bill are fictitious
persons, the acceptor is liable on the bill to a holder in due course. If the latter can show that
the signature of the supposed drawer and the first endorser are in the same hand, for the bill
being payable to the drawer’s order the fictitious drawer must indorse the bill before he can
negotiate it. (Sec. 42).

5. No effect of conditional delivery: Where negotiable instrument is delivered conditionally or


for a special purpose and is negotiated to a holder in due course, a valid delivery of it is
conclusively presumed and he acquired good title to it. (Sec. 46).

Example: A, the holder of a bill indorses it “B or order” for the express purpose that B may get
it discounted. B does not do so and negotiates it to C, a holder in due course. D acquires a good
title to the bill and can sue all the parties on it.

6. No effect of absence of consideration or presence of an unlawful consideration: The plea of


absence of or unlawful consideration is not available against the holder in due course. The
party responsible will have to make payment (Sec. 58).

7. Estoppel against denying original validity of instrument: The plea of original invalidity of
the instrument cannot be put forth, against the holder in due course by the drawer of a bill of
exchange or cheque or by an acceptor for the honour of the drawer. But where the instrument is
void on the face of it e.g. promissory note made payable to “bearer”, even the holder in due
course cannot recover the money. Similarly, a minor cannot be prevented from taking the
defence of minority. Also, there is no liability if the signatures are forged. (Sec. 120).

8. Estoppel against denying capacity of the payee to endorsee: No maker of promissory note
and no acceptor of a bill of exchange payable to order shall, in a suit therein by a holder in due
course, be permitted to resist the claim of the holder in due course on the plea that the payee
had not the capacity to indorse the instrument on the date of the note as he was a minor or
insane or that he had no legal existence (Sec 121)

9. Estoppel against endorser to deny capacity of parties: An endorser of the bill by his
endorsement guarantees that all previous endorsements are genuine and that all prior parties
had capacity to enter into valid contracts. Therefore, he on a suit thereon by the subsequent
holder, cannot deny the signature or capacity to contract of any prior party to the instrument.

DISHONOUR OF A NEGOTIABLE INSTRUMENT

When a negotiable instrument is dishonoured, the holder must give a notice of dishonour to all
the previous parties in order to make them liable. A negotiable instrument can be dishonoured

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either by non- acceptance or by non-payment. A cheque and a promissory note can only be
dishonoured by non-payment but a bill of exchange can be dishohoured either by non-
acceptance or by non-payment.

Dishonour by non-acceptance (Section 91):

A bill of exchange can be dishonoured by non-acceptance in the following ways:

1. If a bill is presented to the drawee for acceptance and he does not accept it within 48 hours
from the time of presentment for acceptance. When there are several drawees even if one of
them makes a default in acceptance, the bill is deemed to be dishonoured unless these several
drawees are partners. Ordinarily when there are a number of drawees all of them must accept
the same, but when the drawees are partners acceptance by one of them means acceptance by
all.

2. When the drawee is a fictitious person or if he cannot be traced after reasonable search.

3. When the drawee is incompetent to contract, the bill is treated as dishonoured.

4. When a bill is accepted with a qualified acceptance, the holder may treat the bill of exchange
having been dishonoured.

5. When the drawee has either become insolvent or is dead.

6. When presentment for acceptance is excused and the bill is not accepted. Where a drawee in
case of need is named in a bill or in any endorsement thereon, the bill is not dishonoured until
it has been dishonoured by such drawee.

Dishonour by non-payment (Section 92):

A bill after being accepted has got to be presented for payment on the date of its maturity. If the
acceptor fails to make payment when it is due, the bill is dishonoured by non-payment. In the
case of a promissory note if the maker fails to make payment on the due date the note is
dishonoured by non-payment. A cheque is dishonoured by non-payment as soon as a banker
refuses to pay. An instrument is also dishonoured by non-payment when presentment for
payment is excused and the instrument when overdue remains unpaid (Sec 76).

Effect of dishonour: When a negotiable instrument is dishonoured either by non acceptance or


by non-payment, the other parties thereto can be charged with liability. For example if the
acceptor of a bill dishonours the bill, the holder may bring an action against the drawer and the
indorsers. There is a duty cast upon the holder towards those whom he wants to make liable to
give notice of dishonour to them.

Notice of dishonour: Notice of dishonour means the actual notification of the dishonour of the
instrument by non-acceptance or by non-payment. When a negotiable instrument is refused
acceptance or payment notice of such refusal must immediately be given to parties to whom

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the holder wishes to make liable. Failure to give notice of the dishonour by the holder would
discharge all parties other than the maker or the acceptor (Sec. 93).

Notice by whom: Where a negotiable instrument is dishonoured either by non- acceptance or


by non-payment, the holder of the instrument or some party to it who is liable thereon must
give a notice of dishonour to all the prior parties whom he wants to make liable on the
instrument (Section 93). The agent of any such party may also be given notice of dishonour. A
notice given by a stranger is not valid. Each party receiving notice of dishonour must, in order
to render any prior party liable give notice of dishonour to such party within a reasonable time
after he has received it. (Sec. 95)

When an instrument is deposited with an agent for presentment and is dishonoured, he may
either himself give notice to the parties liable on the instrument or he may give notice to his
principal. If he gives notice to his principal, he must do so within the same time as if he were
the holder. The principal, too, in his turn has the same time for giving notice as if the agent is
an independent holder. (Sec. 96)

Notice to whom?: Notice of dishonour must be given to all parties to whom the holder seeks to
make liable. No notice need be given to a maker, acceptor or drawee, who are the principal
debtors (Section 93).

Notice of dishonour may be given to an endorser. Notice of dishonour may be given to a duly
authorised agent of the person to whom it is required to be given. In case of the death of such a
person, it may be given to his legal representative. Where he has been declared insolvent the
notice may be given to him or to his official assignee (Section 94). Where a party entitled to a
notice of dishonour is dead, and notice is given to him in ignorance of his death, it is sufficient
(Section 97).

Mode of notice: The notice of dishonour may be oral or written or partly oral and partly
written. It may be sent by post. It may be in any form but it must inform the party to whom it is
given either in express terms or by reasonable intendment that the instrument has been
dishonoured and in what way it has been dishonoured and that the person served with the
notice will be held liable thereon.

What is reasonable time?: It is not possible to lay down any hard and fast rule for determining
what is reasonable time. In determining what is reasonable time, regard shall be had to the
nature of the instrument, the usual course the dealings with respect to similar instrument, the
distance between the parties and the nature of communication between them. In calculating
reasonable time, public holidays shall be excluded (Section 105).

Section 106 lays down two different rules for determining reasonable time in connection with
the notice of disnonour (a) when the holder and the party to whom notice is due carry on
business or live in different places, (b) when the parties live or carry on business in the same
place.

In the first case the notice of dishonour must be dispatched by the next post or on the day next
after the day of dishonour. In the second case the notice of dishonour should reach its
destination on the day next after dishonour.

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Place of notice: The place of business or (in case such party has no place of business) at the
residence of the party for whom it is intended, is the place where the notice is to given. If the
person who is to give the notice does not know the address of the person to whom the notice is
to be given, he must make reasonable efforts to find the latter’s address. But if the party
entitled to the notice cannot after due search be found, notice of dishonour is dispensed with.

Duties of the holder upon dishonour

(1) Notice of dishonour. When a promissory note, bill of exchange or cheque is dishonoured by
non-acceptance or non-payment the holder must give notice of dishonour to all the parties to
the instrument whom he seeks to make liable thereon. (Sec. 93)

(2) Noting and protesting. When a promissory note or bill of exchange has been dishonoured
by non-acceptance or non-payment, the holder may cause such dishonour to be noted by a
notary public upon the instrument or upon a paper attached thereto or partly upon each (Sec.
99). The holder may also within a reasonable time of the dishonour of the note or bill, get the
instrument protested by notary public (Sec. 100).

(3) Suit for money. After the formality of noting and protesting is gone through, the holder may
bring a suit against the parties liable for the recovery of the amount due on the instrument.

Instrument acquired after dishonour: The holder for value of a negotiable instrument as a rule,
is not affected by the defect of title in his transferor. But this rule is subject to two important
exceptions (i) when the holder acquires it after maturity and (ii) when he acquires it with notice
of dishonour.

The holder of a negotiable instrument who acquired it after dishonour, whether by non-
acceptance or non-payment, with notice thereof, or after maturity, has only, as against the other
parties, the rights thereon of his transfer. (Sec. 59).

Discharge of parties:

1. By payment

2. By cancellation

3. By release

4. By default of Holder

5. By material Alteration

Discharge of instrument and discharge of parties from liability is not the same. A party may be
discharged from liability but the instrument may be yet in existence as the rights and
obligations of the other parties still exist. It is only when the party ultimately liable on the
instrument is discharged from liability that the instrument is discharged. Discharge of one or
more parties to the instrument does not therefore, discharge the instrument. Parties may be
discharged from liability on negotiable instrument in any of the following ways.

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By payment: When the maker acceptor or indorser makes payment on an instrument in due
course to the person entitled to receive payment in accordance with the apparent tenor of the
instrument in good faith and without negligence discharges the parties to the instrument.

By cancellation: when the holder or his agent cancels or strikes out the name of the acceptor or
indorser with intention to discharge him, such party is discharged from liability to the holder
and to all subsequent parties. Cancellation by mistake does not discharge the party. It must be
intentional. Cancellation must be legible and apparent on the face of the instrument.

By release: Where the holder discharges or release the maker, acceptor or indorser such party
receiving notice of discharge is discharged to the holder and to all subsequent parties. Holder
may therefore discharge any one of the parties by agreement, renunciation or by accord and
satisfaction

By default of the holder: The parties to the instrument are discharged when the following
defaults are committed by the holder.

1) Allowing drawee more than 48 hours: If the holder of a bill of exchange allows the
drawee more than 48 hours (exclusive of public holidays) to consider whether he will accept
the same, all pervious parties not consenting to such allowance are thereby discharged from
liability to such holder.

2) Parties not consenting to qualified or limited acceptance: If the holder of a bill of


exchange accepts qualified acceptance, all previous parties whose consent to such qualified
acceptance is not obtained are discharged unless the holder gives notice thereof and the parties
give their assent to such qualified acceptance.

3) Delay in presentment of cheque and drawer damaged thereby: When the holder of a
cheque does not present the cheque for payment within a reasonable time of its issue and the
drawer suffers actual damage the drawer is discharged to the extent of such damage.

Illustrations:

1) A draws a cheque for Rs 1000 and when the cheque ought to be presented has funds at
the bank to meet it. The bank fails before the cheque is presented. The drawer is discharged but
the holder can proceed against the bank for the amount of the cheque.

