Business law- Assignment 1

A1) Introduction:
As per Indian Contact Act 1872 “A contract is an accepted proposal (agreement) that is fully
understood by the law and is legally defined or enforceable by the law. So a contract is a legal
document that bestows upon the parties special rights (defined by the contract itself) and also
obligations which are introduced, defined and agreed upon by all the parties of the contract.”

The Contracts or agreements between various parties are framed and validated by the Indian
Contract Act. Contract Act is one of the most central laws that regulates and oversees all the
business wherever a deal or an agreement is to be reached at.

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement
enforceable by law”. In other words, we can say that a contract is anything that is an agreement and
enforceable by the law of the land.

This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in order to
understand a contract in the light of The Indian Contract Act, 1872 we need to define and explain
these two pivots in the definition of a contract.

Agreement
The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act
defines the term agreement as “every promise and every set of promises, forming the consideration
for each other”. Now that we know how the Act defines the term “agreement”, there may be some
ambiguity in the definition of the term promise.

Promise
This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise” here
as: “when the person to whom the proposal is made signifies his assent thereto, the proposal is said
to be accepted. Proposal when accepted, becomes a promise”.

In other words, an agreement is an accepted promise, accepted by all the parties involved in the
agreement or affected by it. This definition thus introduces a flow chart or a sequence of steps that
need to be triggered in order to establish or draft a contract. The steps may be described as under:
The definition requires a person to whom a certain proposal is made.
The person (parties) in step one have to be in a position to fully understand all the aspects of a
proposal.“signifies his assent thereto” – means that the person in point one accepts or agrees with
the proposal after having fully understood it.

Once the “person” accepts the proposal, the status of the proposal changes to “accepted proposal”.
“accepted proposal” becomes a promise. Note that the proposal is not a promise. For the proposal to
become a promise, it has to be accepted first.
Thus, in other words, an agreement is obtained from a proposal once the proposal, made by one or
more of the participants affected by the proposal, is accepted by all the parties addressed by the
agreement. To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

Enforceable By Law
Now let us try to understand this aspect of the definition as is present in the Act. Suppose you agree
to sell a unicorn for ten magic beans with a friend. Can you have a contract for this? Well if you follow
the steps in the previous section, you will argue that once you and your friend agree on the promise, it
becomes an agreement. But in order to be a contract as per the definition of the Act, the agreement
has to be legally enforceable.
Thus we can say that for an agreement to change into a Contract as per the Act, it must give rise to
or lead to legal obligations or in other words must be within the scope of the law. Thus we can
summarize it as Contract = Accepted Proposal (Agreement) + Enforceable by law (defined
within the law)

Types of Contracts On the basis of Validity:

Valid: The Contracts which are enforceable in a court of law are called Valid Contracts. To attain
Validity the Contract should have certain features like consensus ad idem, Certainty, free consent,
two directional consideration, fulfillment of legal formalities, legal obligations, lawful object, capacity of
parties, possibility of performance, etc.

All agreements are contracts 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 hereby expressly declared to
be void. Thus, an agreement becomes a valid contract if it has the following elements.

1) Proper offer and its proper acceptance

2) Intention to create legal relationship
3) Free consent
4) Capacity of parties to contract
5) Lawful consideration
6) Lawful object
7) Agreement not expressly declared void
8) Certainty of meaning
9) Possibility of performance
10) Legal formalities

1) Proper offer and proper acceptance: In order to create a valid contract, it is necessary that
there must be at least two parties, one making the offer and the other accepting it. The law has
prescribed certain rules for making the offer and its acceptance that must be satisfied while
entering into an agreement. For example, the offer must be definite and duly communicated to
the other party. Similarly, the acceptance must be unconditional and communicated to the
offerer in the prescribe mode, and so on. Unless such conditions with regard to the offer and
the acceptance are satisfied the agreement does not become enforceable.

2) Intention to create legal relationship: There must be an intention among the parties to create
a legal relationship, If an agreement is not capable of creating a legal obligation it is not a
 contract. In case of social or domestic agreements, generally there is no intension to create
legal relationship. For example, in an invitation to dinner there is no intention to create legal
relationship and therefore, is not a contract. Similarly, certain agreements between husband
and wife do not become contracts because there is no intention to create legal relationship.

3) Free consent: For a contract to be valid, it is essential that there must be free and genuine
consent of the parties to the contract. They must have made the contract of their own free will
and not under any fear or pressure.

4) Capacity of parties: The parties to an agreement must be competent to contract i.e., they
must be capable of entering into a contract. If any party to the contract is not competent to
contract, the contract is not valid.

5) Lawful consideration: An agreement must be supported by cohsideration, Consideration

means something in return. It is also defined as the price paid by one party to buy the promise
of the other. However, this price need not v always be in terms of money. For' example, A
agrees to sell his book to B for Rs. 20. Here the consideration for A is Rs. 20, and for B it is the
book.