2) A draws a cheque at Umballa on a bank in Calcutta. The bank fails before the cheque
would be presented in ordinary course A is not discharged for he has not suffered actual
damage through any delay in presenting the cheque.

4) Delay in presentment for payment: When the instrument is not presented for payment within
reasonable time.

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5) Failure to give notice of dishonour: when the holder fails to give notice of dishonour to all
pervious parties where necessary.

By material alteration: Any material alteration of a negotiable instrument renders the same
avoid as against any one who is a party thereto at the time of making such alteration and does
not consent thereto, unless it was made in order to carry out common intention of the original
parties. Any such alteration if made by indorsee discharges the indorser from all liability to him
in respect of the consideration thereof.

Material alteration without consent of the other parties thereto renders the alteration void and
discharges the parties to the instruments because by alteration the identity of the instrument is
destroyed. Accidental alteration does not render a document invalid.

Introduction to Goods and Services Tax

The present structure of Indirect Taxes is very complex in India. There are so many types of
taxes that are levied by the Central and State Governments on Goods & Services.

We have to pay ‘Entertainment Tax’ for watching a movie. We have to pay Value Added Tax
(VAT) on purchasing goods & services. And there are Excise duties, Import Duties, Luxury
Tax, Central Sales Tax, Service Tax….hhmmm..

As of today some of these taxes are levied by the Central Government and some are by the
State governments. How nice will it be if there is only one unified tax rate instead of all these
taxes?

Existing Indirect Tax Structure in India

Central Taxes

•Central Excise duty

•Additional duties of excise

•Excise duty levied under Medicinal & Toiletries Preparation Act

•Additional duties of customs (CVD & SAD)

•Service Tax

•Surcharges & Cesses

State Taxes

•State VAT / Sales Tax

•Central Sales Tax

•Purchase Tax

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•Entertainment Tax (other than those levied by local bodies)

•Luxury Tax

•Entry Tax (All forms)

•Taxes on lottery, betting & gambling

•Surcharges & Cesses

Constitution amended to provide concurrent powers to both Centre & States to levy GST
(Centre to tax sale of goods and States to tax provision of services)

let us understand – what is Goods and Services Tax and its importance. What are the benefits
of GST Bill to Corporates, common man and end consumer? What are the advantages,
disadvantages and challenges?

What is GST?

It has been long pending issue to streamline all the different types of indirect taxes and
implement a “single taxation” system. This system is called as GST ( GST is the abbreviated
form of Goods & Services Tax). The main expectation from this system is to abolish all
indirect taxes and only GST would be levied. As the name suggests, the GST will be levied
both on Goods and Services.

GST was first introduced during 2007-08 budget session. On 17th December 2014, the current
Union Cabinet ministry approved the proposal for introduction GST Constitutional
Amendment Bill. On 19th of December 2014, the bill was presented on GST in Loksabha. The
Bill will be tabled and taken up for discussion during the coming Budget session. The current
central government is very determined to implement GST Constitutional Amendment Bill.

GST is a tax that we need to pay on supply of goods & services. Any person, who is providing
or supplying goods and services is liable to charge GST.

How is GST applied?

GST is a consumption based tax/levy. It is based on the “Destination principle.” GST is applied
on goods and services at the place where final/actual consumption happens.

GST is collected on value-added goods and services at each stage of sale or purchase in the
supply chain. GST paid on the procurement of goods and services can be set off against that
payable on the supply of goods or services.The manufacturer or wholesaler or retailer will pay
the applicable GST rate but will claim back through tax credit mechanism.

But being the last person in the supply chain, the end consumer has to bear this tax and so, in
many respects, GST is like a last-point retail tax. GST is going to be collected at point of Sale.

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The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is
the customer of the goods and services who bears the tax. This is the case even today for all
indirect taxes but the difference under the GST is that with streamlining of the multiple taxes
the final cost to the customer will come out to be lower on the elimination of double charging
in the system.

Let us understand the above supply chain of GST with an example:

The current tax structure does not allow a business person to take tax credits. There are lot of
chances that double taxation takes place at every step of supply chain. This may set to change
with the implementation of GST. Indian Government is opting for Dual System GST. This
system will have two components which will be known as

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 Central Goods and Service Tax (CGST) and

 State Goods and Service Tax (SGST).

The current taxes like Excise duties, service tax, custom duty etc will be merged under CGST.
The taxes like sales tax, entertainment tax, VAT and other state taxes will be included in SGST.

So, how is GST Levied? GST will be levied on the place of consumption of Goods and
services. It can be levied on :

o Intra-state supply and consumption of goods & services

o Inter-state movement of goods

o Import of Goods & Services

GST Network (GSTN)

A section 25 private limited company with Strategic Control with the Government

To function as a Common Pass-through portal for taxpayers-

submit registration application

file returns

make tax payments

To develop back end modules for 25 States (MODEL –II)

Infosys appointed as Managed Service Provider (MSP)

34 GST Suvidha Providers (GSPs) appointed

Features of Constitution Amendment Act

Concurrent jurisdiction for levy & collection of GST by the Centre (CGST) and the States
(SGST)

Centre to levy and collect IGST on supplies in the course of inter-State trade or commerce
including imports

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Compensation for loss of revenue to States for five years

GST on petroleum crude, high speed diesel, motor spirit (commonly known as petrol),
natural gas & aviation turbine fuel to be levied from a later date on recommendations of
Council

GST Council - Constitution

Consists of Finance Minister, the MOS (Finance) and the Minister of Finance / Taxation of
each State

Chairperson – Union FM

Vice Chairperson - to be chosen amongst the Ministers of State Government

Quorum is 50% of total members

Decision by 75% majority

Council to make recommendations on everything related to GST including laws, rules and
rates etc.

Threshold limit for exemption to be Rs. 20 lac (Rs. 10 lac for special category States)

Compounding threshold limit to be Rs. 50 lac – not available to inter-State suppliers, service
providers (except restaurant service) & specified category of manufacturers

Government may convert existing Area based exemption schemes into reimbursement based
scheme

Four tax rates namely 5%, 12%, 18% and 28%

Some goods and services would be exempt

Separate tax rate for precious metals

To ensure single interface – all administrative control over

90% of taxpayers having turnover below Rs. 1.5 cr would vest with State tax administration

10% of taxpayers having turnover below of Rs. 1.5 cr. would vest with Central tax
administration

taxpayers having turnover above Rs. 1.5 cr. would be divided equally between Central and
State tax administration

Main Features of the GST Act

GST to be levied on supply of goods or services

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All transactions and processes only through electronic mode – Non-intrusive administration

PAN Based Registration

Registration only if turnover more than Rs. 20 lac

Option of Voluntary Registration

Deemed Registration in three days

Input Tax Credit available on taxes paid on all procurements (except few specified items)

Credit available to recipient only if invoice is matched – Helps fight huge evasion of taxes

Set of auto-populated Monthly returns and Annual Return

Composition taxpayers to file Quarterly returns

Automatic generation of returns

GST Practitioners for assisting filing of returns

GSTN and GST Suvidha Providers (GSPs) to provide technology based assistance

Separate electronic ledgers for cash and credit

Tax can be deposited by internet banking, NEFT / RTGS, Debit/ credit card and over the
counter

Cross utilization of IGST Credit first as IGST and then as CGST or SGST /UTGST

Concept of TDS for Government Departments

Concept of TCS for E-Commerce Companies

Refund to be granted within 60 days

Provisional release of 90% refund to exporters within 7 days

Interest payable if refund not sanctioned in time

Refund to be directly credited to bank accounts

Comprehensive transitional provisions for smooth transition of existing tax payers to GST
regime

Special procedures for job work

System of GST Compliance Rating

Anti-Profiteering provision

Benefits of GST

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Benefits of GST Bill implementation

1. The tax structure will be made lean and simple

2. The entire Indian market will be a unified market which may translate into lower
business costs. It can facilitate seamless movement of goods across states and reduce
the transaction costs of businesses.

3. It is good for export oriented businesses. Because it is not applied for goods/services
which are exported out of India.

4. In the long run, the lower tax burden could translate into lower prices on goods for
consumers.

5. The Suppliers, manufacturers, wholesalers and retailers are able to recover GST
incurred on input costs as tax credits. This reduces the cost of doing business, thus
enabling fairer prices for consumers.

6. It can bring more transparency and better compliance.

7. Number of departments (tax departments) will reduce which in turn may lead to less
corruption

8. More business entities will come under the tax system thus widening the tax base. This
may lead to better and more tax revenue collections.

9. Companies which are under unorganized sector will come under tax regime.

10. Non-Intrusive Electronic Tax Compliance System

UNIT – IV

BUSINESS ETHICS

“Ethics knows the difference between what you have a right to do and what is the right
thing to do.”

Ethics, Morals & Law:

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Ethics: Rational examination of moral beliefs and behavior; the study of morality.

Morality: Standards, conduct, and systems that provide guidance on how to act.

Law: Society’s standards and values that is enforceable in court.

Ethics is the branch of study dealing with what is the proper course of action for man. It
answers the question, "What do I do?" It is the study of right and wrong in human endeavours
(deeds). At a more fundamental level, it is the method by which we categorize our values and
pursue them. Do we pursue our own happiness, or do we sacrifice ourselves to a greater cause?
Is that foundation of ethics based on the Bible, or on the very nature of man himself, or
neither?

Definition of Ethics?

Ethics is often defined as an underlying principle that would produce an action to prevent a
substantial harm to others, when an individual or group has an opportunity to do so for their
own benefit (Boddy, 2011).

Ethics is believed to be a set of moral beliefs and conduct that discourages acts of self-gain and
encourages honest and modest ways of generating business income (Ghosh et al.,2011).

Ethics is a set of moral principles or values which is concerned with the righteousness or
wrongness of human behaviour and which guides your conduct in Ethics is the activity of
examining the moral standards of a society, and asking how these standards apply to our lives
and whether these standards are reasonable or unreasonable, that is whether they are supported
by good reasons or poor ones.

What is Business Ethics?

Ethics in business, or business ethics as it is often called, is the application of the discipline,
principles, and theories of ethics to the organizational context. Business ethics have been
defined as “principles and standards that guide behaviour in the world of business.” Business
ethics is also a descriptive term for the field of academic study in which many scholars conduct
research and in which undergraduate and graduate students are exposed to ethics theory and
practice, usually through the case method of analysis.

Ethical behaviour in business is critical. When business firms are charged with infractions, and
when employees of those firms come under legal investigation, there is a concern raised about
moral behaviour in business.

What is the purpose of business ethics?

Business ethics allow businesses to trust those they do business with and the customer to trust
those they buy products and services from. An ethical business will pay the agreed on price for
services or material, they will deliver what they say they will, when they say they will. If there
is a problem it will be dealt with fairly and equitably. For thousands of years businessmen have

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dealt with each other in an ethical manner according to an agreed on set of practices. They had
to or no one would do business with them again.

Unfortunately some businesses try to take advantage of the customers, employees and
suppliers. That's why there are laws regarding the enforcement of contracts and consumer
protection laws protecting customers. The lawmakers tend to try to minimize the laws but
unethical businessmen keep coming up with new ways to defraud their fellow businesses and
customers.

Nature of Business Ethics:


 Ethics and Business goals may differ
 Ethical behaviour creates goodwill
 People prefer ethical companies
 Golden bridge between corporate interest with moral demands
 Long run benefits and rewards

Need of Business Ethics:

 Ethical steps by business improves society


 Ethical programs maintain moral course
 Improve teamwork and productivity
 Support growth and meaning
 Ensure legal compliances
 Avoid criminal acts and lower fines
 Help manage values associated with quality management, strategic planning and
diversity management
 Promote a strong public image
 Strengthens organizational work culture
 Enhances quality of work

Importance of Ethics in Business

Several factors play a role in the success of a company that are beyond the scope of financial
statements alone. Organizational culture, management philosophy and ethics in business each
have an impact on how well a business performs in the long term. No matter the size, industry
or level of profitability of an organization, business ethics are one of the most important
aspects of long-term success.

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Ethics in Leadership: The management team sets the tone for how the entire company runs on
a day-to-day basis. When the prevailing management philosophy is based on ethical practices
and behavior, leaders within an organization can direct employees by example and guide them
in making decisions that are not only beneficial to them as individuals, but also to the
organization as a whole. Building on a foundation of ethical behavior helps create long lasting
positive effects for a company, including the ability to attract and retain highly talented
individuals and building and maintaining a positive reputation within the community. Running
a business in a ethical manner from the top down builds a stronger bond between individuals
on the management team, further creating stability within the company.

Employee Ethics:

When management is leading an organization in an ethical manner, employees follow in those


footsteps. Employees make better decisions in less time with business ethics as a guiding
principle; this increases productivity and overall employee morale. When employees complete
work in a way that is based on honesty and integrity, the whole organization benefits.
Employees who work for a corporation that demands a high standard of business ethics in all
facets of operations are more likely to perform their job duties at a higher level and are also
more inclined to stay loyal to that organization.

Business Ethics Benefits:

The importance of business ethics reaches far beyond employee loyalty and morale or the
strength of a management team bond. As with all business initiatives, the ethical operation of a
company is directly related to profitability in both the short and long term. The reputation of a
business from the surrounding community, other businesses and individual investors is
paramount in determining whether a company is a worthwhile investment. If a company's
reputation is less than perfect based on the perception that it does not operate ethically,
investors are less inclined to buy stock or otherwise support its operations. With consistent
ethical behavior comes increasingly positive public image, and there are few other
considerations as important to potential investors and current shareholders. To retain a positive
image, businesses must be committed to operating on an ethical foundation as it relates to
treatment of employees, respect to the surrounding environment and fair market practices in
terms of price and consumer treatment.

Ethics concern an individuals moral judgment about right and wrong. Decisions taken within
an organization may be made by individuals or groups, but whoever makes them will be
influenced by the culture of the company. The decision to behave ethically is amoral one;
employees must decide what they think is the right course of action. This may involve rejecting
the route that would lead to the biggest short-term profit.

Ethical behavior and corporate social responsibility can bring significant benefits to a business.
For example, they may:

• Attract customers to the firms products, thereby boosting sales and profits. This makes
maintenance of employees I the business, reduce labor turnover and therefore increase
productivity.

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• Attract more employees wanting to work for the business, reduce recruitment costs and
enable the company to get the most talented employees.

• Attract investors and keep the company share price high, there by protecting the business
from takeover. Unethical behavior or a lack of corporate social responsibility, by comparison,
may damage a firms reputation and make it less appealing to stakeholders. Profits could fall as
a result.

• Build public image of the company, as it complies with rules and regulation of the country
which provides aesthetic value and sense of satisfaction to stake holders.

CLASSIFICATION OF ETHICS

Ethics is divided into descriptive ethics (which provides the scientific description of what
ethics is), normative ethics (which involves both the standard normative ethical theory and also
its application to particular disciplines, actions, classes of actions), and meta-ethics ( which is
about the methods, the meaning and the language of ethics).

Descriptive Ethics are scientific description of ethics. Sound logic for ethics is presented.
These moral standards can be applied to human action to judge their moral character, that is,
whether they are right or wrong. Examples of some of the moral standards are utility, duty,
conscience, use of right means for right ends, justice, prudence, and stewardship. Just as there
are several standard to measure distance, such as meter, yard, mile, etc., so also there are
several standards to judger an action right or wrong.

Normative ethics Norms or standard are also known as values or codes. Norms set clear
guidelines for social interaction in a community. Normative ethics is a subject of study wherein
student study moral Business ethics comes under this classification. Normative standards of
moral judgment are applied by business managers to the business decisions they take. The
ethical element is part and parcel of the integral process of decision making on a business
management problem. Business ethics, therefore, deals with the application of normative
standards to specific business experiences.

The study of business ethics is as essentials for a businessman as the study of professional
norms for a medical practitioner. We expect a doctor to diagnose correctly so that the right
medication is given. There are chances that he could diagnose a simple ailment but report it as
a serious one in order to exploit the patient financially. Likewise, a client places trust on a
businessman fort a transition and hopes that the latter does not deceive. Thus, applied ethics is
strictly professional ethics.

Meta-ethics The Greek word meta stands for beyond. Thus meta-ethics laterally means beyond
ethic, suggesting an in-depth study of the discipline. In other words, it is scientific study of the
concepts of ethics in itself. You many not fine these concepts practical, because nowhere in the
world will you find a perfect human being who is ideas that are considered as supra- standard ,
and are concept that can be conceived as perfectly as perfection itself.

We study these concepts as ultimate principal- principle such as good and evil, right and
wrong. We study them just the way we study theoretical physics when dealing with the

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principles of gravitation, energy, or light. The character of these principles is universal in


nature. For instance, if we handle ‘ duty’ as an ethical principal, it would be applicable as a
standard of ethical judgment in all the cases of duty. Hence, meta-ethics is a study of the
general principles that govern right and wrong human actions.

Business Ethics and the Changing Environment

 Businesses & governments operate in changing technological, legal, economic, social


& political environments with competing stakeholders & power claims.

 Stakeholders are individuals, companies, groups & nations that cause and respond to
external issues, opportunities, and threats.

 The rate of change and uncertainty in which stake- holders & society must make &
manage business & moral decisions have accelerated due to the impact of:

Internet and information technologies

Globalization

Deregulation

Mergers

Wars

Environmental Forces and Stakeholders

Local, national, and international environments are increasingly moving toward and into a
global system of dynamically interrelated interactions among local, national, and regional
politics, economies, regulations, technologies, demographics, and international law.

Economic environment
Technological
Political
Governmental and regulatory
Legal
Demographic

Why does ethics matter in business?

1. “Doing the right thing” matters

2. To companies and employers, acting legally and ethically means saving billions of
dollars each year in lawsuits, settlements, and theft.

3. CNN reported that an estimated one out of three business closes because of employee
theft.

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4. Costs to businesses also include deterioration of relationships; damage to reputation;


declining employee productivity; creativity, and loyalty; ineffective information flow
throughout the organization; and absenteeism.

5. For business leaders and managers, managing ethically also means managing with
integrity

6. Integrity will shape and influences the values, tone, and culture of the organization; the
communications among the members; and the realism, commitment, and imagination
of everyone in a company.

Levels of Business Ethics

Because ethical problems are not only an individual or personal matter, it is helpful to see the
different levels at which issues originate and how they move to other levels. We cannot avoid
ethical issues in business any more than we can avoid them in other areas of our lives. In
business, most ethical questions fall into one or more of four categories: societal, stakeholder,
internal policy, or personal.

Societal: At the societal level, we ask questions about the basic institutions in a society. The
problem of apartheid in South Africa was a societal-level question: Is it ethically correct to
have a social system in which a group of people – indeed, the majority – is systematically
denied basic rights? Although recent changes in South Africa have ended the apartheid system,
it is difficult to project how smoothly the transition to equality will go. Companies wishing to
do business there still face a complex set of issues as political, economic, and social dynamics
change; the situation can be still present an ethical conundrum for many companies.

Another societal-level question concerns the merits of capitalism. Is capitalism a just system
for allocating resources? What role should the government play in regulating the marketplace?
Should we tolerate gross inequalities of wealth, status, and power? For some people, the
relatively huge increases in executive compensation in the past decade or so in the United
States are part of this issue. For example, in the United States from 1980 to 1990, while worker
pay increased 53 percent and corporate profits 78 percent, CEO pay rose by 212 percent. In
1980 the chief executive’s average pay was $624,996 with total compensation 42 times the pay
of a factory worker. In 1992 the average CEO made a record $3,842,247 in total pay – 157
times what factory workers earned. By way of contrast, in Japan CEOs make less than 32 times
as much as the rank and file.. In 1992 there were only eight Japanese CEOs whose
compensation was over a million dollars.

Societal level questions usually represent an ongoing debate among major competing
institutions. As managers and individuals, each of us can try to shape that debate. Andrew
Carnegie (along with other early theorists of corporate social responsibility) worked at this
level when he argued that the proper role of a business such as his own Steel was to apply the
principles of charity to assist the poor and unfortunate.

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Stake holder: The second kind of ethical questions concerns stakeholders – suppliers,
customers, shareholders, and the rest. Here we ask questions about how a company should deal
with the external groups affected by its decisions, as well as how the stake holders should deal
with the company.

There are many stakeholders’ issues. Insider trading is one; another is a company’s obligation
to inform its customers about the potential dangers of its products. What obligations does a
company have to its suppliers? To the communities where it operates? To its stockholders?
How should we attempt to decide such matters? Kinko’s managers face the ethical question of
whether to respect the rights of copyright holders as stakeholders.

Internal policy: A third category of ethics might be called ‘internal policy” Here we ask
questions about the nature of a company’s relations with its employee. What kind of
employment contract is fair? What are the mutual obligations of managers and workers? What
rights do employees have? These questions too, pervade the workday of a manager. Layoffs
benefit work rules, motivation and leadership are all ethical concerns here.

Personal: Here we ask questions about how people should treat one another within an
organization. Should we be honest with one another, whatever the consequences? What
obligation do we have both as human beings and as workers who fill specific work roles to our
bosses, our employees, and our peers? These questions deal with the day-to-day issues of life
in any organization. Behind them lie two broader issues: Do we have the right to look at other
people primarily as means to our ends/can we avoid doing so?