6) Lawful object: The object of an agreement must be lawful. An agreement made for any act
which is prohibited by law will not be valid. For example, if A rents out a house for use as a
gambling den, the agreement is void because the object of the agreement is unlawful.

7) Agreement not expressly declared void: The agreement must not have been expressly
declared void under Contract Act.

8) Certainty of meaning: To make a valid contract it is absolutely essential thnt its terms must
be clear and not vague or uncertain. For example, A agreed to sell 100 tonnes of oil to B. Here
it is not clear what kind of oil is intended to be sold. Therefore, this agreement is not valid on
the ground of uncertainty. If, however, the meaning of the agreement could be made certain
from the circumstances of the case, it will be treated as a valid contract. In the example given
above if we know that A and B are dealers in mustard oil only, then the agreement shall.be
enforceable because the meaning of the agreement could be easily ascertained from the
circumstances of the case.

9) Possibility of performance: The terms of the agreement must also be such as are capable of
performance. If the act is impossible of performance, physically or legally, the agreement
cannot be enforced by law. The reasoning is very simple. We make an agreement with a view
to perform it and if the performance is not possible, what is the fun of making such
agreements? For example, A promises to B that he will enclose some area between two
parallel lines or that he will run at a speed of 200 kms. per hour or that he will bring gold from
the sun. All these acts are such which are impossible of performance and therefore the
agreement is not treated as valid.

10) Legal formalities: The Contract Act does not require that a contract must be in writing to be
valid. But, in some cases the Act has specified that the agreement must be made in writing.
 For example, a promise to pay a time barred debt must be in writing and an agreement for a
sale of immovable property must be in writing and registered under the Transfer of Property
Act, 1882. In such a situation, the agreement must comply with the necessary formalities as to
writing, registration, etc. If these legal formalities are not carried out, then the contract is not
enforceable by law.

Void Contracts:

Void contracts are those which are not contracts at all. They are destitute of any legal effect.
They cannot be brought in a court of law for any action. Examples are gaming and wagering
contracts. These are not necessarily illegal contracts. It should be remembered that all illegal
contracts are void, but all void contracts are not necessarily illegal in insurance contracts. An
example of void contract may be affecting an insurance policy by concealment or fraudulent
misrepresentation or an insurance contract not supported by insurable interest.

In void contract, no party can claim any damages for the non-performance of the contract. On
the other hand, the aggrieved party can claim damages for any loss sustained.

A void contract is not a contract and has no effect in a court of law and cannot be enforced in a
court of law. Most commonly, a void contract will be missing one or all of the essential
elements needed for a valid contract. Neither party needs to take action to terminate it, since it
was never a contract to begin with.

Voidable Contracts:

A Contract which is deficient in only free consent, is called Voidable Contract. That
means it is a Contract which is made under certain pressure either physical or mental. At the
option of suffering party, a voidable contract may become either Valid or Void in future. For
example: there is a Contract between A and B where B has forcibly made A involved in the
Contract. It is voidable at the option of A.

Voidable contracts are those where minor breaches exist, e.g., breach of the duty of utmost
good faith. In such circumstances it is the option of the aggrieved party to decide whether the
contract is to be treated as valid. If the aggrieved party so decides then the contract becomes a
good valid enforceable contract. If the decision is otherwise, then the contract becomes void.
Therefore, it can be said that a voidable contract shall remain valid until it is declared void by
the party who has suffered as a result of the breach.

A2) Introduction:
The Companies Act 1956 is administered by the Government of India through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, etc. The Act is 658 sections long. The
Act contains provisions about Companies, directors of the companies, memorandum and
articles of associations, etc. This act states and discusses every single provision requires or
may need to govern a company. It mentions what type on companies their differences,
 constitution, management, members , capital, how should the shares should be issues,
debentures, registration of charge, at the end of the act it concludes the about winding up of a
company, discussing the situations a company needs to be winded up. The ways it should be
done by volunteer or through courts.

An Overview of Companies Act 1956:

Companies Act 1956 explains about the whole procedure of the how to form a company, its
fees procedure, name, constitution, its members, and the motive behind the company, its share
capital, about its general board meetings, management and administration of the company
including an important part which is the directors as they are the decision makers and they
take all the important decisions for the company their main responsibility and liabilities about
the company matter the most. The Act explains about the winding of the business as well and
what happens in detail during liquidation period.

Companies Act 2017 changes and there Impact on India Inc.