Myths About Business Ethics:


Business ethics in the workplace is about prioritizing moral values for the workplace and
ensuring behaviors are aligned with those values — it’s values management. Yet, myths
abound about business ethics. Some of these myths arise from general confusion about the
notion of ethics. Other myths arise from narrow or simplistic views of ethical dilemmas.

1. Myth: Business ethics is more a matter of religion than management.

Diane Kirrane, in “Managing Values: A Systematic Approach to Business Ethics,”(Training


and Development Journal, November 1990), asserts that “altering people’s values or souls isn’t
the aim of an organizational ethics program — managing values and conflict among them is
…”

2. Myth: Our employees are ethical so we don’t need attention to business ethics.

Most of the ethical dilemmas faced by managers in the workplace are highly complex. Wallace
explains that one knows when they have a significant ethical conflict when there is presence of
a) significant value conflicts among differing interests, b) real alternatives that are equality
justifiable, and c) significant consequences on “stakeholders” in the situation. Kirrane
mentions that when the topic of business ethics comes up, people are quick to speak of the

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Golden Rule, honesty and courtesy. But when presented with complex ethical dilemmas, most
people realize there’s a wide “gray area” when trying to apply ethical principles.

3. Myth: Business ethics is a discipline best led by philosophers, academics and theologians.

Lack of involvement of leaders and managers in business ethics literature and discussions has
led many to believe that business ethics is a fad or movement, having little to do with the day-
to-day realities of running an organization. They believe business ethics is primarily a complex
philosophical debate or a religion. However, business ethics is a management discipline with a
programmatic approach that includes several practical tools. Ethics management programs
have practical applications in other areas of management areas, as well. (These applications are
listed later on in this document.)

4. Myth: Business ethics is superfluous — it only asserts the obvious: “do good!”

Many people react that codes of ethics, or lists of ethical values to which the organization
aspires, are rather superfluous because they represent values to which everyone should
naturally aspire. However, the value of a codes of ethics to an organization is its priority and
focus regarding certain ethical values in that workplace. For example, it’s obvious that all
people should be honest. However, if an organization is struggling around continuing occasions
of deceit in the workplace, a priority on honesty is very timely — and honesty should be listed
in that organization’s code of ethics. Note that a code of ethics is an organic instrument that
changes with the needs of society and the organization.

5. Myth: Business ethics is a matter of the good guys preaching to the bad guys.

Some writers do seem to claim a moral high ground while lamenting the poor condition of
business and its leaders. However, those people well versed in managing organizations realize
that good people can take bad actions, particularly when stressed or confused. (Stress and
confusion are not excuses for unethical actions — they are reasons.) Managing ethics in the
workplace includes all of us working together to help each other remain ethical and to work
through confusing and stressful ethical dilemmas.

6. Myth: Business ethics in the new policeperson on the block.

Many believe business ethics is a recent phenomenon because of increased attention to the
topic in popular and management literature. However, business ethics was written about even
2,000 years ago — at least since Cicero wrote about the topic in his On Duties. Business ethics
has gotten more attention recently because of the social responsibility movement that started in
the 1960s.

7. Myth: Ethics can’t be managed.

Actually, ethics is always “managed” — but, too often, indirectly. For example, the behavior of
the organization’s founder or current leader is a strong moral influence, or directive if you will,
on behavior or employees in the workplace. Strategic priorities (profit maximization,
expanding marketshare, cutting costs, etc.) can be very strong influences on morality. Laws,
regulations and rules directly influence behaviors to be more ethical, usually in a manner that

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improves the general good and/or minimizes harm to the community. Some are still skeptical
about business ethics, believing you can’t manage values in an organization. Donaldson and
Davis (Management Decision, V28, N6) note that management, after all, is a value system.
Skeptics might consider the tremendous influence of several “codes of ethics,” such as the “10
Commandments” in Christian religions or the U.S. Constitution. Codes can be very powerful
in smaller “organizations” as well.

8. Myth: Business ethics and social responsibility are the same thing.

The social responsibility movement is one aspect of the overall discipline of business ethics.
Madsen and Shafritz refine the definition of business ethics to be: 1) an application of ethics to
the corporate community, 2) a way to determine responsibility in business dealings, 3) the
identification of important business and social issues, and 4) a critique of business. Items 3 and
4 are often matters of social responsibility. (There has been a great deal of public discussion
and writing about items 3 and 4. However, there needs to be more written about items 1 and 2,
about how business ethics can be managed.) Writings about social responsibility often do not
address practical matters of managing ethics in the workplace, e.g., developing codes, updating
polices and procedures, approaches to resolving ethical dilemmas, etc.

9. Myth: Our organization is not in trouble with the law, so we’re ethical.

One can often be unethical, yet operate within the limits of the law, e.g., withhold information
from superiors, fudge on budgets, constantly complain about others, etc. However, breaking
the law often starts with unethical behavior that has gone unnoticed. The “boil the frog”
phenomena is a useful parable here: If you put a frog in hot water, it immediately jumps out. If
you put a frog in cool water and slowly heat up the water, you can eventually boil the frog. The
frog doesn’t seem to notice the adverse change in its environment.

10. Myth: Managing ethics in the workplace has little practical relevance.

Managing ethics in the workplace involves identifying and prioritizing values to guide
behaviors in the organization, and establishing associated policies and procedures to ensure
those behaviors are conducted. One might call this “values management.” Values management
is also highly important in other management practices, e.g., managing diversity, Total Quality
Management and strategic planning.

Why use ethical reasoning in business?

There are 3 reasons:

1. Many times laws do not cover all aspects or ‘gray areas’ of a problem

E.g. tobacco industry.

2. Free market and regulated-market mechanisms do not effectively inform owners and
managers how to respond to complex issues that have far-reaching ethical consequences

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3. Complex moral problems require ‘an intuitive or learned understanding and concern for
fairness, justice, due process to people, groups, human, and communities’. Ethics plays a role
in business because laws are many times insufficient or guide action.

Can business ethics be taught and trained?

Because laws and legal enforcement are not always sufficient to help guide or solve complex
human problems relating to business situations, the questions arise:

Can ethics help?

If so, how?

Can business ethics be taught?

Decisions depend on:

 Facts

 Inferences and rigorous

 Ethical reasoning

Ethics courses and training can do the following:

Provide people with rationales, ideas, and vocabulary to help them participate
effectively in ethical decision making process

Help people ‘make sense’ of their environments

Enhance sensitivity to moral issues and commitment to finding moral solutions

Enhance moral reflectiveness and strengthen moral courage

Improve the moral climate of firms by providing ethical concepts and tools for creating
ethical codes and social audits

Moral Reasoning

It is the process in which an individual tries to determine the difference between what is right
and what is wrong in a personal situation by using logic. To make such an assessment, one
must first know what an action is intended to accomplish and what its possible consequences
will be on others. People use moral reasoning in an attempt to do the right thing. People are
frequently faced with moral choices, such as whether to lie to avoid hurting someone's
feelings, or whether to take an action that will benefit some while harming others. Such
judgments are made by considering the objective and the likely consequences of an action.
Moral reasoning is the consideration of the factors relevant to making these types of
assessments.

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Thus, to know if "this direction" is the right direction to follow to get to a coffee shop, one
must first know where one is, where the coffee shop is, and the terrain between here and there
(to avoid blocks, etc).

Or, to know if this action is the right action to take, one must know what one wants to
accomplish, where one is, and the environment between here and the accomplished state (for
example, to impress my boss, I have to know what is likely to impress him/her, what I, myself,
can do at the work-place or where he/she would observe, etc).

Thus, to know if something (an idea, an action, a behavior) is "right" one has to know both
what one intends to accomplish and the environment that exists between "here" and "there. But
that alone is not enough! To go to a bank and threaten the cashier might well accomplish your
aim because you know security is weak and the prospect of capture is low. There is a third
consideration: is it good for the people who live around me, and supply the things my stolen
cash will buy. Here we have a further dilemma: a quick injection of stolen cash may well help
my closest suppliers, but where should we draw the boundary? The neighbourhood? The city?

Our Nation? or The whole world? Only this last reason: Good for all humanity, yields "moral

reasoning" Satisfactory solutions to problems are determined by using this principle. Problems
or behaviours are difficult to solve when either the environment or the desired accomplishment
are incompletely understood from a global perspective.

Stages of Moral development Kohlberg’s study

Kohlberg defined moral reasoning as judgements about right and wrong. His studies of moral
reasoning are based on the use of moral dilemmas, or hypothetical situations in which people
must make a difficult decision.

Kohlberg defined a subject's level of moral reasoning from the reasoning used to defend his or
her position when faced with a moral dilemma. He thought this more important than the actual
choice made, since the choices people make in such a dilemma aren't always clearly and
indisputably right.

He noted that development of moral reasoning seemed to be related to one's age. However, he
also determined that the highest level of moral reasoning was not reached by all of his subjects.

Kohlberg's six stages can be more generally grouped into three levels of two stages each:
preconventional, conventional and post-conventional.

Level 1: Pre-conventional

At this level judgement is based solely on a person's own needs and perceptions.

Stage 1: Obedience and Punishment (“I do things so I don’t get in trouble”)

Those in the first stage are like a child, basing their decisions on compliance to an authority
and the risk of negative consequences for failing to obey. A negative consequence means the
person is wrong, and avoiding a negative consequence, or punishment, means the person is

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right. They do not consider the impact on others, only the outcomes based on the negative
impact on themselves.

Stage 2: Individualism and Exchange (“I do things so I get something out of it”)

A stage two perspective is still childlike, but situations are no longer black and white, right and
wrong. There can be varying degrees of loss or gain; relative outcomes based on the value a
person receives from the activity. The person does not yet consider the impact on others, but
only sees decisions in relative befit to themselves.

Level 2: Conventional

The expectations of society and society's laws are taken into account in a decision about a
moral dilemma.

Stage 3: Good Interpersonal Relationships (“I do things so you like me”)

In stage three, the person begins to consider someone other than themselves. They think about
their immediate social circles, be it their family or friends, when they make decisions. The
person starts considering their actions based on the impact it might have to those they care
about or those they have relationships with.

Stage 4: Maintaining the Social Order (“I do it because it is the law, and I respect the law”)

The person in stage four extends their thoughts of others beyond their immediate circle of
family and friends. They make decisions out of respect for the social order and the law that
maintains that social order. They are not primarily concerned with fear of breaking the law, but
rather acknowledge the intent of the law for the greater good.

Level 3: Post Conventional

Judgements are based on abstract, more personal principles that aren't necessarily defined by

society's laws.

Stage 5: Social Contract and Individual Rights (“I do it because of a social contract we have
with each other”)

The stage five individual extends beyond the law for law’s sake and makes decisions based on
what makes for a good society, at times irrespective of the law. The person acknowledges that
decisions made for the greater good can at times violate the letter of the law. Of primary
concern in their decision-making are concepts such as “morality”, “rights” and democratic
processes.

Stage 6: Universal Principles (“I do it because it is the right thing to do”)

Stage 5 decisions may be right for the majority, but they may not be just. As such, the stage 6
individual is primarily concerned with justice. Whereas the person at stage 5 may be more

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focused on establishing status quo, the person at stage 6 would possibly consider civil unrest
and revolution to effect a greater change for long-term social justice and sustainability.

Carol Gilligan’s Moral Development Theory

 Carol Gilligan was born on November 28, 1936, in New York City.

 She graduated summa cum laude from Swarthmore College in 1958.

 She went on to do advanced work at Radcliffe University receiving a Masters in


clinical psychology in 1960.

 She earned her doctorate in social psychology from Harvard University in 1964.

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 Gilligan began teaching at Harvard in 1967 with renowned psychologist Erik Erikson.

 In 1970 she became a research assistant for Lawrence Kohlberg.

 Kohlberg is known for his research on moral development and his stage theory of moral
development, justice and rights.

 Gilligan's primary focus came to be moral development in girls. Her interest in these
dilemmas grew as she interviewed young men thinking about enlisting for the Vietnam
War and women who were contemplating abortions.

Theory Background

• While teaching at Harvard in 1968, Gilligan worked with Erik Erikson and Lawrence
Kohlberg, two of the leading theorists in mainstream psychology.

• She criticized both Erikson’s theory of identity due to it reflecting his own life, and
Kohlberg’s ideas about moral dilemmas which mirrored his own experiences and were
ultimately biased against women.

• She found that Kohlberg's investigations concluded that women scored lower and less
developed than that of men. Her research found that neither theory represented women's
identity and experience (Medea, 2009).

• Gilligan noticed that approximately fifteen of the twenty-five women who signed up for
Kohlberg’s class on moral development dropped.

• Only about five out of fifty men that enrolled were left. Gilligan found that women in the
class posed difficult questions of human suffering that could not be adequately addressed by
moral theories.

• Her first paper about moral development,“In a Different Voice—Women’s Conceptions of


Self and Morality,” included interview notes from the women who left the class about their
moral perspective (Hekman, 1997).

• Her research reflected that women’s development was set within the context of caring and
relationships, rather than in compliance with an abstract set of rights or rules (Young, 1999).

She asked four questions about women's voices:

• who is speaking?

• what body?

• what story?

• what cultural framework is the story presented?

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• Gilligan found that a morality of care can serve in place of the morality of justice and rights
earlier theorized by Kohlberg. She views morality of care and morality of justice as distinct yet
also connected (Young, 1999). Gilligan would go on to criticize Kohlberg's work. This was
based on two things:

• First, he only studied privileged, white men and boys. She felt that this caused a biased
opinion against women.

• Secondly, in his stage theory of moral development, the male view of individual rights and
rules was considered a higher stage than women's point of view of development in terms of its
caring effect on human relationships.

• She outlines three stages of moral development progressing from selfish, to social or
conventional morality, and finally to post conventional or principled morality.

• Carol Gilligan has been instrumental in research on adolescence, moral development,


women's development and conflict resolution. As a feminist, scholar, professor and author, she
has helped to form a new direction for women.

"Women must learn to deal to their own interests and to the interests of others.” She thinks that
women hesitate to judge because they see the complexities of relationships.

Pre Conventional
-Person only cares for themselves in order to ensure survival
-This is how everyone is as children

In this transitional phase, the person 's attitude is considered selfish, and the person sees the
connection between themselves and others.

Conventional
-Responsibility
-More care shown for other people.

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-Gilligan says this is shown in the role of Mother & Wife


-Situation sometimes carries on to ignoring needs of self.
In this transitional phase, tensions between responsibility of caring for others and caring for
self are faced.

Post Conventional
-Acceptance of the principle of care for self and others is shown.
-Some people never reach this level.

Principles of Ethics

Beauchamp and Childress (2009) developed four Ethical Principles.


■ Respect for Autonomy
■ Beneficence
■ Non-malfeasance
■ Justice

Four fundamental ethical principles (a very simple introduction)

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The Principle of Respect for autonomy


Autonomy is Latin for "self-rule" We have an obligation to respect the autonomy of other
persons, which is to respect the decisions made by other people concerning their own lives.
This is also called the principle of human dignity. It gives us a negative duty not to interfere
with the decisions of competent adults, and a positive duty to empower others for whom we’re
responsible.

Corollary principles: honesty in our dealings with others & obligation to keep promises.

The Principle of Beneficence

We have an obligation to bring about good in all our actions.

Corollary principle? We must take positive steps to prevent harm. However, adopting this
corollary principle frequently places us in direct conflict with respecting the autonomy of other
persons.

The Principle of nonmaleficence

(It is not "non-malfeasance," which is a technical legal term, & it is not "nonmalevolence,"
which means that one did not intend to harm.)

We have an obligation not to harm others: "First, do no harm."

Corollary principle: Where harm cannot be avoided, we are obligated to minimize the harm we
do.

Corollary principle: Don't increase the risk of harm to others.

Corollary principle: It is wrong to waste resources that could be used for good.

Combining beneficence and nonaleficence: Each action must produce more good than harm.

The Principle of justice


We have an obligation to provide others with whatever they are owed or deserve. In public life,
we have an obligation to treat all people equally, fairly, and impartially.
Corollary principle: Impose no unfair burdens.

Combining beneficence and justice: We are obligated to work for the benefit of those who are
unfairly treated.

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Unit - V

Introduction to Cyber Crime

"The modern thief can steal more with a computer than with a gun. Tomorrow's terrorist
may be able to do more damage with a keyboard than with a bomb".

National Research Council, U S A "Computers at Risk”.1991

The first recorded cyber crime took place in the year 1820! That is not surprising considering
the fact that the abacus, which is thought to be the earliest form of a computer, has been around
since 3500 B.C. in India, Japan and China. The era of modern computers, however, began with
the analytical engine of Charles Babbage.

In 1820, JosephMarie Jacquard, a textile manufacturer in France, produced the loom. This
device allowed the repetition of a series of steps in the weaving of special fabrics. This resulted
in a fear amongst Jacquard's employees that their traditional employment and livelihood were
being threatened. They committed acts of sabotage to discourage Jacquard from further use of
the new technology. This is the first recorded cyber crime!

Today computers have come a long way, with neural networks and nanocomputing promising t
o turn every atom in a glass of water into a computer capable of performing a billion
operations per second.

Cyber crime is an evil having its origin in the growing dependence on computers in modern
life. In a day and age when everything from microwave ovens and refrigerators to nuclear
power plants is being run on computers, cyber crime has assumed rather sinister implications.
Major cyber crimes in the recent past include the Citibank rip off. US $ 10 million were
fraudulently transferred out of the bank and into a bank account in Switzerland. A Russian
hacker group led by Vladimir Kevin, a renowned hacker, perpetrated the attack. The group
compromised the bank's security systems.

Vladimir was allegedly using his office computer at AO Saturn, a computer firm in St.
Petersburg, Russia, to break into Citibank computers. He was finally arrested on Heathrow
airport on his way to Switzerland.

Defining Cyber Crime:

At the onset, let us satisfactorily define "cyber crime" and differentiate it from "conventional
Crime". 166 Computer crime can involve criminal activities that are traditional in nature, such
as theft, fraud, forgery, defamation and mischief, all of which are subject to the Indian Penal
Code. The abuse of computers has also given birth to a gamut of new age crimes that are
addressed by the Information Technology Act, 2000.

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Defining cyber crimes, as "acts that are punishable by the Information Technology Act" would
be unsuitable as the Indian Penal Code also covers many cyber crimes, such as email spoofing
and cyber defamation, sending threatening emails etc. A simple yet sturdy definition of cyber
crime would be "unlawful acts wherein the computer is either a tool or a target or both".

Let us examine the acts wherein the computer is a tool for an unlawful act. This kind of
activity usually involves a modification of a conventional crime by using computers.

Cyber security means protecting information, equipment, devices, computer, computer


resource, communication device and information stored therein from unauthorized access, use,
disclosure, disruption, modification or destruction

Classification of cyber crimes:

1. Cybercrime against individual:


 E-Mail spoofing and other online fraud
 Phishing
 Spamming
 Cyberdefamation
 Cyberstalking and harassment
 Computer sabotage
 Pornographic offenses

2. Cybercrime against property:


 Credit card frauds
 Intellectual property crime
 Internet time theft

3. Cybercrime against organization:


 Unauthorized accessing of computer
 Password sniffing
 Denial-of-service attacks
 Virus
 E-Mail bombing
 Salami attack
 Logic bomb
 Trojan horse
 Data diddling
 Industrial spying
 Computer network intrusions
 Software piracy

4. Cybercrime against society:

 Forgery
 Cyberterrorism
 Web jacking

5. Crimes emanating from Usenet newsgroup:

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Usenet group may carry very offensive, harmful, inaccurate or otherwise inappropriate
material or postings that have been misplaced or are deceptive in another way.

Who are cyber Criminals?

Categorized in 3 groups:

Type I: Cybercriminals- hungry for recognition

 Hobby hackers
 IT professionals
 Politically motivated hackers
 Terrorist organizations

Type II: Cybercriminals- not interested in recognition

 Psychological perverts
 Financially motivated hackers
 State-sponsored hacking
 Organized criminals

Type III: cybercriminals- the insiders

 Former employees seeking revenge


 Competing companies using employees to gain economic advantage through damage
and/or theft

Need for Cyber Laws:

There are various reasons why it is extremely difficult for conventional law to cope with
cyberspace. Some of these are discussed below.

1. Cyberspace is an intangible dimension that is impossible to govern and regulate using


conventional law.

2. Cyberspace has complete disrespect for jurisdictional boundaries. A person in India could
break into a bank’s electronic vault hosted on a computer in USA and transfer millions of
Rupees to another bank in Switzerland, all within minutes. All he would need is a laptop
computer and a cell phone.

3. Cyberspace handles gigantic traffic volumes every second. Billions of emails are
crisscrossing the globe even as we read this, millions of websites are being accessed every
minute and billions of dollars are electronically transferred around the world by banks every
day.

4. Cyberspace is absolutely open to participation by all. A ten year-old in Bhutan can have a
live chat session with an eight year-old in Bali without any regard for the distance or the
anonymity between them.

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5. Cyberspace offers enormous potential for anonymity to its members. Readily available
encryption software and steganographic tools that seamlessly hide information within image
and sound files ensure the confidentiality of information exchanged between cyber-citizens.