Relief For Creditors Of Distressed Companies

The first proposed change brings relief to creditors hoping to convert their debt into equity
during an insolvency or restructuring process. Creditors will be able to convert debt to equity of
a distressed companies at a discount to face value. Currently, company law mandates that
such conversion has to happen either at par or premium.
For financially distressed companies where the lenders have triggered either the insolvency
and bankruptcy code or some other restructuring mechanism, the book value of the company
is typically lower than the face value of the shares of the company owing to accumulated
losses incurred by the company.
In such a situation, if the lenders are allowed to convert their loan into equity only at face value
then this would lead to a breach of the borrowing company’s contractual commitment which
pertains to conversion of debt at the lowest possible price.

Leniency In Loans To Directors And Interested Parties

Another significant change relates to loans that a company can extend to its directors and
persons that a director is ‘interested’ in.
The law prohibits a company from granting a loan to its director or his relatives or to
any firm where such director or his relative is a partner
a private company where the director is shareholder or director
a corporate where the director has 25 percent and more voting rights or management control
But now, a carve out to this provision will allow a company to extend loans and security to such
entities but on approval by a special resolution, that is, approval by 75 percent of shareholders
present and voting. The other condition is that the loan funds can be used by the borrower only
for its principal business activity. However, loans given directly to a director or his relatives will
continue to be prohibited.

Related Parties Transaction:

The third important change is a mixed one for related party transactions – on the one hand it
brings relief to closely held companies and on the other it expands the definition of a ‘related
party’.
The existing law prohibits a related party from voting on a related party transaction involving
that party. All related party transactions need 75 percent approval from non-interested
shareholders.
 The first change to this provision relaxes the voting restriction in the case of a company where
90 percent or more shareholders or members, in number, are relatives of promoters, or are
related parties.
Another important change is the expansion of the ‘related party’ definition to include any other
body corporate, Indian or foreign, apart from companies. Such body corporate could include a
LLP, registered society, trust etc.
The new definition means that foreign entities that have at least 20 percent of total voting
power, or control over the company will also have to comply with related party transaction
requirements.
Transactions that were deliberately structured to get around the related party transaction
requirements under the present company law will be impacted. But typically foreign investors
dealt with the Indian companies on an arms-length basis, so this will not impact them much.

Relaxation For Independent Directors

Creditors are not the only beneficiaries of the changes to the Companies Act, 2013.
Independent directors too have reason to cheer.
Companies law bars a person from acting as an independent director of a company if such
person has a pecuniary relationship with that company. Experts say that the interpretation of
the term ‘pecuniary relationship’ often led to confusion.
The amendment now clarifies that a person who has transacted with a company will not be
barred from acting as independent director, provided the value of such transaction is less than
10 percent of the independent director’s total income.
There were several transactions for comparatively small amounts and in ordinary course of
business that previously barred an independent director from acting in such capacity.

Easier To Fund Subsidiaries And Joint Ventures

The fifth key change makes it easier for holding companies to give loans and financial
assistance to their subsidiaries and joint ventures. Once the amendments take effect, no
shareholder approval will be required for such transactions.
Experts point out that the proposed changes will make structuring of transactions easier and
will further ease of doing business.

A3(a) Introduction:
Contract of Guarantee:
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’;
the person in respect of whose default the guarantee is given is called the ‘principal debtor’,
and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be
either oral or written. —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’; the person in respect of whose default the guarantee is given
is called the ‘principal debtor’, and the person to whom the guarantee is given is called the
‘creditor’. A guarantee may be either oral or written."

There are three parties in a contract of guarantee; the creditor, the principal debtor and the
surety. In a contract of guarantee, there are two contracts; the Principal Contract between the
principal debtor and the creditor as well as the Secondary Contract between the creditor and
the surety. The contract of the surety is not contract collateral to the contract of the principal
debtor but is an independent contract. Liability of surety is secondary and arises when principal
debtor fails to fulfill his commitments. Even an acknowledgement of debt by the principal
debtor will bind the surety.
 In the given question , the creditor role is played by the bank, Arun played the role of surety of
guarantor and Smitha played the role of principle debtor and the contract.

In a contract of guarantee, there are two contracts; the Principal Contract between the principal
debtor and the creditor as well as the Secondary Contract between the creditor and the surety.
The contract of the surety is not contract collateral to the contract of the principal debtor but is
an independent contract. Liability of surety is secondary and arises when principal debtor fails
to fulfil his commitments. Even an acknowledgement of debt by the principal debtor will bind
the surety.

A3b) The liability of the surety is joint and connected with the principal debtor. It is the choice
of the creditor to recover the amount either from the principal debtor after his default or from
surety. He may file a suit against both the principal debtor and the surety or may file a suit
against the surety only or the principal debtor only, so yes bank does have right against Arun.
Following are the rights of Arun in case he voluntarily offers to pay the loan to the bank.
• The right to the information on the outstanding balance of the account of the borrower with the
financial institution subject to the borrower's consent.
• The right to obtain a copy of the letter of guarantee or contract of guarantee and any other
documents in relation to the loan transaction