6. Cyberspace offers never-seen-before economic efficiency. Billions of dollars worth of


software can be traded over the Internet without the need for any government licenses,
shipping and handling charges and without paying any customs duty.

7. Electronic information has become the main object of cyber crime. It is characterized by
extreme mobility, which exceeds by far the mobility of persons, goods or other services.
International computer networks can transfer huge amounts of data around the globe in a
matter of seconds.

8. A software source code worth crores of rupees or a movie can be pirated across the globe
within hours of their release.

9. Theft of corporeal information (e.g. books, papers, CD ROMs, floppy disks) is easily
covered by traditional penal provisions.

However, the problem begins when electronic records are copied quickly, inconspicuously and
often via telecommunication facilities. Here the “original” information, so to say, remains in
the “possession” of the “owner” and yet information gets stolen.

Cyber Law: Cyber Law is the law governing cyber space.

Cyber space includes computers, networks, software's, data storage devices (such as hard
disks, USB disks etc), the Internet, websites, emails and even electronic devices such as cell
phones, ATM machines etc.

Cyber Law Deals with

 Cyber Crimes
 Electronic or Digital Signatures
 Intellectual Property
 Data Protection and Privacy

Need of Cyber Law in Indian context:

Internet has dramatically changed the way we think, the way we govern, the way we do
commerce and the way we perceive ourselves.
Information technology is encompassing all walks of life and all the sectors.
Cyber space creates moral, civil and criminal wrongs. It has now given a new way to
express criminal tendencies.
Cyberspace is open to participation by all and most of them doesn’t know about right or
Wrong?
“IT” has brought Transition from paper to paperless world
The laws of real world cannot be interpreted in the light of emerging cyberspace to
include all aspects relating to different activities in cyberspace
Internet requires an enabling and supportive legal infrastructure in tune with the times

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Information Technology act 2000

Information Technology Act 2000, is to provide legal recognition for transactions carried out
by means of electronic data interchange and other means of electronic communication,
commonly referred to as “electronic commerce”, which involve the use of alternatives to
paper-based methods of communication and storage of information, to facilitate electronic
filing of documents with the Government agencies and further to amend the Indian Penal
Code, the Indian Evidence Act, 1872, the Bankers Books Evidence Act, 1891 and the Reserve
Bank of India Act, 1934 and for matters connected therewith or incidental thereto.

• Information Technology Act 2000, is based on UNCITRAL (United Nations Commission on


International Trade Law) Model Law.

• Information Technology Act 2000, has 13 chapters, 94 sections and 4 schedules.

– First 14 sections deals with some legal aspects concerning digital signature.

– Further other sections deal with certifying authorities who are licensed to issue digital
signature certificate.

– Sections 43 to 47 provide for penalties and compensation.

– Sections 48 to 64 deals with Tribunals a appeal to high court.

– Section 65 to 79 of the act deals with offences.

– Section 80 to 94 deals with miscellaneous of the Act.

OBJECTIVES:

• It shall extend to the whole of India and, save as otherwise provided in this Act, it applies also
to any offence or contravention there under committed outside India by any person.

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

Nothing in this Act shall apply to, —

– a negotiable instrument as defined in section 13 of the Negotiable Instruments Act, 1881;

– a power-of-attorney as defined in section 1A of the Powers-of-Attorney Act, 1882;

– a trust as defined in section 3 of the Indian Trusts Act, 1882;

– a will as defined in clause (h) of section 2 of the Indian Succession Act, 1925 including any
other testamentary disposition by whatever name called;

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– any contract for the sale or conveyance of immovable property or any interest in such
property; – any such class of documents or transactions as may be notified by the Central
Government in the Official Gazette.

SECTIONS OF IT ACT 2000

• Sections 2(d) of the act defines “affixing digital signature” as affixing digital signature, with
its grammatical variations and cognate expressions means adoption of any methodology or
procedure by a person for the purpose of authenticating an electronic record by means of
digital signature.

• Section 2(i) “computer” is defined as any electronic, magnetic, optical or high speed data
proceeding device or systems which performs logical, arithmetic and memory functions by
manipulations of electronic, magnetic or optical impulses and includes all input, output,
proceedings, storage, computer software or communication facilities which are concerned or
related to the computer in a computer system or computer network.

• Section 2(zc) defines private key as the key of a key pair used to create a digital signature.

• Section 2(zd) defines public key as the key of a key pair used to verify a digital signature and
listed in Digital Signature Certificate.

SECTION 5

• Section 5 of the Act gives legal recognition to digital signatures.

• Where any law provides that information or any other matter shall be authenticated by
affixing the signature or any document shall be signed or bear the signature of any person then,
notwithstanding anything contained in such law, such requirement shall be deemed to have
been satisfied, if such information or matter is authenticated by means of digital signature
affixed in such manner as may be prescribed by the Central Government.

SECTION 15 SECURE DIGITAL SIGNATURE

• If, by application of a security procedure agreed to by the parties concerned, it can be verified
that a digital signature, at the time it was affixed, was

– unique to the subscriber affixing it;

– capable of identifying such subscriber;

– created in a manner or using a means under the exclusive control of the subscriber and is
linked to the electronic record to which it relates in such a manner that if the electronic record
was altered the digital signature would be invalidated,

• then such digital signature shall be deemed to be a secure digital signature.

SECTION 43 PENALTY FOR DAMAGE TO COMPUTER

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• If any person without permission of the owner or any other person who is incharge of a
computer, computer system or computer network, —

– accesses or secures access to such computer, computer system or computer network;

– downloads, copies or extracts any data, computer data base or information from such
computer, computer system or computer network including information or data held or stored
in any removable storage medium;

– introduces or causes to be introduced any computer contaminant or computer virus into any
computer, computer system or computer network;

– damages or causes to be damaged any computer, computer system or computer network,


data, computer data base or any other programmes residing in such computer, computer system
or computer network;

– disrupts or causes disruption of any computer, computer system or computer network;

– denies or causes the denial of access to any person authorised to access any computer,
computer system or computer network by any means;

– provides any assistance to any person to facilitate access to a computer, computer system or
computer network in contravention of the provisions of this Act, rules or regulations made
there under;

– charges the services availed of by a person to the account of another person by tampering
with or manipulating any computer, computer system, or computer network,

• he shall be liable to pay damages by way of compensation not exceeding one crore rupees to
the person so affected.

SECTION 61 CIVIL COURT NOT TO HAVE JURISDICTION

No court shall have jurisdiction to entertain any suit or proceeding in respect of any matter
which an adjudicating officer appointed under this Act or the Cyber Appellate Tribunal
constituted under this Act is empowered by or under this Act to determine and no injunction
shall be granted by any court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under this Act.

SECTION 62 APPEAL TO HIGH COURT.

• Any person aggrieved by any decision or order of the Cyber Appellate Tribunal may file an
appeal to the High Court within sixty days from the date of communication of the decision or
order of the Cyber Appellate Tribunal to him on any question of fact or law arising out of such
order

• Provided that the High Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding sixty days.

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SECTION 63 COMPOUNDING OF CONTRAVENTIONS

It states that any contraventions under this Act either before or after the institution of
adjudication proceedings, be compounded by the Controller or such other officer as may be
specially authorised by him in this behalf or by the adjudicating officer, as the case may be,
subject to such conditions as the Controller or such other officer or the adjudicating officer
may impose.

SECTION 64 RECOVERY OF PENALTY

A penalty imposed under this Act, if it is not paid, shall be recovered as an arrear of land
revenue and the licence or the Digital Signature Certificate, as the case may be, shall be
suspended till the penalty is paid.

SECTION 65 TAMPERING WITH COMPUTER SOURCE DOCUMENTS

Whoever knowingly or intentionally conceals, destroys or alters or intentionally or knowingly


causes another to conceal, destroy or alter any computer source code used for a computer,
computer programme, computer system or computer network, when the computer source code
is required to be kept or maintained by law for the time being in force, shall be punishable with
imprisonment up to three years, or with fine which may extend up to two lakh rupees, or with
both.

SECTION 66 HACKING WITH COMPUTER SYSTEM

• Whoever with the intent to cause or knowing that he is likely to cause wrongful loss or
damage to the public or any person destroys or deletes or alters any information residing in a
computer resource or diminishes its value or utility or affects it injuriously by any means,
commits hack:

• Whoever commits hacking shall be punished with imprisonment up to three years, or with
fine which may extend upto two lakh rupees, or with both.

SECTION 67 PUBLISHING OF OBSCENE INFORMATION

• Whoever publishes or transmits or causes to be published in the electronic form, any material
which is lascivious or appeals to the prurient interest or if its effect is such as to tend to
deprave and corrupt persons who are likely, having regard to all relevant circumstances, to
read, see or hear the matter contained or embodied in it, shall be punished on first conviction
with imprisonment of either description for a term which may extend to five years and with
fine which may extend to one lakh rupees and in the event of a second or subsequent
conviction with imprisonment of either description for a term which may extend to ten years
and also with fine which may extend to two lakh rupees.

SECTION 71 PENALTY FOR MISREPRESENTATION• Whoever makes any


misrepresentation to, or suppresses any material fact from, the Controller or the Certifying
Authority for obtaining any licence or Digital Signature Certificate, as the case may be, shall

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be punished with imprisonment for a term which may extend to two years, or with fine which
may extend to one lakh rupees, or with both.

SECTION 72 PENALTY FOR BREACH OF PRIVACY

Save as otherwise provided in this Act or any other law for the time being in force, any person
who, in pursuance of any of the powers conferred under this Act, rules or regulations made
there under, has secured access to any electronic record, book, register, correspondence,
information, document or other material without the consent of the person concerned is closes
such electronic record, book, register, correspondence, information, document or other material
to any other person shall be punished with imprisonment for a term which may extend to two
years, or with fine which may extend to one lakh rupees, or with both.

SECTION 73 - PENALTY FOR PUBLISHING FALSE DIGITAL SIGNATURE


CERTIFICATE

No person shall publish a Digital Signature Certificate or otherwise make it available to any
other person with the knowledge that—

– the Certifying Authority listed in the certificate has not issued it; or

– the subscriber listed in the certificate has not accepted it; or

– the certificate has been revoked or suspended,

• unless such publication is for the purpose of verifying a digital signature created prior to such
suspension or revocation.

• Any person who contravenes the provisions of sub-section (1) shall be punished with
imprisonment for a term which may extend to two years, or with fine which may extend to one
lakh rupees, or with both.

SECTION 74 PUBLICATION FOR FRAUDULENT PURPOSE

Whoever knowingly creates, publishes or otherwise makes available a Digital Signature


Certificate for any fraudulent or unlawful purpose shall be punished with imprisonment for a
term which may extend to two years, or with fine which may extend to one lakh rupees, or
with both.

SECTION 75 - ACT TO APPLY FOR OFFENCE OR CONTRAVENTION COMMITTED


OUTSIDE INDIA

• Subject to the provisions of sub-section (2), the provisions of this Act shall apply also to any
offence or contravention committed outside India by any person irrespective of his nationality.

• For the purposes of sub-section (1), this Act shall apply to an offence or contravention
committed outside India by any person if the act or conduct constituting the offence or
contravention involves a computer, computer system or computer network located in India.

THE CYBER REGULATIONS APPELLATE TRIBUNAL

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• Cyber Appellate Tribunal are created to regulate and supervise the Certifying Authorities who
issue Digital Signature certificates.

• Cyber Appellate Tribunal provide for appeal by person aggrieved against an order made by
the Adjudicating Officer under the Information Technology Act.

• Section 48 to 64 of Information Technology Act 2000 contains provisions relating to Cyber


Appellate Tribunal.

SECTION 48 ESTABLISHMENT OF CYBER APPELLATE TRIBUNAL

• The Central Government shall, by notification, establish one or more appellate tribunals to be
known as the Cyber Regulations Appellate Tribunal.

• The Central Government shall also specify, in the notification referred to in subsection(1), the
matters and places in relation to which the Cyber Appellate Tribunal may exercise jurisdiction.

SECTION 49 COMPOSITION OF CYBER APPELLATE TRIBUNAL

• A Cyber Appellate Tribunal shall consist of one person only (hereinafter referred to as the
Residing Officer of the Cyber Appellate Tribunal) to be appointed, by notification, by the
Central Government

SECTION 50 - QUALIFICATIONS FOR APPOINTMENT AS PRESIDING OFFICER

• A person shall not be qualified for appointment as the Presiding Officer of a Cyber Appellate
Tribunal unless he—

– is, or has been. or is qualified to be, a Judge of a High Court; or

– is or has been a member of the Indian Legal Service and is holding or has held a post in
Grade I of that Service for at least three years.

SECTION 51 - TERM OF OFFICE

• The Presiding Officer of a Cyber Appellate Tribunal shall hold office for a term of five years
from the date on which he enters upon his office or until he attains the age of sixty- five years,
whichever is earlier.

SECTION 52 - SALARY, ALLOWANCES AND OTHER TERMS AND CONDITIONS OF


PRESIDING OFFICER

• The salary and allowances payable to, and the other terms and conditions of service including
pension, gratuity and other retirement benefits of. the Presiding Officer of a Cyber Appellate
Tribunal shall be such as may be prescribed:

• Provided that neither the salary and allowances nor the other terms and conditions of service
of the Presiding Officer shall be varied to his disadvantage after appointment.

SERVICE 53 - FILLING UP OF VACANCIES

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• If, for reason other than temporary absence, any vacancy occurs in the office n the Presiding
Officer of a Cyber Appellate Tribunal, then the Central Government shall appoint another
person in accordance with the provisions of this Act to fill the vacancy and the proceedings
may be continued before the Cyber Appellate Tribunal from the stage at which the vacancy is
filled.

SECTION 54 – RESIGNATION AND REMOVAL

• The Presiding Officer of a Cyber Appellate Tribunal may, by notice in writing under his hand
addressed to the Central Government, resign his office:

– Provided that the said Presiding Officer shall, unless he is permitted by the Central
Government to relinquish his office sooner, continue to hold office until the expiry of three
months from the date of receipt of such notice or until a person duly appointed as his successor
enters upon his office or until the expiry of his term of office, whichever is the earliest.

• The Presiding Officer of a Cyber Appellate Tribunal shall not be removed from his office
except by an order by the Central Government on the ground of proved misbehaviour or
incapacity after an inquiry made by a Judge of the Supreme Court in which the Presiding
Officer concerned has been informed of the charges against him and given a reasonable
opportunity of being heard in respect of these charges.

• The Central Government may, by rules, regulate the procedure for the investigation of
misbehaviour or incapacity of the aforesaid Presiding Officer.

SECTION 55 ORDERS CONSTITUTING TRIBUNAL TO BE FINAL AND NOT TO


INVALIDATE ITS PROCEEDINGS

• No order of the Central Government appointing any person as the Presiding Officer of a
Cyber Appellate Tribunal shall be called in question in any manner and no act or proceeding
before a Cyber Appellate Tribunal shall be called in question in any manner on the ground
merely of any defect in the constitution of a Cyber Appellate Tribunal.

SECTION 56 STAFF OF THE CYBER APPELLATE TRIBUNAL

• The Central Government shall provide the Cyber Appellate Tribunal with such officers and
employees as that Government may think fit

• The officers and employees of the Cyber Appellate Tribunal shall discharge their functions
under general superintendence of the Presiding Officer.

• The salaries, allowances and other conditions of service of the officers and employees or’ the
Cyber Appellate Tribunal shall be such as may be prescribed by the Central Government.

SECTION 57 APPEAL CYBER APPELLATE TRIBUNAL

• Save as provided in sub-section (2), any person aggrieved by an order made by Controller or
an adjudicating officer under this Act may prefer an appeal to a Cyber Appellate Tribunal
having jurisdiction in the matter.

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• No appeal shall lie to the Cyber Appellate Tribunal from an order made by an adjudicating
officer with the consent of the parties.

• Every appeal under sub-section (1) shall be filed within a period of only-five days from the
date on which a copy of the order made by the Controller or the adjudicating officer is received
by the person aggrieved and it shall be in such form and be accompanied by such fee as may be
prescribed: – Provided that the Cyber Appellate Tribunal may entertain an appeal after the
expiry of the said period of only-five days if it is satisfied that there was sufficient cause or not
filing it within that period.

• On receipt of an appeal under sub-section (1), the Cyber Appellate Tribunal may, after giving
the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit,
confirming, modifying or setting aside the order appealed against.

• The Cyber Appellate Tribunal shall send a copy of every order made by it to" the parties to
the appeal and to the concerned Controller or adjudicating officer.

• The appeal filed before the Cyber Appellate Tribunal under sub-section (1) shall be dealt with
by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal
finally within six months from the date of receipt of the appeal.

SECTION 58 PROCEDURE AND POWERS OF THE CYBER TRIBUNAL

• The Cyber Appellate Tribunal shall not be bound by the procedure laid down by the Code of
civil Procedure, 1908 but shall be guided by the principles of natural justice and, subject to the
other provisions of this Act and of any rules, the Cyber Appellate Tribunal shall have powers to
regulate its own procedure including the place at which it shall have its sittings.

• The Cyber Appellate Tribunal shall have, for the purposes of discharging its functions under
this Act, the same powers as are vested in a civil court under the Code of Civil Procedure,
1908, while trying a suit, in respect of the following matters, namely:—

– summoning and enforcing the attendance of any person and examining him on oath;

– requiring the discovery and production of documents or other electronic records;

– receiving evidence on affidavits;

– issuing commissions for the examination of witnesses or documents;

– reviewing its decisions;

– dismissing an application for default or deciding it ex pane;

– any other matter which may be prescribed.

• Every proceeding before the Cyber Appellate Tribunal shall be deemed to be a judicial
proceeding within the meaning of sections 193 and 228, and for the purposes of section 196 of
the Indian Penal Code and the Cyber Appellate Tribunal shall be deemed to be a civil court for
the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973.

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SECTION 59 – RIGHT TO LEGAL REPRESENTATION

• The appellant may either appear in person or authorise one or more legal practitioners or any
of its officers to present his or its case before the Cyber Appellate Tribunal.

SECTION 60 – LIMITATION

• The provisions of the Limitation Act, 1963, shall, as far as may be, apply to an appeal made
to the Cyber Appellate Tribunal.

SECTION 61 CIVIL COURT NOT TO HAVE JURISDICTION

• No court shall have jurisdiction to entertain any suit or proceeding in respect of any matter
which an adjudicating officer appointed under this Act or the Cyber Appellate Tribunal
constituted under this Act is empowered by or under this Act to determine and no injunction
shall be granted by any court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under this Act.

SECTION 62 – APPEAL TO HIGH COURT

• Any person aggrieved by any decision or order of the Cyber Appellate Tribunal may file an
appeal to the High Court within sixty days from the date of communication of the decision or
order of the Cyber Appellate Tribunal to him on any question of fact or law arising out of such
order

• Provided that the High Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding sixty days.

SECTION 63 COMPOUNDING OF CONTRAVENTIONS

• Any contravention under this Chapter may, either before or after the institution of
adjudication proceedings, be compounded by the Controller or such other officer as may be
specially authorised by him in this behalf or by the adjudicating officer, as the case may be,
subject to such conditions as the Controller or such other officer or the adjudicating officer
may specify:

– Provided that such sum shall not, in any case, exceed the maximum amount of the penalty
which may be imposed under this Act for the contravention so compounded.

• Nothing in sub-section (1) shall apply to a person who commits the same or similar
contravention within a period of three years from the date on which the first contravention,
committed by him, was compounded.

• Where any contravention has been compounded under sub-section (1), no proceeding or
further proceeding, as the case may be, shall be taken against the person guilty of such
contravention in respect of the contravention so compounded.

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SECTION 64 – RECOVERY OF PENALTY

• A penalty imposed under this Act, if it is not paid, shall be recovered as an arrear of land
revenue and the licence or the Digital Signature Certificate, as the case may be, shall be
suspended till the penalty is paid.

CASE STUDY – 1 State Of Tamil Nadu v/s Suhas Katti Conviction Within 7 Months

• The case related to posting of obscene, defamatory and annoying message about a divorcee
woman in the yahoo message group. E-Mails were also forwarded to the victim for information
by the accused through a false e-mail account opened by him in the name of the victim. The
posting of the message resulted in annoying phone calls to the lady in the belief that she was
soliciting.

• The accused was a known family friend of the victim and was reportedly interested in
marrying her. She however married another person. This marriage later ended in divorce and
the accused started contacting her once again. On her reluctance to marry him, the accused
took up the harassment through the Internet.

• The accused is found guilty and convicted for offences under section 469, 509 IPC and 67 of
IT Act 2000 . This is considered as the first case convicted under section 67 of Information
Technology Act 2000 in India.

• “ The accused is found guilty of offences under section 469, 509 IPC and 67 of IT Act 2000
and the accused is convicted and is sentenced for the offence to undergo RI for 2 years under
469 IPC and to pay fine of Rs.500/-and for the offence u/s 509 IPC sentenced to undergo 1
year Simple imprisonment and to pay fine of Rs.500/- and for the offence u/s 67 of IT Act 2000
to undergo RI for 2 years and to pay fine of Rs.4000/- All sentences to run concurrently.”

• The accused paid fine amount and he was lodged at Central Prison, Chennai. This is
considered as the first case convicted under section 67 of Information Technology Act 2000 in
India.

CASE STUDY – 2 Forgery - Andhra Pradesh Tax Case

• In the explanation of the Rs. 22 Crore which was recovered from the house of the owner of a
plastic firm by the sleuths of vigilance department, the accused person submitted 6000
vouchers to legitimize the amount recovered, but after careful scrutiny of vouchers and
contents of his computers it revealed that all of them were made after the raids were
conducted . All vouchers were fake computerized vouchers.

CASE STUDY – 3 Cyber Stalking

• Ritu Kohli (first lady to register the cyber stalking case) is a victim of cyber-stalking. A friend
of her husband gave her phone number and name on a chat site for immoral purposes. A
computer expert, Kohli was able to trace the culprit. Now, the latter is being tried for
"outraging the modesty of a woman", under Section 509 of IPC.

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CASE STUDY – 4 Extortion of Money Through Internet

• The complainant has received a threatening email and demanded protection from unknown
person claiming to be the member of Halala Gang, Dubai. Police registered a case u/s.
384/506/511 IPC.

• The sender of the email used the email ID xyz@yahoo.com & abc@yahoo.com and signed as
Chengez Babar.

• Both the email accounts were tracked, details collected from ISP’s & locations were
identified.• The Cyber cafes from which the emails has been made were monitored and the
accused person was nabbed red handed.

CASE STUDY – 5 Fir No. 76/02 PS Parliament Street• Mrs. Sonia Gandhi received
threatening e-mails:

• E - mail from

• missonrevenge84@khalsa.com

• missionrevenge84@hotmail.com

• The case was referred to Cyber Cell

• Accused was traces and found that he had lost his parents during 1984 riots

EMERGING TRENDS & CHALLENGES IN CYBER LAW

Cyber law is likely to experience various emerging trends with the increased usage of digital
technology. The various emerging trends include

A. CHALLENGES IN MOBILE LAWS

B. LEGAL ISSUES OF CYBER SECURITY

C. CLOUD COMPUTING & LAW

D. SOCIAL MEDIA & LEGAL PROBLEMS

E. SPAM LAWS

A. CHALLENGES IN MOBILE LAWS

Today, there are lots of activities in the mobile ecosystem. The increasing competition has
introduced new models of mobile phones, personal digital assistors (pda), tablets and other
communication devices in the global market. The intensive use of mobile devices has widened
the mobile ecosystem and the content generated is likely to pose new challenges for cyber legal
jurisprudence across the world.

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There are no dedicated laws dealing with the use of these new communication devices and
mobile platforms in a number of jurisdictions across the world as the usage of mobile devices
for input and output activities is increasing day by day. With the increasing mobile crimes,
there is an increasing necessity to meet the legal challenges emerging with the use of mobile
devices and ensure mobile protection and privacy.

B. LEGAL ISSUES OF CYBER SECURITY

The other emerging cyber law trend is the need for enacting appropriate legal frameworks for
preserving, promoting and enhancing cyber security. The cyber security incidents and the
attacks on networks are increasing rampantly leading to breaches of cyber security which is
likely to have serious impact on the nation.

However, the challenge before a lawmaker is not only to develop appropriate legal regimes
enabling protection and preservation of cyber security, but also to instill a culture of cyber
security amongst the net users.

The renewed focus and emphasis is to set forth effective mandatory provisions which would
help the protection, preservation and promotion of cyber security in use of computers, allied
resources and communication devices.

C. CLOUD COMPUTING AND LAW

With the growth in internet technology, the word is moving towards cloud computing. The
cloud computing brings new challenges to the law makers. The distinct challenges may include
data security, data privacy, jurisdiction and other legal issues. There pressure on the cyber
legislators and stakeholders would be to provide appropriate legal framework that could
benefit the industry and enable effective remedies in the event of cloud computing incidents.

D. SOCIAL MEDIA & LEGAL PROBLEMS

The social media is beginning to have social and legal impact in the recent times raising
significant legal issues and challenges. A latest study indicates the social networking sites
responsible for various problems. Since the law enforcement agencies, intelligence agencies
target the social media sites; they are the preferred repository of all data.

The inappropriate use of social media is giving rise to crimes like cyber harassments, cyber
stalking, identity theft etc. The privacy in social media is going to be undermined to a great
extent despite the efforts by relevant stake holders. The challenge to the cyber legislators
would be to effectively regulate the misuse of social media and provide remedies to the victims
of social media crimes.

Social Media Litigations are also likely to increase concerning the association or nexus with
the output of social media. The litigations regarding defamation, matrimonial actions are
popularly increasing and with the data, information resident on social media networking there
is an emerging trend of various other litigations in the coming years.

E. SPAM LAWS

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There is considerable growth of spam in emails and mobiles. Many countries have already
become hot spots for generating spam. As the number of internet and mobile users increase the
spammers make use of innovative methods to target the digital users. It is therefore necessary
to have effective legislative provisions to deal with the menace of spam.

CASE STUDIES

i. Two managers of Chennai based Radiant Software a Computer Education Company were
arrested for an alleged violation of the licensing terms of Software. The top management team
had to obtain anticipatory bail to avoid arrests until a compromise was worked out.

ii. Napster, a very successful E-Venture was hauled to the Court and beaten to death for having
caused violation of Copyright of music companies. Despite willing customers and working
technology, the business of the Company had to be shelved under an enormous loss to the
promoters.

iii. There are many websites in India which could be held to be infringing the Patent rights of
somebody abroad and asked to shut down or pay compensation putting an end to their
entrepreneurial dreams.

These are some of the trends in Cyber Law which are based on the analysis of emerging cyber
law jurisprudence. With the growing pace of technology, it may not possible to overrule any
new trend in the technology which might have direct or indirect impact on Cyber Law.

There may be various interesting and important challenging threats emerging in the
jurisprudence of cyber law.

Cyber crime scenario in India

India is trying to implement the Digital India project to the best of its capabilities. The success
of Digital India project would depend upon maximum connectivity with minimum cyber
security risks. This is also a problem for India as India has a poor track record of cyber
security. According to Home Ministry statistics, as many as 71,780 cyber frauds were reported
in 2013, while 22,060 such cases were reported in 2012. There have been 62,189 incidents of
cyber frauds till June 2014.

In 2013, a total of 28,481 Indian websites were hacked by various hacker groups spread across
the globe. The numbers of hacking incidents were 27,605 in 2012 and 21,699 in 2011. As per
the cyber-crime data maintained by National Cyber Records Bureau, a total of 1,791, 2,876 and
4,356 cases were registered under the Information Technology Act in 2011, 2012 and 2013,
respectively. A total of 422, 601 and 1,337 cases were registered under cyber-crime related
sections of the Indian Penal Code in 2011, 2012 and 2013, respectively.

There has been an annual increase of more than 40 per cent in cyber-crime cases registered in
the country during the past two-three years. According National Crime Records Bureau

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(NCRB), a total of 288, 420, 966, 1,791 and 2,876 cyber-crime cases were registered under IT
Act during 2008, 2009, 2010, 2011 and 2012, respectively.

As per the information reported to and tracked by Indian Computer Response Team (CERT-In),
a total number of 308, 371 and 78 government websites were hacked during the years 2011,
2012 and 2013 respectively and 16,035 incidents related to spam, malware infection and
system break-in were reported in 2013.

Cyber crimes reported in India rose 19 times over the last ten years (2005 to 2014), from 481
in 2005 to 9,622 in 2014, and India is now ranked third – after the US and China – as a source
of “malicious activity” on the Internet and second as a source of “malicious code”.

Arrests involving cyber crimes also rose nine times from 569 in 2005 to 5,752 in 2014,
according to National Crime Records Bureau (NCRB) data, even as more Indians logged on to
the Internet. Internet subscribers in India crossed the 400 million mark, and are expected to
reach 462 million by June 2016.

Maharashtra reported the most cyber crimes (1,879) in 2014, double the cases (907) of the
previous year. Uttar Pradesh was second (1,737), followed by Karnataka (1,020), Telangana
(703) and Rajasthan (697). The top five states accounted for 63% of all cases in 2014.

As many as 5,752 people were arrested for cyber crimes in 2014, of which 5,744 were Indians
and eight foreigners. As many as 95 persons were convicted and 276 acquitted for cyber crimes
in 2014.

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Issues and Challenges of cyber crimes

Endless discussion is there regarding the pros and cons of cyber crime. There are many
challenges in front of us to fight against the cyber crime. Some of them here are discussed
below:

A. Lack of awareness and the culture of cyber security, at individual as well as organizational
level.

B. Lack of trained and qualified manpower to implement the counter measures.

C. No e-mail account policy especially for the defense forces, police and the security agency
personnel.

D. Cyber attacks have come not only from terrorists but also from neighboring countries
contrary to our National interests.

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E. The minimum necessary eligibility to join the police doesn’t include any knowledge of
computers sector so that they are almost illiterate to cyber-crime.

F. The speed of cyber technology changes always beats the progress of govt. sector so that they
are not able to identify the origin of these cybercrimes.

G. Promotion of Research & Development in ICTs is not up to the mark.

H. Security forces and Law enforcement personnel are not equipped to address high-tech
crimes.

I. Present protocols are not self sufficient, which identifies the investigative responsibility for
crimes that stretch internationally.

J. Budgets for security purpose by the government especially for the training of law
enforcement, security personnel’s and investigators in ICT are less as compare to other crimes.

MEASURES TO PREVENT CYBER CRIME

There is a famous saying-Prevention is always better than cure. It is always better to take
certain preventive measures while working on internet. One should make it a habit of doing
this. Sailesh Kumar Zarkar, technical advisor and network security consultant to the Mumbai
Police Cyber crime Cell, ha given the 5P strategy for cyber security:

Precaution, Prevention, Protection, Preservation and Perseverance. A cyber user should keep in
mind the following things-

1. To prevent cyber stalking one should avoid disclosing any personal information.

2. Always avoid sending any pictures or videos online particularly to unknown people and
online friends as therehave been many incidents of misuse of the personal pictures, videos etc.

3. Always use latest and updated anti virus software to guard against virus attacks.

4. Always keep back up volumes to avoid loss of data in case of virus attacks.

5. Never send your credit card details such as card number to any unsecured, to guard against
frauds.

6. Always keep a watch on the sites that your children are accessing to prevent any kind of
harassment or depravation in children.

7. It is better to use a security programme that gives control over the cookies and send
information back to the site as leaving the cookies unguarded might prove fatal.

8. Web site owners should watch traffic and check any irregularity on the site. Putting host-
based intrusion detection devices on servers may do this.

9. Use of firewalls may be beneficial.

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10. Web servers running public sites must be physically separate protected from internal
corporate network.

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